(The International Business Machines Corporation (IBM) is an American multinational technology

corporation)
A strategic alliance is an agreement between two or more parties to pursue a set of agreed upon
objectives needed while remaining independent organizations. This form of cooperation lies
between mergers and acquisitions 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,[1] shared expenses and shared risk.

The five criteria of a strategic alliance

What is it that makes an alliance truly strategic to a particular company? Is it possible for an
alliance to be strategic to only one of the parties in a relationship? Many alliances default to
some form of revenue generationwhich is certainly important but revenue alone may not be
truly strategic to the objectives of the business. There are five general criteria that differentiate
strategic alliances from conventional alliances. An alliance meeting any one of these criteria is
strategic and should be managed accordingly.
1. Critical to the success of a core business goal or objective.
2. Critical to the development or maintenance of a core competency or other source of
competitive advantage.
3. Blocks a competitive threat.
4. Creates or maintains strategic choices for the firm.
5. Mitigates a significant risk to the business.
The essential issue when developing a strategic alliance is to understand which of these criteria
the other party views as strategic. If either partner misunderstands the others expectation of the
alliance, it is likely to fall apart. For example, if one partner believes the other is looking for

revenue generation to achieve a core business goal, when in reality the objective is to keep a
strategic option open, the alliance is not likely to survive.
Examining each of the five strategic criteria in depth provides insight into how the strategic value
of alliances can be leveraged.
1. Critical to a business objective
While the most common type of alliance generates revenue through a joint go-to-market
approach, not every alliance that produces revenue is strategic. For example, consider the
impact on revenue objectives if the relationship were terminated? Clearly, a truly strategic
relationship would have a great bearing on the prospects for achieving revenue growth targets.
In addition to a single strategic alliance, related groupings of alliancesnetworks or
constellationsmay also be critical to a business objective. Sun Microsystems has established
a group of integrator alliances that function as an effective marketing channel and drive
significant revenues for the company each quarter. (See article, Constellation Strategy,
elsewhere in this issue of IBJ Online).
This category also includes alliances with high potential, such as alliances that have large but
unrealized revenue opportunity. Consider the impact of new industry standards that make it
possible for products from different manufacturers to work together. This can unlock customer
value and boost the revenue potential of new, technology-based products. From writable DVD
formats to next-generation wireless technologies, technical standards are democratically
determined in consortiums of interested industry participants. With product development racing
in parallel, the first movers advantage can be substantial, and hence alliance development and
lobbying within an industry become paramount to financial success.
Cost reduction may also be a core business objective of the alliance, particularly among supplyside partners. By investing together in new processes, technologies and standards, alliance
partners can obtain substantial cost savings in their internal operations. Again, however, a costsaving alliance is not truly strategic unless it has an underlying business objective, such as to
achieve an industry-leading cost structure.
2. Competitive advantage and core competency
Another way in which an alliance can prove to be strategic is to play a key role in developing or
protecting a firms competitive advantage or core competency. Learning alliances are the most
common form of competitive/competency strategic alliances. An organizations need to build
incremental skills in an area of importance is often accelerated with the help of an experienced
partner. In some cases, the learning objective of the relationship is openly agreed between the
partners; however, this is not always the case. Learning alliances work best when:

