Introduction
Strategic alliances also referred to as strategic partnership is an agreement between two or more parties to work on specific goals while remaining as individual entities. The two partners can work on long-term goals on win-win basis depending on the goals they have set. Companies form entities and share both profits and losses. The organizations form alliances on resources such as expertise, distribution channels, manufacturing capability, project funding, capital equipment among others. The strategic alliances are becoming popular in the present global markets as companies are trying to achieve their business objectives. Entrepreneurs are taking the partnerships as an excellent cooperation strategy to use instead of competition (Gulati, 2013). The basis for the formation of the alliances is to create the mutually beneficial trade of technologies. Some major characteristics define the nature of the partnerships which include:
Even after the establishment of an alliance, the two companies remain independent. The idea behind formation is sharing of resources to meet the required goals.
Delegate your assignment to our experts and they will do the rest.
The involved companies share both profits, benefits and the competitive advantage.
The organizations work together through making contributions towards the projects being worked upon by all. Each company gets involved depending on the type of assets and resources they possess.
The groups work on trust.
Types of strategic alliances
Alliances can be grouped depending on the extent of interaction between companies or the conflict potential between the involved companies. The extent of cooperation must be defined in line with the resources to be shared to ensure that the companies work efficiently. The parties involved must also understand the types of conflicts that might occur when they act as competitors and when they partner to reduce the rate of competition. By these there are four types of alliances namely:
Noncompetitive alliances – commonly formed between companies that work in the same industry but do not have a rivalry between them. It is little or no competition between them hence they can freely interact without causing much conflict. The organizations might be located in different geographical regions to be able to minimize the rate of competition for resources. This creates a better platform for interaction and partnership (Gulati, 2013).
Competitive alliances- formed by two or more highly competitive organizations. The corporations might be dealing with the same product or related items. Some of the reasons that might lead to the formation of competing alliances are to reduce the competition between them, take control over the market, control over other upcoming organizations among others. Due to the high levels of interactions for the involved corporations, many conflict cases occur between the groups. The competitive alliances work on horizontal strategies where through a partnership they boost their positions in the marketplace. While working on the specified goals, the companies set common activities that optimize their levels of interaction to be able to form joint production to accomplish economies of scale. An excellent example of the competitive horizontal alliance is the alliance between Sina Corp and Yahoo that aimed at offering online auction services in China. The two companies came up with a common website that acted as a platform for interaction between medium-sized businesses and consumers. Yahoo also formed another alliance with Microsoft where the aim was to use Microsoft’s Bing search engine on Yahoo's website (Austin, 2016).
Procompetitive- characterized by low interaction rates and fewer cases of conflicts. An example is when a production company relates to the suppliers or distributors without them necessary investing in the production firm. The involved parties commonly share the benefits of vertical integration. The proactive alliances are also referred to as vertical alliances by resource contributions. There is a vertical chain that is the collaboration platform for the involved companies. The vertical relations that are mainly created depend on the decision "make-versus-buy." An example is the Caterpillar company that deals in manufacturing of land lovers. The automotive company assembles approximately 30 percent of the parts. The other 70 percent of the components are put together by the suppliers before distributing them to the end user (Man, 2013).
Precompetitive alliances- associated with low interactions but more cases of conflicts. The reason for this is because commonly the companies that form a coalition are unrelated in line with production activities. The companies come together and create a development strategy that they might be both interested in achieving. Such activities include the creation of a new product, advertising, awareness on the product and new technology development.
Benefits of strategic alliances
First, with the formation of effective strategies, there is ease of market entry for both companies. When international corporations form alliances, they share essential resources in technology, transportation, expertise among others. The cost of entering into the international markets may be beyond the capability of one firm, but by allying with another foreign firm, it might be easier. A global market entry plan involves making strategies that will help distribute one's goods and services to other broader markets. According to Man (2013), there is enough proof to show that organizations that fully embark on strategies aimed at international markets become competitive and reap huge monetary benefits from it. The reason behind allying when venturing into the markets is to be able to share existing assets, fill the resource gaps available and share aides when making decisions on the same. More benefits are realized on entry into the foreign international markets. They include the realization of economies of scale, scope in marketing and distribution, learning new business cultures, new revenue potential, greater access to talent, exposure to foreign investment opportunities, improving company’s reputation and diversifying Company Markets. Most of the alliances that are formed involve a smaller company with more unused resources that relate to an international organization that is technologically advanced but running short of the resources. The benefit realized when a global company is involved the rapid entry into the markets while the cost is still down. Choosing strategic alliances and engaging an international company cuts down other expenses such as harsh governmental regulations and entrenched competition.
Secondly, the formation of alliances is important in sharing of risks. When making a new product or trying out a new idea, there are many market uncertainties and instabilities that occur. With the competitive nature of the business, it is hard for a company to venture into new markets while alone. The reason for this is because there are different types of organizations that are advanced in different areas of the production. A single firm cannot manage to attain all these technologies single-handed. Therefore, the company chooses partners who have the respective technologies, assets, and resources that might be required to make advancements (Lorange et al. 2012). A balanced presentation of both risk and costs can be realized when a company reduces the expenditure of buying what they do not have and partnering with those who already have it, and it is effective. Some risks are usually hidden when a business starts. The entrepreneurs never realize about them until they happen because they are unpredictable. When these risks occur, they are easier to handle for two or more firms as compared to one organization. In business, hardly anyone likes risks because they might lead to losses. Minimizing risk through the formation of alliances has become particularly important during the unpredictable economy of the past few years.
