Strategic alliances are of three primary types:
- Joint Ventures: Under joint ventures, two companies contractually agree to a partnership and form a distinct business entity. The alliance between the parent companies creates a third legal entity (known as a child company). In a 50-50 Joint Venture, the partners equally own the third entity. Alternatively, if one partner holds a majority stake in the third entity, it becomes a Majority-owned Venture.
- Equity Strategic Alliance: Where one business partner holds a given stake in another company, it creates an equity strategic alliance. For example, if ABD Corporation purchases a 40% stock in Company XYZ, the merger becomes an equity strategic alliance. This strategic alliance involves the purchase of equity in one partner. Alternatively, the two partners can purchase each other's equity.
- Non-Equity Strategic Alliance: Non-equity strategic alliances do not involve any shared equity or child entities. These informal agreements are motivated by mutual commercial objectives. Partners entering non-equity strategic alliances pool resources and capabilities to pursue common business objectives.
Examples of Joint, Equity, and Non-Equity Strategic Alliances
- A good example of a joint venture is the strategic alliance between Tata Global Beverages and Starbucks Corporation in 2012. The 50-50 joint venture between the beverage giants resulted in the creation of Tata Starbucks. This partnership allowed the parent companies to leverage their unique brand products and take advantage of new market opportunities.
- Panasonic's purchase of Tesla's stock for $30 million is an excellent equity strategic alliance example. But, how did this investment benefit both companies? Through the alliance, Tesla gained the right to use Panasonic's cutting-edge battery cell technology on its vehicles. Meanwhile, Panasonic achieved its mission of becoming a leader in the green innovation industry.
- Distribution partnerships are the most common examples of non-equity strategic alliances. For instance, BigCommerce partnered with FedEx to enhance the efficiency and convenience of e-commerce deliveries. The strategic alliance ensured that BigCommerce customers, mainly business owners, had access to shipping discounts, free shipping services, and other e-commerce solutions provided by FedEx. Equally, FedEx benefits through increased networking and brand presence on BigCommerce stores.
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What are the advantages and disadvantages of strategic alliances in international business? One benefit of strategic alliances is increased access to resources. Companies enjoy more access to supplementary resources such as products, knowledge, and assets without modifying their core functions. Partnerships allow partner organizations to share expertise and resources while maintaining their core competencies. Strategic alliances provide access to new markets. One of the significant motivations for partnerships in international business is access to new market opportunities. Indeed, strategic alliances are especially valuable when launching new products, campaigns, or events.
The alliances offer a sense of exclusivity, which facilitates market penetration. The strategic alliances' added exposure provides access to a wide customer base. Strategic partners complement each other in terms of market position and local presence, allowing them to target market segments that would otherwise be inaccessible. Sharing risks and resources through the alliances boosts growth, promotes brand awareness, and makes exploring new investment opportunities at lower costs easier. Partnering with companies that have an excellent reputation enhances public image through association.
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Nonetheless, strategic alliances have notable shortcomings and challenges. One disadvantage is conflicts of interest, especially regarding commitment, resource investment, values, and mission. Aligning with the wrong partner will adversely affect business outcomes. Challenges such as misrepresentations, lack of transparency, lack of commitment by one partner, and ineffective use of resources put a strain on the partnership. Mismanagement and financial losses by one partner increase the liability. Although companies come together to share risks and resources, they also share profits, significantly reducing profitability. Furthermore, sharing business knowledge can result in a new potential competitor. Ultimately, strategic alliances with foreign companies may backfire due to cultural barriers.
What Are Success Factors for Strategic Alliances in International Business?
After understanding what is strategic alliance in international business, explore the success factors for creating successful alliances.
What makes a strategic alliance truly successful? First, it is crucial to align strengths and goals. Partners should complement each other through their unique strengths. At the same time, they need to leverage these strengths to pursue a common goal. Another strategy for creating successful alliances is shared values. Business values include culture, operational style, and strategy. Shared values are the foundation for a cohesive vision within the partnership. As such, partners with shared values are more likely to succeed. Where these values diverge, business conflict is inevitable.
Transparency and strong connections help businesses integrate effectively. Joint activities, collaboration, and contact points demonstrate better integration. Connecting more stakeholders throughout various organizational levels makes developing and implementing initiatives easier. Co-hosted events and co-branded marketing activities drive business integration, publicize the partnership, and enhance public image while projecting the strength of the alliance.
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Strategic alliance is defined as the independent cooperation of two companies in pursuit of a mutually beneficial project. What is strategic alliance in international business? When two entities cooperate globally, they are said to be in an international strategic alliance. Businesses are motivated to enter into strategic alliances to spread risks, collaborate in research and development, reduce costs, enhance efficiency and increase returns. Through strategic alliances, companies can also share knowledge and dive into foreign markets. Strategic alliances assume three primary forms-- joint ventures, characterized by creating a third distinct entity, equity strategic alliances, where one partner purchases the stock of another, and non-equity strategic alliance, which is informal and motivated by commercial objectives. The success factors for strategic alliances in international business include
- Aligning strengths and goals
- Shared values
- Transparency and strong connections
Examples of these alliances include Starbuck's 50-50 joint venture with Tata Global Beverages, Panasonic's purchase of Tesla's stock for $30 million, and BigCommerce partnership with FedEx, respectively.