1. The objectives are openly shared

2. There is little chance of future competition (such as when the partners are in adjacent
industries)
3. The cultures of the organizations are similar enough to enable process and methods to be
leveraged, and
4. The governance structure of the alliances is established to promote learning at the executive,
managerial and operational levels.
3. Blocking a competitive threat
An alliance can be strategic even when it falls short of establishing a competitive advantage.
Consider the case of an alliance that blocks a competitive threat. It is strategic to bring
competitive parity to a secondary segment of a market in which the firm competes, when
the absence of parity creates a competitive disadvantage in the related primary segments of
that market. For example, competing in the high and medium price range of a market with a
premium product may leave the firm vulnerable to a low-priced entry. If the firms manufacturing
processes do not permit the creation of a low-priced product entry, a strategic alliance with a
volume partner in an adjacent market can successfully block the competitive threat.
Another example of strategic alliances that block competitive threats are the airline alliances
that permit route-sharing among carriers. The two primary determinants of customer flight
selection are routing and cost. Therefore, the adoption of route-sharing alliances by the airlines
blocks the competitive threat of preferential routing in the specific markets in which the airline
chooses to compete. In essence, strategic alliances within the airline industry ensure
competitive parity with respect to routing and force other factors such as on-time departures and
customer service to become the bases for competitive differentiation.
4. Future strategic options
From a longer-term perspective, an alliance that is not fundamental to achieving a business
objective today could become critical in the future. For example, in 1984, a U.S. consumer
products company needed to expand distribution beyond the Midwestern states. Faced with the
prospect of European competition at some point in the future, the firm made a strategic decision
to invest in an alliance with a distribution and support services company that had incremental
distribution capacity in the U.S. and a similar presence in Europe, rather than invest in
expanding its own local distribution capabilities. With the option to expand into European
distribution at any point, the firm could work to sew up the U.S. market before expanding too
quickly internationally.

5. Risk mitigation
When an alliance is driven by intent to mitigate significant risk to an underlying business
objective, the nature of the risk and its potential impact on the underlying business objective are
the key determinants of whether or not it is truly strategic. Dual sourcing strategies for critical
production components or processes are excellent examples of how risk mitigation can become
the context for supply-side strategic alliances.
As process manufacturing companies advance the yield of their operations, suppliers often
collaborate with the manufacturer to ensure their new products fit within its new operations. The
benefits of such an alliance are cost savings to the manufacturer and accelerated product
development for the supplier. In situations where the suppliers product is critical to the
manufacturers operation, it may be necessary for the manufacturer to have strategic alliances
with two competing suppliers in order to mitigate such risks as unilateral cost increases or
degradation in quality of service.

DEFINITION OF 'STRATEGIC ALLIANCE'

An arrangement between two companies that have decided to share resources to
undertake a specific, mutually beneficial project. A strategic alliance is less
involved and less permanent than a joint venture, in which two companies
typically pool resources to create a separate business entity. In a strategic
alliance, each company maintains its autonomy while gaining a new opportunity.
A strategic alliance could help a company develop a more effective process,
expand into a new market or develop an advantage over a competitor, among
other possibilities.

INVESTOPEDIA EXPLAINS 'STRATEGIC ALLIANCE'

For example, an oil and natural gas company might form a strategic alliance with
a research laboratory to develop more commercially viable recovery processes. A
clothing retailer might form a strategic alliance with a single clothing manufacturer

to ensure consistent quality and sizing. A major website could form a strategic
alliance with an analytics company to improve its marketing efforts.

Success factors[edit]
The success of any alliance very much depends on how effective the capabilities of the involved
enterprises are matched and weather the full commitment of each partner to the alliance is achieved.
There is no partnership without trade-offs, but the benefits of it must preponderate the
disadvantages, because alliances are made to fill gaps in each otherscapabilities and capacities.
Poor alignment of objectives, performance metrics, and a clash of corporate cultures can weaken
and constrain the effectiveness of the alliance effectiveness. Some key factors that have to be
considered to be able to manage a successful alliance include: [12][13][14]

Understanding: The cooperating companies need a clear understanding of the potential

partners resources and interests and this understanding should be the base of set the alliance
goals.

No time pressure: During negotiations time pressure must not have an influence on the
outcome of the process. Managers need time to establish a working relationship with each other,
develop a time plan set milestones and design communication channels.

Limited alliances: Some incompatibilities between enterprises might not be avoidable, so

the number of alliances should be limited to a necessary amount, which enables the companies
to achieve their goals.

Good connection: Negotiations need experienced managers especially the managers from
the larger firm need to be connected very well so that they have the possibility to integrate
different departments and business areas over internal borders and they need legitimations and
support from the top management.

Creation of trust and goodwill: The best basis for a profit-yielding cooperation between
enterprises is the creation of trust and goodwill, because it increases tolerance, intensity and
openness of communication and makes the common work easier. Further it leads to equal and
satisfied partners.

