What is the relationship between a joint venture and a strategic alliance?

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-term or long-term.

Key Takeaways

• A strategic alliance is an arrangement between two companies that have decided to share resources to undertake a specific, mutually beneficial project.
• A strategic alliance agreement could help a company develop a more effective process.
• Strategic alliances allow two organizations, individuals or other entities to work toward common or correlating goals.
• Strategic alliances diversify revenue streams, grant access to potentially difficult-to-obtain resources, and may improve a company's public image.
• Strategic alliances may also cause companies to expend resources resolving conflict, not yield results as expected, or negatively impact a company's public image.
  

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Strategic Alliance

Understanding Strategic Alliances

At the heart of strategic alliances lies companies striving to be better but may not have the resources to embark on certain endeavors. Instead of single-handedly attempting to build out market opportunities, companies can seek out existing resources to leverage personal growth.

Consider the massive clientele base of Uber. While Uber may have an interest in making the ridership experience as strong as possible, it may not be feasible for the company to single-handedly build out their own repository of music with technological capabilities to be played on demand. For this reason, Uber turned to Spotify to enter into a strategic alliance.

On the other hand, Spotify can boast of a strong technological product. However, it may seek opportunities to get in front of a wider consumer audience (exactly what Uber has to offer). By forming a strategic alliance in where Uber provides the consumers and Spotify offers the technology, the two companies came together to create a market opportunity that neither entity could have achieved on their own.

Though less formal than other types of agreements, a strategic alliance is often still bound with a contractual obligation that legally binds the actions of each alliance member.

Types of Strategic Alliances

There are three primary forms of strategic alliances. These three types of strategic alliances vary in the degree of financial investment each company makes into the agreed-upon joint effort.

Joint Venture

A joint venture occurs when two companies agree to come together to create an entirely new, separate company that each of the existing companies become a parent to.

In 2012, Microsoft and General Electric Healthcare signed a joint agreement to create a new third company called Caradigm. Caradigm was created to develop and market an open healthcare intelligence platform. The idea behind the joint venture was Microsoft had the technical capability of making such a platform work, while GE's healthcare IT division had the expertise on the healthcare side.

Equity Strategic Alliance

An equity strategic alliance may have similar outcome goals as a joint venture; however, it is funded differently in that one company makes an equity investment into another.

In 2010, Panasonic invested $30 million into Tesla. The investment was intended to help build a stronger alliance between the two companies and to more rapidly advance the electric vehicle market expansion. As one of the world's leading battery cell manufacturers, Panasonic's skillset blended strongly with Tesla's ambition of incorporating proprietary packing using cells from multiple battery suppliers.

Non-Equity Strategic Alliance

A non-equity strategic alliance forms when two entities realize mutual benefit exists and no equity transfusion is necessary. As discussed below regarding Barnes & Noble and Starbucks, each member of the alliance simply brings their resources to the alliance for the other party to capitalize upon. A more simple contractual obligation is agreed upon for the two entities to pool resources and capabilities together.

How Do Strategic Alliances Create Value?

There's many reasons why a company may choose to enter into a strategic alliance. These reasons may include but are not limited to:

• Improving short-term finances. Companies wanting to make immediate financial impacts may find it easiest to leverage another company's resources to improve its short-term position in the market.
• Eliminating barriers to entry. Companies may not have the capital on hand to enter certain markets. Instead, they can use companies that have already made those investments to gain access cheaper and faster.
• Gaining better business insights. Companies may have no idea how a certain business model may perform. Instead of having to build out an entire model and self-fund an experiment, companies can leverage strategic alliances to "test run" how certain situations may go and use that information for future decision-making.
• Sharing financial risk. Should a business venture fail, both parties in a strategic alliance are likely to contribute to paying for those losses. Instead of single-handedly being responsible for the failure, both parties may receive assistance from the other as part of the alliance agreement.
• Innovating beyond current capabilities. In the Panasonic/Tesla alliance mentioned above, that partnership created a cutting-edge, innovative agreement that put some of the smartest experts for electric vehicles batteries on the same team.

Strategic alliances often form between companies with varying business or product cycles. For example, companies with short cycles may seek companies that have made long-term investments to aid in the rapid development of a product that would otherwise require more time.

How to Find a Strategic Alliance

Forming a strategic alliance requires creativity, forward-thinking, and savvy business sense. Though many strategic alliances are not the same, each is rooting in common steps outlined below.