The main advantages of strategic alliances include increased access to resources, new markets, and knowledge. These alliances also allow companies to share expertise and expand their customer base. Strategic partners also benefit from shared risks and increased brand awareness. On the other hand, the primary disadvantages of strategic alliances are conflicts of interest, lack of commitment and transparency, increased liability, and shared profits. Cultural barriers hinder strategic alliances with foreign companies.
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Video Transcript
Definition of Strategic Alliance
A strategic alliance in business is a relationship between two or more businesses that enables each to achieve certain strategic objectives neither would be able to achieve on their own. The strategic partners maintain their status as independent and separate entities, share the benefits and control over the partnership, and continue to make contributions to the alliance until it is terminated. Strategic alliances are often formed in the global marketplace between businesses that are based in different regions of the world.
Advantages of Strategic Alliances
Strategic alliances usually are only formed if they provide an advantage to all the parties in the alliance. These advantages can be broken down to four broad categories.
The first category is organizational advantages. You may wish to form a strategic alliance to learn necessary skills and obtain certain capabilities from your strategic partner. Strategic partners may also help you enhance your productive capacity, provide a distribution system, or extend your supply chain. Your strategic partner may provide a good or service that complements a good or service you provide, thereby creating a synergy. If you are relatively new or untried in a certain industry, having a strategic partner who is well known and respected will help add legitimacy and credibility to your venture.
A second category is economic advantage. You can reduce costs and risks by distributing them across the members of the alliance. You can also obtain greater economies of scale in an alliance, as production volume can increase, causing the cost per unit to decline. Finally, you and your partners can take advantage of co-specialization, where you bundle your specializations together, creating additional value, such as when a leading computer manufacturer bundles its desktop with a leading monitor manufacturer's monitor.
Another category includes strategic advantages. You may join with your rivals to cooperate instead of compete. You can also create alliances to create vertical integration where your partners are part of your supply chain. Strategic alliances may also be useful to create a competitive advantage by the pooling of resources and skills. This may also help with future business opportunities and the development of new products and technologies. Strategic alliances may also be used to get access to new technologies or to pursue joint research and development.
Lastly is the category of political advantages. Sometimes you need to form a strategic alliance with a local foreign business to gain entry into a foreign market either because of local prejudices or legal barriers to entry. Forming strategic alliances with politically-influential partners may also help improve your own influence and position.
Disadvantages of Strategic Alliances
Strategic alliances do come with some disadvantages and risks.
One disadvantage is sharing. Strategic alliances require you to share resources and profits, and often require you to share knowledge and skills as well. Sharing knowledge and skills can be problematic if they involve trade secrets. Agreements can be executed to protect trade secrets, but they are only as good as the willingness of parties to abide by the agreements or the courts' willingness to enforce them.
Strategic alliances may also create a potential competitor. An ally one day may become a competitor the next when it decides it no longer needs you.
Another disadvantage includes opportunity costs. Specifically, engaging in one opportunity may close the door on other opportunities that may have been valuable as well. This may be especially true in strategic alliances that often require a lot of time and resources to develop properly.
Additionally, there might be uneven alliances. For instance, if the relative power of each partner in the alliance is very uneven, the weaker partners may become bullied, pushed around and forced to proceed as the more powerful members wish.
Lastly, foreign confiscation is another disadvantage to consider. Specifically, there is always a risk that a foreign national government will attempt to seize your local business or force you out so your local strategic partner can have the market all to itself once it has been developed. This isn't likely in the developed world, but may be a problem in developing economies with weak political and legal systems.
Lesson Summary
Strategic alliances are formed by two or more businesses in order to achieve strategic objectives they could not otherwise achieve alone. There are organizational, economic, strategic, and political advantages in pursuing a strategic alliance.
On the other hand, disadvantages include the fact you will have to share profit and possibly expose trade secrets. You may also create a potential competitor and have to give up other opportunities. An uneven power relationship between members can create problems, and there is always a risk of foreign government interference if the alliance involves foreign investment.
Strategic Alliance Vocabulary, Advantages & Disadvantages
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- Strategic Alliance: a formation between two or more businesses for specific objectives
| Advantages | Disadvantages |
|---|---|
| Organizational: strategic partner may provide goods & services that complement your own | Sharing: trade secrets |
| Economic: reduced costs & risks | Competition: strategic alliances may create a potential competitor |
| Strategic: cooperation with rivals | Costs: one opportunity may close the door to an even better financial deal |
| Political: cooperation with foreign companies to gain local favor | Uneven alliances: one company may have more power than the other |
| Major losses: foreign takeover of a company, confiscation of assets |
Learning Outcomes
Study this lesson until you've built your capacity to:
- Interpret the meaning of a strategic alliance
- Emphasize the advantages of strategic alliances
- Remember the disadvantages of these alliances
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