Thirdly, there is shared knowledge and expertise. It is probable that a firm is competent in one area and lacking in another sector. When a firm forms an alliance, there is the benefit of acquiring expertise in the sector that they lack. More than one company display a wide range of expertise which is essential in decision making and stimulating cultural change and innovation. In most cases, the most share items are knowledge and technology. Managing knowledge and skills properly can bring more benefits like:
Making organization’s best decision-making ideas reusable for as many times as required. Once a valid solution has been developed the members of the organization can use it for solving future related problems. On forming a partnership, the company can share the solution with the other groups instead of coming up with a new one. Knowledge sharing also improves communication and relationship between the involved parties.
Better and faster decision making. Making a firm and effective idea call for the collection of many similar thoughts and coming up with one strong idea. The two partnering companies might be having same problems in line with customer relations. However, using past experiences for both groups can help come up with one main solutio0n for their problems.
Shared knowledge and skills stimulate growth and innovations. Everyone is entitled to different opinions and ideas. A combination of these approaches is important in delivering better results. Taking an example of two competing companies allying. There is a high probability of increasing revenue and profits when the two of them share their ideas and strategies they had used to reach the competitive market levels (Yoshino et al. 2015).
Other advantages include improved delivery and reduction of the know-how knowledge. Clients and end-users tend to appreciate the companies that portray diverse expertise more than the others. Companies that share skills realize more benefits in increased win rates and satisfied customers.
Fourthly, there is the benefit of competitive advantage. This occurs when companies working towards a common project maximize each other’s strengths to bring synergy into the process. This is hard to practice when a company is venturing the new markets alone. On small businesses, getting into new markets can be time-consuming and more expensive as compared to large and established firms. This is because large companies have established reputations and supply chain systems in both the local and global markets. The small firms can join the big organizations to gain support and create a favorable brand image and efficient distribution networks. Short run and long run competition patterns in the market are formed by ensuring interaction of the market demand and market supply curves. In the real world of business, this is seen when companies form alliances, produce a common or related product as per goals and set a common price where all end user is comfortable. Formation of alliances for more than two companies leads to perfect competition when they aim at merging their products or having a common item for all of them. This is because a perfect market is formed when goods in the market are perfect substitutes, there are a large number of firms selling currency, there are a large number of consumers to buy the items, and there are useful quality information and most buyers. The competitive nature formed by joint companies include encouraged cost savings due to productivity and Innovation, low prices of products for customers, high-quality products, quality services and efficient allocation of resources (Yoshino et al .2015).
Other benefits include high probability of success, better resources, no much commitments because it is temporary, the joint ventures are more flexible, and there are always ready and available ways to exit the alliances in case of conflicts. The partnership agreements have defined ends and focus on the project being worked upon. This is important in that there is no diversion from the goals set taking less time in achieving them. Companies can form as many alliances as they may be interested in being able to meet up with the recent requirements of the global markets (Austin, 2016). The shared governance in the alliances is a major requirement to ensure equality in sharing of costs, benefits, and risks that might occur. A study by the U.S. Department of Commerce which involved 20,000 entities shows that companies realized a 5.5 percent average return on assets when they formed joint ventures in the year 2012.
Conclusion
Unless a company has many passive investors that are required in business filings and administrative complexities, it is important to form alliances with others. Strategic alliances are most commonly formed with similar elements such as the number of parties involved, the product being handled, the structural form, governance and control and the exit and evolution provisions. These features are beneficial in establishing a well-defined alliance that will meet the set goals on time. The process of the partnership involves defining the business strategies and negotiating on the detailed terms and conditions related to the plan. The benefits realized outdo the disadvantages with the recent economy being favorable for partnership. The federal governments in different countries recognize the different types of venturing that are present and effective in the global markets. To be able to form a good partnership it is important to adequately define the agreement that addresses the purpose of the business and the authority and responsibility of each partner.
References
Austin, J. (2016). The collaboration challenge: how nonprofits and businesses succeed through strategic alliances . San Francisco, Calif: Jossey-Bass Publishers.
Gulati, R. (2013). Network location and learning: The influence of network resources and firm capabilities on alliance formation. Strategic management journal , 20 (5), 397-420.
Lorange, P. & Roos, J. (2012). Strategic alliances: formation, implementation, and evolution . Cambridge, Mass. USA: Blackwell Business.
Man. (2013). Alliances: an Executive Guide to Designing Successful Strategic Partnerships . Hoboken: Wiley.
Monczka, R. M., Petersen, K. J., Handfield, R. B., & Ragatz, G. L. (2015). Success factors in strategic supplier alliances: the buying company perspective. Decision Sciences , 29 (3), 553-577.
Yoshino, M. Y., & Rangan, S. (2015). Strategic alliances: An entrepreneurial approach to globalization.
