Question 1: What is a strategic alliance?
Strategic alliances designate any form of formal or informal pacts signed by two, or sometimes more than two corporations having mutual corporate objectives. The term strategic alliances can also be used to refer to contractual agreements especially when the arrangements are long term, possess the attribute of continual strategic cooperation; thereby, offering strategic paybacks to the parties involved. It is also important to note that strategic alliances can assume various shapes and types. A strategic alliance can be in the form of a simple informal cooperation. However, sometimes, strategic alliances can take more complex forms, for example, joint proprietorship of global operations.
Question 2: What are vertical and horizontal business-level alliances?
Business-level strategic alliances imply agreements between two or more business entities with the aim of pursuing sets of predetermined business objectives, and in so doing, still be able to exist as independent organizations. Two forms of business-level alliances exist namely: vertical and horizontal strategic alliances.
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Vertical Strategic Alliances
This type of business-level alliance exists when business partnerships occur across the value chain (A kind of partnership that involves a firm and the firm’s distributors or suppliers, or both). An example of a vertical strategic alliance is a deal between a business unit and its buyers to help extend the firm’s network, and buy goods and services exclusively from the firm in return of lower prices on the firm’s goods and services. The agreements (contracts) in this type of business-level alliance are basic. Additionally, vertical strategic alliances are mostly effective in situations where the parties involved have enough trust in each other. The significance of trust in this form of alliance cannot be underestimated. Trust significantly cuts down both time and exertion invested in the fulfillment of contracts. Besides, trust facilitates learning of new of new ideas among the partners, and also expedites the transmission of technological knowledge among the parties involved.
Horizontal Strategic Alliances
A horizontal strategic alliance refers to an agreement between two or more business units (firms) existing at the same level (stage) of the value chain, permitting them to share capabilities and production resources. Firms often sign horizontal strategic alliance deals for various reasons. One of the reasons is to improve their competitiveness in a diverse market. Another reason rests in the fact that through horizontal strategic deals, firms are suited to handle various risks and uncertainties existing in the highly competitive business market. The risks and uncertainties are shared among the firms involved in the agreement. Compared to vertical alliances, horizontal strategic alliances are fairly difficult to oversee and protract. This is due to two main reasons. The first reason is the high stake of prospective opportunistic exploits from the parties involved. Some of the partners may seek to gain more from the partnership. Finally, there are high possibilities of conflicts of interest emerging with such setups.
Question 3: What are corporate-level strategic alliances?
Corporate-level strategic alliances refer to agreements between corporations with the intentions of facilitating products (product lines) as well as market diversification. Corporate-level alliances are also aimed at enhancing the growth and expansion of the firms involved. Three types of corporate-level strategic alliances exist: Diversification by alliance, Synergy by alliance, and Franchising.
Diversification by alliance
This type of corporate-level strategic alliance are also referred to as Research and Development Alliances. Here, the firms involved mainly focus on the integration of unique expertise to come up with products, or even services to serve the interests of new customers or markets. The new products however, should be related to the current products to ensure more success and also the creation of synergy. In addition, diversification by alliance partnerships also sometimes focus on firm evaluation, followed by reduction of diversification. Diversification can be reduced by closing less profitable ventures within a business.
Synergy by alliance
This type of alliance is formed when the parties involved divvy production resources or combine complementary competences so as to build economies of scope (production of two or more separate goods, especially when the costs of producing the individual goods is far much more than the expenses of combined production).
Franchising
Franchising is the process of accrediting of particular goods, services, or sometimes, business models to partners within an agreement for stipulated fees. Some of the advantages of franchising include the fact that it allows firms to grow without necessarily having to incur huge financial risks. Secondly, franchising enables the franchisor to earn first-mover benefits without having to experience a lot of risks. Finally, franchising lets the franchisor maintain command of its business model and products.
