Strategic alliances

A Strategic Alliance is a relationship between two or more parties to pursue a set of agreed upon
goals or to meet a critical business need while remaining independent organizations. This form of
cooperation lies between M&A and organic growth.
Partners may provide the strategic alliance with resources such as products, distribution
channels, manufacturing capability, project funding, capital equipment, knowledge, expertise, or
intellectual property. The alliance is a cooperation or collaboration which aims for a synergy
where each partner hopes that the benefits from the alliance will be greater than those from
individual efforts. The alliance often involves technology transfer (access to knowledge and
expertise), economic specialization shared expenses and shared risk.

Types of strategic alliances

Various terms have been used to describe forms of strategic partnering. These include
international coalitions (Porter and Fuller, 1986), strategic networks (Jarillo, 1988) and, most
commonly, strategic alliances. Definitions are equally varied. An alliance may be seen as the
joining of forces and resources, for a specified or indefinite period, to achieve a common
objective.
There are seven general areas in which profit can be made from building alliances.
Stages of Alliance Formation
A typical strategic alliance formation process involves these steps:

Strategy Development: Strategy development involves studying the alliances

feasibility, objectives and rationale, focusing on the major issues and challenges and
development of resource strategies for production, technology, and people. It requires
aligning alliance objectives with the overall corporate strategy.

Partner Assessment: Partner assessment involves analyzing a potential partners

strengths and weaknesses, creating strategies for accommodating all partners management
styles, preparing appropriate partner selection criteria, understanding a partners motives for
joining the alliance and addressing resource capability gaps that may exist for a partner.

Contract Negotiation: Contract negotiations involves determining whether all parties

have realistic objectives, forming high calibre negotiating teams, defining each partners
contributions and rewards as well as protect any proprietary information, addressing

termination clauses, penalties for poor performance, and highlighting the degree to which
arbitration procedures are clearly stated and understood.

Alliance Operation: Alliance operations involves addressing senior managements

commitment, finding the calibre of resources devoted to the alliance, linking of budgets and
resources with strategic priorities, measuring and rewarding alliance performance, and
assessing the performance and results of the alliance.

Alliance Termination: Alliance termination involves winding down the alliance, for
instance when its objectives have been met or cannot be met, or when a partner adjusts
priorities or re-allocates resources elsewhere.

The advantages of strategic alliance include:

1. Allowing each partner to concentrate on activities that best match their capabilities.
1. Learning from partners & developing competences that may be more widely
exploited elsewhere.
2. Adequate suitability of the resources & competencies of an organization for it to survive.
There are four types of strategic alliances: joint venture, equity strategic alliance, non-equity
strategic alliance, and global strategic alliances.

Joint venture is a strategic alliance in which two or more firms create a legally
independent company to share some of their resources and capabilities to develop a
competitive advantage.

Equity strategic alliance is an alliance in which two or more firms own different
percentages of the company they have formed by combining some of their resources and
capabilities to create a competitive advantage.

Non-equity strategic alliance is an alliance in which two or more firms develop a

contractual-relationship to share some of their unique resources and capabilities to create a
competitive advantage.

Global Strategic Alliances working partnerships between companies (often more than
two) across national boundaries and increasingly across industries, sometimes formed
between company and a foreign government, or among companies and governments.

