Strategic Alliances: Types, Benefits, and Challenges
Partnerships are a mainstay in successful business strategies for companies of any size, and can often include branded marketing campaigns, manufacturing, training, sales, and more. Alliances involve any task that combines capabilities to generate mutual goals and shared objectives.
Strategic alliances allow businesses to pool resources, leverage expertise, and drive additional revenue as a team.
However, as many alliances begin with big visions, not all partnerships turn out to be strategic. Depending on how you approach the partnership, these business relationships can prove to be a boon or a burden for your company.
In this article, we’ll define a strategic alliance, examine the different types of strategic alliances, look at the pros and cons, dive into real-life channel partner success stories, and help you decide what’s best for your business.
What are Strategic Alliances?
A strategic alliance happens when two or more companies enter into an agreement to work together toward a common goal (while remaining independent). These agreements are designed to complement a specific campaign or project and deliver mutual benefits. The idea is that everyone cooperates together and reaps the benefits of the outcome.
When a strategic alliance is forming, both potential partners agree to share resources, resulting in a strong synergy to execute the project. Working with a premium channel partner can result in a higher profit margin, faster development of products or new technology, and more substantial core competencies.
For example, in a strategic alliance, Company A and Company B will combine their capabilities, respective resources, and core business methods to generate mutual interests in development, manufacturing, and distribution channels.
The Types of Strategic Alliances
One of the top secrets to reaching new prospects is understanding the types of strategic alliances a business entity can choose from. There are three main kinds:
In a joint venture partnership, two parent companies establish a child company. These alliance partners maintain the relationship by sharing resources and equity with a binding legal agreement. Whether formed for a specific purpose or ongoing strategy, a joint venture has a clear objective, and profits are split between two companies.
For example, Company A and Company B are parent companies that form a joint venture by creating Company C (new business), which is the child company. If both parent companies own 50% of the child company, it’s a 50-50 joint venture. If Company A owns 65% and Company B owns 35%, this joint venture is referred to as a Majority-owned venture.
One example of a joint venture is the partnership between Google’s parent company, Alphabet, and GlaxoSmithKline, with the intent of treating diseases with electrical signals. This child company is called Galvani Bioelectronics and continues to build devices and further research in the field of bioelectronics.
Equity Strategic Alliance
An equity strategic alliance is created when one company purchases a certain percentage of equity from another company. This is also referred to as a partial acquisition. If each business purchases equity in the other, this is called a cross-equity transaction.
One example of an equity strategic alliance is Panasonic and Tesla. It began when Panasonic invested $30 million to accelerate battery technology for electric vehicles. This partnership eventually grew to include building a lithium-ion battery plant in the state of Nevada.
Non-Equity Strategic Alliance
Another common type of strategic alliance is called non-equity. In a non-equity strategic alliance, two companies sign a contract agreeing to pool resources, decision-making, and core capabilities. In this case, no separate entity is created, and equity-sharing is taken out of the equation.
Non-equity strategic alliances make up the vast majority of business alliances and are often loose and more informal than partnerships involving equity.
One example of a non-equity strategic alliance is Project Baseline (formed by Galvani Bioelectronics mentioned above). This project is a fully connected ecosystem of companies (from startups and small businesses to enterprise operations) that works closely together to create a more comprehensive map of human health.
Why Do Companies Form a Strategic Alliance?
To fully understand the many reasons for forming a strategic alliance, you must look at the different product lifecycles in business. There are three:
- Slow Cycle
- Standard Cycle
- Fast Cycle
This lifecycle is determined by the need to continually create new products and innovate in any given industry. For example, the software industry operates in a fast product lifecycle, while the pharmaceutical industry operates in a slow one. Thus, the reasons for their strategic alliances are different.
When a business has a slow product lifecycle, the competitive advantages are shielded for relatively long periods. Medicine operates in a slow cycle because it takes years to develop, and patents are difficult to get. In this case, strategic alliances form to gain access to a restricted market, establish a franchise in a new market, and maintain market stability (through setting product standards).
In a standard cycle, a business launches a new product every few years, and may or may not retain its customer base and position in the industry. In this instance, strategic alliances are formed to push out other companies, pool resources, gain market share, establish economies of scale, and/or gain access to complementary resources.
A company’s competitive advantages are not protected in a fast cycle. A business must constantly develop new products/services to stay afloat. In this case, strategic alliances form to speed up the creation of new goods/services, streamline market penetration, share R&D expenses, and overcome uncertainty.
Advantages of a Strategic Alliance
A strategic alliance enables companies to scale faster, build innovative solutions for customers, pool valuable expertise, enter new markets, create a collaborative business environment, and much more. Here are a few of the more common advantages of forming this kind of business partnership:
A strategic alliance allows two companies to share resources and expertise. It combines the best both companies have to offer, which can include a deeper understanding of the product, marketing knowledge, sales, or even more team members to increase speed.