Intense Relationship: Intensifying the partnership leads to the fact that partners get to know
each other better, each other's interests and operating styles and increases trust.

Life cycle of a Strategic Alliance[edit]

Formation[edit]
Forming a Strategic Alliance is a process which usually implies some major steps that are mentioned
below:[9][15][16]

Strategy Development: In this stage the possibility of a Strategic Alliance is examined with
respect to objectives, major issues, resource strategies for production, technology and people. It
is necessary that objectives of the company and of the alliance are compatible.

Partner Assessment: In this phase potential partners for the Strategic Alliance are
analyzed, in order to find an appropriate company to cooperate with. A company must know the
weaknesses and strengths and the motivation for joining an alliance of another company.
Besides that appropriate criteria for the partner selection are defined and strategies are
developed how to accommodate the partners management style.

Contract Negotiations: After having selected the right partner for a Strategic Alliance the
contract negotiations start. At first all parties involved discuss if their goals and objectives are
realistic and feasible. Dedicated negotiation teams are formed which determine each partners
role in the alliance like contribution and reward, penalties and retaining companies interests.

Advantages
For companies there are many reasons to enter a Strategic Alliance:

Shared risk: The partnerships allow the involved companies to offset their market exposure.
Strategic Alliances probably work best if the companies portfolio complement each other, but do
not directly compete.

Shared knowledge: Sharing skills (distribution, marketing, management), brands, market

knowledge, technical know-how and assets leads to synergistic effects, which result in pool of
resources which is more valuable than the separated single resources in the particular company.

Opportunities for growth: Using the partners distribution networks in combination with
taking advantage of a good brand image can help a company to grow faster than it would on its
own. The organic growth of a company might often not be sufficient enough to satisfy the
strategic requirements of a company, that means that a firm often cannot grow and extend itself
fast enough without expertise and support from partners

Speed to market: Speed to market is an essential success factor In nowadays competitive

markets and the right partner can help to distinctly improve this.

Complexity: As complexity increases, it is more and more difficult to manage all

requirements and challenges a company has to face, so pooling of expertise and knowledge can
help to best serve customers.

Costs: Partnerships can help to lower costs, especially in non-profit areas like
Research&Development.

Access to resources: Partners in a Strategic Alliance can help each other by giving access
to resources, (personnel, finances, technology) which enable the partner to produce its
products in a higher quality or more cost efficient way.

Access to target markets: Sometimes, collaboration with a local partner is the only way to
enter a specific market. Especially developing countries want to avoid that their resources are
exploited, which makes it hard for foreign companies to enter these markets alone.

Economies of Scale: When companies pool their resources and enable each other to
access manufacturing capabilities, economies of scale can be achieved. Cooperating with
appropriate strategies also allows smaller enterprises to work together and to compete against
large competitors.

Disadvantages[edit]
Disadvantages of strategic alliances include:[2][10][11]

Sharing: In a Strategic Alliance the partners must share resources and profits and often
skills and know-how. This can be critical if business secrets are included in this knowledge.
Agreements can protect these secrets but the partner might not be willing to stick to such an
agreement.

Creating a Competitor: The partner in a Strategic Alliance might become a competitor one
day, if it profited enough from the alliance and grew enough to end the partnership and then is
able to operate on its own in the same market segment.

Opportunity Costs: Focusing and committing is necessary to run a Strategic Alliance

successfully but might discourage from taking other opportunities, which might be benefitial as
well.

Uneven Alliances: When the decision powers are distributed very uneven, the weaker
partner might be forced to act according to the will of the more powerful partners even if it is
actually not willing to do so.

Foreign confiscation: If a company is engaged in a foreign country, there is the risk that the
government of this country might try to seize this local business so that the domestic company
can have all the market on its own.

Risk of losing control over proprietary information, especially regarding complex transactions
requiring extensive coordination and intensive information sharing.

Coordination difficulties due to informal cooperation settings and highly costly dispute
resolution.