A Global Strategic Alliance

A global strategic alliance is usually established when a company wishes to edge into a related
business or new geographic market -- particularly one where the government prohibits imports in
order to protect domestic industry. Typically, alliances are formed between two or more
corporations, each based in their home country, for a specified period of time. Their purpose is to
share in ownership of a newly formed venture and maximize competitive advantages in their
combined territories.
The cost of a global strategic alliance is usually shared equitably among the corporations
involved, and is generally the least expensive way for all concerned to form a partnership. An
acquisition, on the other hand, offers a faster start in exploiting an overseas market, but tends to
be a much more expensive undertaking for the acquiring company -- one that is likely to be well
out of the reach of a solo operator. While a global strategic alliance works well for core business
expansion and utilizing existing geographic markets, an acquisition works better for immediate
penetration to new geographic territories. Hence, an alliance provides a good solution to global
marketers that lack required distribution to get into overseas markets.
A global strategic alliance is also much more flexible than an acquisition with respect to the
degree of control enjoyed by each party. Depending on your resources, you can structure an
equity or non-equity partnership. Within an equity partnership, you can hold a minority, majority
or equal stake. In a non-equity partnership, the host country partner has a greater stake in the
deal, and thus holds a majority interest. Yet whom you choose as your partner is arguably more
important than how the partnership is structured. For when it gets down to business, you want a
partner who will have an active contribution to make, and who is flexible and able to resolve
conflicts as the alliance evolves. Even more important, however, is that you keep clearly in mind
what you are seeking to gain from the alliance, and that you choose a partner whose contribution
will enable you to achieve those goals.
Where Should Importers and Exporters Look for Partners?
You might be surprised to find that you can build mutually advantageous alliances with some
unlikely allies. Many companies make conscious decisions to form partnerships with
complimentary or even competing companies that can offer them market share in countries they
have been struggling to break into for years. Nokia and Microsoft, for example, have entered into
a broad global strategic alliance where they plan to combine assets and develop innovative
mobile products on an unprecedented scale. By using their complementary strengths and
expertise, these potential competitors thus ensure their mutual survival in the new global mobile
ecosystem and marketplace.
Even if you're not an international technology company or world's leading mobile phone
supplier, you can follow Nokia's and Microsoft's example and see which of your contacts,
colleagues, peers and competitors in the international market might have compatible needs and
objectives. You'll probably feel most secure with a company with whom you already have a
reasonably long-standing business relationship, especially if you have achieved substantial sales
growth together. It could be your distributor in South Africa, a manufacturer who took on
distribution of your product in China, or that trading company in Japan who can't keep up with

consumer demand! Any one of your contacts with a problem you can solve or a need you can
fulfill might serve as a potential partner.
Advantages of the Global Strategic Alliance
There are many specific advantages of a global strategic alliance. You can:

Get instant market access, or at least speed your entry into a new market.
Exploit new opportunities to strengthen your position in a market where you already have
a foothold.

Increase sales.

Gain new skills and technology.

Develop new products at a profit.

Share fixed costs and resources.

Enlarge your distribution channels.

Broaden your business and political contact base.

Gain greater knowledge of international customs and culture.

Enhance your image in the world marketplace.

Disadvantages of the Global Strategic Alliance
There are also some inevitable trade-offs to consider:

Weaker management involvement or less equity stake.

Fear of market insulation due to local partner's presence.

Less efficient communication.

Poor resource allocation.

Difficult to keep objectives on target over time.

Loss of control over such important issues as product quality, operating costs, employees,
etc.
For example, if you enter into a global strategic alliance with even a little less equity stake -- say,
49% -- you lose managerial control. You may end up with that equity percentage because the
host government only allows up to 49% for an outsider, because you could only negotiate that
amount, or because you were willing to accept a minority stake in exchange for gains (e.g.,
responsibility for research and development) that you thought important during the negotiation
phase. Whatever the reason, what are you going to do if profits plummet, product quality
deteriorates, or customers are dissatisfied? You do not have enough interest in the venture to take
action. Your 49% can swiftly depreciate when it comes to exercising any control. In any
partnership, the majority interest holder tends to dominate, putting their needs first, their
partner's last. The ideal situation is a 50-50 partnership which allows both parties to share in
mutual successes, but if you do settle for a minority interest, make sure you maintain enough
control to accomplish your objectives in the target market.
It's also critical to explore all the legal and financial implications before entering into a
partnership with an overseas company. Seek legal counsel that is well-experienced in
international trade, acquisitions, joint ventures and divestitures to go over the best and worst-case
scenarios with you. You should hire counsel both in your own country and the host country for
maximum protection of your rights. You are not only seeking to ensure the fundamental integrity
of the partnership, but to work out crucial entitlements and obligations such as copyrights,
trademarks, patents, taxes, antitrust and exchange controls.
You will also need to keep informed about the host country's political and economic stability. Get
in touch with the local economic development offices within the host country. They should be
able to assess the country's future investment climate, and to provide you with past, present and
future growth trends. This will give you a better idea of what kind of risks you will incur, if any,
if you go ahead with the alliance.