The right alliance drives innovation. Partners can outpace the competition with new solutions that form a complete package for customers. These revolutionary partnerships are creative and can dramatically shift the market landscape.
To compete with the best players, sometimes it’s good to have an ally. Strategic alliances can help a business face the competition head-on, with support from a like-minded brand.
Increase Brand Awareness
A company can build brand awareness by using the goodwill of a brand that’s already established.
In many cases, a strategic alliance gives a company access to new markets with a solution that would not have been possible on its own. For example, an organization seeking to go global will work with a trusted local partner to gain an advantage in emerging markets.
Economies of Scale
Strategic alliances allow partners to increase their capabilities and scale quickly to meet growing demands. When properly planned and executed, a partnership allows for economies of scale, which is the cost advantage of ramping up production. When a company scales up, the cost per unit comes down.
A strategic alliance produces synergy and a technical upgrade of skills that improves all business processes and drives revenue. This type of partnership is seen with distributors in reseller channels, a tactic a company uses to enhance sales through tactical alliances.
In industries with high risk, two companies can form an alliance to mitigate the risk. This is one of the more common strategies for when a brand wants to enter a new market.
Successful Strategic Alliance Examples
Successful strategic alliances are formed worldwide with big and small brands. Here are some everyday examples of partnerships in action:
Joint Venture Example
As we discussed, two companies that come together to form a child company is a joint venture. A prime example is the partnership between NASA and Google, which created the business Google Earth. Another example is SIA and TATA, which ventured into forming Vistara Airlines out of India.
Strategic Equity Alliance
This is when one company buys equity in another or both buy it in each other. One example of a successful strategic equity alliance is between Tesla and Panasonic. Walmart has also invested in the e-commerce superstar Flipkart.
Non-Equity Strategic Alliance
In a non-equity alliance, two companies share resources and proprietary information. An example of this happening in real life is the relationship between Kroger and Starbucks. Anytime you shop at the grocery chain, there’s a Starbucks stand near the door.
Risks of a Strategic Alliance
Just as there are advantages to any business strategy, there can also be a downside. A strategic alliance needs to start with trust. Each company must commit sufficient capabilities and resources to make it work. If one party is lacking, the other will have to carry the weight. This can result in broken trust and bad performance. Other cons include:
Loss of Control
In a strategic partnership, both organizations must cede a certain amount of control over how the business is run and perceived. This type of partnership requires honesty and transparency; however, trust is built over time. There must be significant buy-in from both parties, or the relationship will likely fail.
In a strategic equity alliance and joint venture, both brands are on the hook for the final outcome. You both share the blame if anything happens during production to create dissatisfied customers. Both are at risk of loss in reputation.
For example, the relationship between Panasonic and Tesla started to crumble when batteries weren’t produced and shipped fast enough, causing delays in Tesla vehicle production.
Since you cannot be inside the other business 100% of the time, there may be hidden costs that aren’t initially visible. This will eventually hamper profitability and produce financial difficulties.
Since both parties have access to proprietary data, data confidentiality is at risk. In addition, the companies are sharing sensitive information which can easily be misused.
As with any relationship in life, it is possible that one brand can be more invested in the strategic alliance than the other. As a result, one company with a better say in a particular process can lose control of the operation to the stronger entity.
- Quality issues related to the production of goods
- Institutional and cultural differences create challenges
- Partners may misrepresent themselves and their capabilities
- One party may not use its complementary resources effectively
- One party is not fully committed to the process or has poor communication
In a recent study, 76% of business leaders believe that current business models will be unrecognizable in the next five years. The main change agents will be ecosystems and strategic alliances. This is when two or more companies agree to work together toward a common goal.
Since every industry is susceptible to disruption, business leaders must think outside the box and look in unlikely places to gain a competitive edge. Strategic alliances fill that gap and help introduce brands to emerging markets. However, true strategic alliances require commitment and trust. Without it, the entire partnership falls apart. Both teams must be equally committed to the shared outcome and fairly matched.
Strategic alliances can drive revenue, increase brand awareness, and mitigate risk. The type of partnership will change depending on your product life cycle and business model, but the concept remains the same. Working together always drives faster and higher quality results than going at it alone.
Companies like Relevize are helping strategic alliances digitally transform their partnerships and quickly bring new products and services to market. A business can automate the entire demand generation process for partnerships to generate leads, revenue, and pipeline efficiently. The advanced tool allows you to easily launch paid campaigns with your partners, gain visibility into every inch of the pipeline, understand which programs are driving success, and what might need to be changed. Ready to find out more? Schedule a personalized demo now.