A strategic alliance is when two or more businesses form a partnership for a project, business venture or for the long term to create a new business. A strategic alliance agreement could help a company develop a more effective process, expand into a new market or develop an advantage over a competitor, among other possibilities.
Advantages of a strategic alliance
Strategic alliances allow two organizations, individuals or other entities to work toward common or correlating goals. The idea is for all parties to benefit, in the short-term, long-term or both. The agreement may be formal or informal in nature, but each party’s responsibilities must be clear. Further, they may be in place for short or long periods of time depending on the needs and goals of those involved.
Often, strategic alliances allow involved organizations to pursue opportunities at a faster rate than if they functioned alone. It provides access to additional knowledge and resources that are held by the other party, which may ease the learning curve for the new pursuit, along with providing setup time and costs.
This strategy provides more flexibility than joint ventures, as the involved parties do not need to merge any assets or funds in order to proceed. Instead, they each remain autonomous in nature, which can help ease the function of the agreement when the two entity’s business practices are highly varied.
- Quick access to a new market
- Reduction of competition by forming an alliance with competitors
- Larger market share
- Increased sales and income
- Gaining new expertise and technologies
- Access to research and development for business development
- Increase in the range of products and services
Disadvantages of a strategic alliance
Though the arrangement is generally spelled out clearly, the differences in how the businesses operate can cause some struggles. Further, if the alliance requires informing one party of the other party’s proprietary information, there may be a level of distrust within the corresponding leadership.
In cases of long-term strategic alliances, the involved parties may become dependent on one another. While the risk is lower if the dependency is experienced by both parties, the risk can increase significantly if the dependence becomes one sided, as this puts an advantage to one side.
- May take on the weakness of the partner, e.g lack of management expertise, unmotivated staff or high costs
- Less efficient communication in a large multinational business
- Increased conflict over decisions and allocation of business resources
- Making the alliance work takes time and energy away from the core business activity
- Loss of control over product quality, operating costs, employees, etc.
Types of strategic alliance
An acquisition is a corporate action in which a company buys most, if not all, of another firm’s ownership stakes to assume control of it. An acquisition occurs when a buying company obtains more than 50% ownership in a target company. As part of the exchange, the acquiring company often purchases the target company’s stock and other assets, which allows the acquiring company to make decisions regarding the newly acquired assets without the approval of the target company’s shareholders. Acquisitions can be paid for in cash, in the acquiring company’s stock or a combination of both.
- Hostile acquisition
A hostile takeover is the acquisition of one company (called the target company) by another (called the acquirer) that is accomplished by going directly to the company’s shareholders or fighting to replace management to get the acquisition approved. A hostile takeover can be accomplished through either a tender offer or a proxy fight.
The key characteristic of a hostile takeover is that the target company’s management does not want the deal to go through. Sometimes a company’s management will defend against unwanted hostile takeovers by using several controversial strategies, such as the poison pill, the crown-jewel defense, a golden parachute or the Pac-Man defense.
- Friendly acquisition
A situation in which a target company’s management and board of directors agree to a merger or acquisition by another company. In a friendly takeover, a public offer of stock or cash is made by the acquiring firm, and the board of the target firm will publicly approve the buyout terms, which may yet be subject to shareholder or regulatory approval. This stands in contrast to a hostile takeover, where the company being acquired does not approve of the buyout and fights against the acquisition.
In most cases, if the board approves a buyout offer from an acquiring firm, the shareholders will vote to pass it as well. The key determinant in whether the buyout will occur is the price per share being offered. The acquiring company will offer a premium to the current market price, but the size of this premium (given the company’s growth prospects) will determine the overall support for the buyout within the target company.
A merger is a deal to unite two existing companies into one new company. There are several types of mergers and also several reasons why companies complete mergers. Most mergers unite two existing companies into one newly named company. Mergers and acquisitions are commonly done to expand a company’s reach, expand into new segments, or gain market share. All of these are done to please shareholders and create value.
- Horizontal Merger
A horizontal merger is a merger or business consolidation that occurs between firms that operate in the same space, as competition tends to be higher and the synergies and potential gains in market share are much greater for merging firms in such an industry. This type of merger occurs frequently because of larger companies attempting to create more efficient economies of scale, such as the amalgamation of Daimler-Benz and Chrysler. Conversely, a vertical merger takes place when firms from different parts of the supply chain consolidate to make the production process more efficient or cost effective.
Horizontal mergers help companies gain advantages over competitors. For example, if one company sells products similar to the other, the combined sales of a horizontal merger give the new company a greater share of the market. If one company manufactures products complementary to the other, the newly merged company may offer a wider range of products to customers. Merging with a company offering different products to a different sector of the marketplace helps the new company diversify its offerings and enter new markets.
- Vertical merger
A vertical merger is a merger between two companies that operate at separate stages of the production process for a specific finished product. A vertical merger occurs when two or more firms, operating at different levels within an industry’s supply chain, merge operations. Most often, the logic behind the merger is to increase synergies created by merging firms that would be more efficient operating as one.
A vertical merger, also known as a vertical integration, is a merger between a manufacturer and a supplier within the same industry. These types of mergers or integrations occur when a company seeks to reduce operating costs and increase efficiency to realize higher profits. Combining the operations of two companies allows a parent company to control the entire production cycle of a product by incorporating two businesses as a single business entity.
A joint venture (JV) is a business arrangement in which two or more parties agree to pool their resources for the purpose of accomplishing a specific task. This task can be a new project or any other business activity. In a joint venture (JV), each of the participants is responsible for profits, losses and costs associated with it. However, the venture is its own entity, separate and apart from the participants’ other business interests.
A continuing relationship in which a franchisor provides a licensed privilege to the franchisee to do business and offers assistance in organizing, training, merchandising, marketing and managing in return for a monetary consideration. Franchising is a form of business by which the owner (franchisor) of a product, service or method obtains distribution through affiliated dealers (franchisees).
In a franchise business model aspects include:
- Products and services
- Business concept
- Marketing strategies and plans
- Operational standards and systems
- Quality control