STRATEGIC ALLIANCE

DEFINITION
 A strategic alliance is an arrangement between two companies
to undertake a mutually beneficial project while each retains
its independence. The agreement is less complex and less
binding than a joint venture, in which two businesses pool
resources to create a separate business entity.
 A company may enter into a strategic alliance to expand into a
new market, improve its product line, or develop an edge over
a competitor. The arrangement allows two businesses to work
toward a common goal that will benefit both
 The relationship may be short- or long-term and the
agreement may be formal or informal
CHARACTERISTICS
 Two or more organizations join together to pursue a defined objective or
goal during a specified period, but, remain organizationally independent
entities.
 The organizations pool their resources and investment and share risk for their
mutual interest/benefit
 The alliance partners contribute, on a continuing basis, in one or more
strategic areas like technology, process, product, design etc.
 The relationship among the partners is reciprocal with partners sharing
specific individual strengths or capabilities to render power to the alliance.
 The partners jointly exercise control over the performance or progress of the
arrangement with regard to the defined goal or objective and share the
benefit.
FORMS OF STRATEGIC ALLIANCE
 The strategists Yoshino and Rangan have classified the
strategic alliance based on two dimensions: Extent
of organizational interaction and conflict potential
among the alliance partners.
Through this classification, the strategists try to explain two
things to the alliance partners:
 The extent to which the partners must interact to have
the alliance work effectively.
 Understand the potential of conflict that may arise out of
being competitors in the market.
 Procompetitive Alliances: The procompetitive alliance is characterized by low
interaction and low conflict.A relationship between the manufacturer and its
suppliers or distributors, without the firms actually investing the resources in the
manufacturing firm or distributing the semi-finished or finished goods.

 General Motors' and Hitachi's working together to develop electronic car is representative of
procompetitive alliances.

 Noncompetitive Alliances: Such alliances are characterized by high interaction

and low conflict. The noncompetitive alliances are formed between the
companies that operate in the same industry but do not consider each other as
rivals. Their business operations do not coincide and are quite distinctive due to
which the feeling of competitiveness does not emerge. Often, the companies
that have expanded geographically within the industry adopt the
noncompetitive alliance.

 Ran — baxy Laboratories Limited and M/S Eli Lilly of the US, where the joint venture
is to manufacture and market Lilly brands in Indian market.
 Competitive Alliances: As the name suggests, these
alliances are characterized by high interaction and high
conflict. Here, two competing firms that perceive each
other as rivals come together to form an alliance . Such
alliances could be intra- or inter-industry. Often, the
foreign companies operating in India forms a
competitive alliance with the local rival companies for
specific purposes.
 Precompetitive Alliance: The precompetitive alliance is
characterized by low interaction and high conflict. Such
partnership brings two firms from different, most often
unrelated industries to work towards a specific activity,
such as new product development, new technology
development, or creating awareness among the
potential customers about the use of new product or
idea. The joint R&D activities and advertising campaigns
are the examples of a precompetitive alliance.
 example of competitive alliance between tata Tea Ltd. and Hitachi of
Japan where the joint venture will largely function as a marketing and
trading company with an aim to market Tata Tea Ltd.'s products m Japan
and international market, between Videocon and Sansui where the
Videocon shall use for five years the technology as wall as the brand name
of .Sansui to enter European market, between Doordarshan and CNN of
the US for CNN to telecast for two years on Doordarshan network, between
Ansal Group and Daewoo Corporation of South Korea and other such .joint
ventures to develop roads and exoressways, between ) Raymond Industries
and Clarity Denim Industries of Italy and other such joint ventures to
manufacture denim fabric
 Example of precompetiti\e alliance between Tata Industries Limited and
IBM World Trade Corporation of the US in the field of electronics to make
the joint venture India's top information £2 and technology company.
OBJECTIVES
 To Enhance Capability and Competence:
Alliances may be specifically used to combine and to enhance the
knowledge, technology, experience, skill and competence of the
partners. Such blending may yield synergy or critical mass. Nissan
sources Maruti’s A-Star small car from its Manesar factory and sells
them as Nissan Pixo in Europe. The government of India preferred a
joint venture between SAIL (India) and POSCO (Korea) over Arcelor-
Mittal, the world’s largest producer in this sector and technology was
that POSCO offered its patented FINEX technology.
 ii. To Enhance Value Creation:
Participants may enhance value generation by means of the sharing
and joint use of knowledge, experience, resources and competence.
And also the unnecessary and/or wasteful duplication of resources
can be avoided. Maruti and Volkswagon have planned joint action in
product development and manufacturing in India.
 To Leverage Resources:
Hamel and Prahlad have suggested that strategic alliances may be used to
• Concentrate resources
• Accumulate resources
• Complement resources
• Conserve resources

 To Enhance Market Position And Achieve Business Development:

Alliance may be used to achieve expansion and growth whilst at the same
time maintaining their individual identity
 To Achieve Globalisation:
Strategic alliances may be used for getting market access and international
business growth, access international networks and distribution, and to
establish regional or continental manufacturing or distribution using large
scale, world class quality facilities whose scale and cost would be beyond the
resources and capability of any one of the partners.
 Risk Management:

Strategic alliances may be used to maximize the inputs of competence and

experience to projects that are novel, uncertain or ambiguous. Since these
projects carry the maximum risk, alliance help in spreading risk to all partners.
Types of Strategic Alliances
 There are three types of strategic alliances: Joint Venture, Equity Strategic
Alliance, and Non-equity Strategic Alliance.
 Joint Venture

 A joint venture is established when the parent companies establish a

new child company. For example, Company A and Company B (parent
companies) can form a joint venture by creating Company C (child
company).

 In addition, if Company A and Company B each own 50% of the child

company, it is defined as a 50-50 Joint Venture. If Company A owns 70%
and Company B owns 30%, the joint venture is classified as a Majority-
owned Venture.
 Equity Strategic Alliance

An equity strategic alliance is created when one company purchases a

certain equity percentage of the other company. If Company A purchases
40% of the equity in Company B, an equity strategic alliance would be
formed.

 Non-equity Strategic Alliance

A non-equity strategic alliance is created when two or more companies sign a

contractual relationship to pool their resources and capabilities together.
Challenges in a Strategic Alliance

Although strategic alliances create value, there are many challenges to

consider:

 Partners may misrepresent what they bring to the table (lie about
competencies that they do not have).

 Partners may fail to commit resources and capabilities to the other partners.

 One partner may commit heavily to the alliance while the other partner
does not.

 Partners may fail to use their complementary resources effectively.

 Principles For Managing Strategic Alliances
 Create an Alliance Strategy That Meets Organizational Objectives and
Needs
 Establish and Follow Alliance Processes
 Perform Due Diligence
 Create Flexible Teaming Agreements
 Create Measurement Processes
 Drive Toward Joint Profitability
 Create a Culture of Alliance Knowledge Sharing
 Understand When to Terminate the Relationship
GLOBAL STRATEGIC PARTNERSHIP
 In a global strategic partnership, two or more firms from different countries work
as a team. They pool their resources or skills to provide better products or
services. Furthermore, they reach a broader audience through collaboration.
Firms engage in global strategic partnerships because they believe the
partnership will lead to synergy, which means increased economic benefits.

 n 2001, The Coca-Cola Company and Procter & Gamble declared a joint
venture to make use of CocaCola’s massive distribution system to improve
reach and reduce time to market for the P&G products.

 Amazon Web Services and McAfee: The alliance helps clients adopt Amazon
Web Services (AWS) and the public cloud using the same security controls
available in a private data center. Clients experience the operational benefits
of the cloud without having to worry about a security gap.
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