• Brainstorm Potential Partners. Often, strategic alliances exist between companies in different industries. Consider other companies that may have a need for your services or have a weakness where your company has a strength. On the other hand, consider the weaknesses of your own company and what types of entities can bring you resources to help fill your gap.
• Outline Alliance Proposals. Strategic alliances must make sense for both parties; otherwise, one party may not agree to the alliance if they feel it does not benefit them. Therefore, you can find a strategic alliance by devising financial budgets and strategies. Then, propose these plans to companies to gauge their interest. Companies are more likely to find a strategic alliance when the other company is receptive to an idea that has a demonstrated plan of benefitting both sides.
• Determine Goals. All sides of a strategic partnership should provide input on what the revenue, profit, and operational strategy will be for the alliance. These goals should be well-documented and include language around what should happen if one party fails to comply with the alliance agreement.
• Devise the Plan. Once all parties are onboard to form a strategic alliance, the formal plan is presented. This often results in a series of legal documents outlining the contract between the two entities. This plan also acts as the roadmap for decision-making in the future as the newly formed alliance moved forwards.

Advantages and Disadvantages of a Strategic Alliance

Pros of a Strategic Alliance

A strategic alliance allows a company to embark on opportunities it may otherwise not have been able to embark upon. This includes earning new clients, engaging in different markets, or selling different products. Each of these avenues has the potential to increase a company's revenue and profitability.

Strategic alliances are also a way to diversify a company's revenue stream and generate different opportunities to mitigate company-wide financial risk. Risk is also mitigated with the help of the alliance members as each entity may have resources that can be used to solve unique challenges or navigate unfamiliar business scenarios.

Last, strategic alliances allow a company to operate differently than it normally would. This means using resources it doesn't have. This might be physical goods, access to markets, or labor with specific expertise. This may also mean the company can leverage the market presence of another firm to more positively gain public perception about their own company. Entering into an alliance with a company with a strong public reputation helps create brand trust and recognition of your own entity.

Cons of a Strategic Alliance

A strategic alliance is most likely to succeed if there is strong communication. This means both parties must continually expend resources to manage the alliance to ensure both sides are in agreement. Should the transmission of information or strategy fail, it will be more difficult for the alliance to succeed.

Though strategic alliances may seem fair and romantic, they are often not equally balanced. One company will almost always naturally benefit more than the other, and there may not be a simple solution to balance the trade. There may also develop an unnatural reliance on one side or the other in terms of resources consumed or expertise relied upon.

Just like how a strategic alliance can help boost a company's public image, the wrongdoing of an alliance company may do harm. One company's reputation may rely on the other, though they have no control over how the other company handles itself in public. Similar difficulty may exist if there are conflicts between the alliance members; should there be strategic disagreements, resources may be wasted on resolving interpersonal conflicts that would not have existed without the alliance.

Strategic Alliances

Pros

• May result in gaining customers, especially ones in unfamiliar markets

• May generate additional revenue and increase profitability

• May diversify a company's revenue stream

• May reduce operational risk of a company due to the addition of unique assets

• May positively influence the brand and perception of the company

Cons

• May require more work in collaborating and communicating with larger teams

• May result in one side getting a better deal than the other (even if this wasn't what was planned)

• May result in conflict should the alliance members disagree on longer-term strategy

• May negatively influence the brand and perception of the company

Examples of Strategic Alliances

The deal between Starbucks and Barnes & Noble is a classic example of a strategic alliance. Starbucks brews the coffee. Barnes & Noble stocks the books. Both companies do what they do best while sharing the costs of space to the benefit of both companies.

Strategic alliances can come in many sizes and forms:

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

Why Are Strategic Alliances Important?

Strategic alliances are important because it enables a company to further benefit in areas it would not because of its personal lack of resources. Whether it is forming an alliance to gain entry into a market, labor from skilled workers, or resources from limited sources, successful companies work with other companies. This is important as it allows a company to personally benefit by leveraging the assets of another company.

What Is the Difference Between a Partnership and a Strategic Alliance?

An alliance is a collaboration between two companies in which each individual company is expected to profit or benefit from the agreement. A partnership is a more formal type of agreement in which partners merge to create a single, shared economic interest.

What Is the Most Important Factor in a Strategic Alliance?

A strategic alliance is a relationship between two entities. For this reason, the most important factor in the alliance is the trust and collaboration between the two teams. There must be a mutual commitment to joint success for strategic alliances to be successful, and the alliance must be guided by clear objectives, strategic, and conversations to make sure both sides are continually on the same page.

The Bottom Line

A strategic alliance is an agreement between two parties for the mutual benefit of both. Each side often provides some sort of resource it allows the other party to use; by collaborating with another entity, both parties are poised to benefit in some way.

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