Strategic alliance in management arena is a treaty between two or more companies to collaborate in a particular business activity, so that each benefits from the strengths of the other, and gains competitive advantage (Mockler, 1999). The development of strategic alliances has been envisaged as a response to globalization and increasing vagueness and intricacy in the business environment. Strategic alliances encompasses the sharing of knowledge and expertise between associates as well as the lessening of risk and costs in areas such as relationships with suppliers and the development of new products and technologies. Strategic alliance is sometimes equated with a joint venture, but an alliance may involve competitors, and generally has a shorter life span. Strategic alliances developed and spread as formalized interorganizational relationships, mainly among companies in international business systems. These supportive arrangements seek to accomplish organizational objectives better through partnership than through competition, but alliances also create problems at several levels of analysis.
There are many reason for strategic alliances (Srinivasan, 2014):
Strategic alliances can be in the form of mutual services, consortia which essentially means partnership of similar companies and similar industries to gain benefits that too expensive to develop alone. When companies cannot legally merge, they combine the strength of the partners to gain outcome which is of value of both allies (Srinivasan, 2014).
Licensing agreement refers to an agreement in which licensing firm grants rights to another firm in another country or market to produce or sell product. The value chain partnership is strong and close alliance in which one company or alliance forms a long term arrangements with important suppliers or distributers for mutual benefits (Srinivasan, 2014).
Historically, strategic alliance in defined by numerous management theorists. In the decade of 70's, entrepreneurs were more concerned about the performance of the product. Alliances aimed to obtain the best raw materials, the lowest prices, advanced technology and improved market penetration globally.
In the decades of 80's, the main objective of companies became merging of the company's position in the sector, using alliances to shape economies of scale and scope. In this period, there was an outburst of alliances. For example, the one between Boeing and a consortium of Japanese companies to build the fuselage of the passenger transport version of the 767; the alliance between Eastman Kodak and Canon, which allowed Canon to produce a line of photocopiers sold under the Kodak brand; an agreement between Toshiba and Motorola to combine their respective technologies in order to produce microprocessors.
Harbison and Pekar (1998) stated that during 90's, collapsing barriers between many geographical markets and the distorting of borders between sectors brought the expansion of capabilities and competencies to the centre of attention. It became necessary to forestall one's competitors through a continuous flow of innovations giving recurrent competitive advantage.
Different theoretical view of strategic alliances (Source: Yi Wei, 2007)
There are numerous theories developed on strategic alliance that concentrate on the reasons why firms enter into closer business relationships. These theories include transaction costs analysis (Williamson,1975,1985),competitive strategy(Porter,1980),resource dependence (Pfeffer and Salancik,1978;Thompson,1967), political economy(Benson,1975;Stern and Reve,1980),social exchange theory (Anderson and Narus,1984).
Summary of different theories of strategic alliances (Source: Siew-Phaik Loke et.al, 2009)
There are three major types of international strategic alliances (Lorange and Roos, 1992)
Number of alliances made by some large and medium scale firms (Schreiner, 2009)
Strategic alliances are the relatively continuing provisions, detached from institutional arrangement, linking associations to utilize resources and plan structures of independent organizations towards shared achievement objectives. For this, the joint achievement of independent organization's objectives are allied to business goals of other supporting organizations. Inter firm assistance, which is mainly targeted to align in strategically, also need to recognise critical hurdles that are important to be removed before proceeding towards encouraging unwavering collaboration in alliance formation. However, efforts in doing research are sometime not up to mark to identify structural magnitude in specific terms in order to support them for better performance leading to positive strategic alliance (Michael, et., al., 1995).
Biggs (2006) recognized some critical factors that determine the success of a strategic alliance:
Critical Success Factors affecting Strategic Alliances (Biggs, 2006)
Determinants of Success in Alliances: There are some factors that are important to achieve success at each stage of alliance. In first stage of alliance, alliances are formed by scrutinizing and selecting a suitable and reliable strategic partner. In the second stage, the alliances are set, designed, job description and ownership at each level is made. In the third stage, there is proper management and post formation evaluation, which includes supervising the perceived worth of outcome.
Table: Stages performed in Successful Alliances (Kauser, 2004)
Benefits of strategic alliance:
International business may realize numerous advantages from strategic alliances that are as under (Bernadette Soares, 2007):
1. Ease of market entry: Improvements in telecommunications, computer technology and transportation have made entry into foreign markets by international firms easier. Entering foreign markets further confers benefits such as economies of scale and scope in marketing and distribution. The cost of entering an international market may be beyond the abilities of a single firm but, by entering into a strategic alliance with an international firm, it accomplishes the benefit of quick entry while curtails the cost. Choosing a strategic partnership as the entry mode may overcome the remaining difficulties, which could include entrenched competition and hostile government conventions.
2. Shared risks: Risk sharing is another common basis for undertaking a cooperative arrangement. When a market has just opened up, or when there is much vagueness and instability in a particular market, sharing risks becomes particularly important. The competitive business makes it difficult for business entering a new market or launching a new product, and strategic alliance is effective way to decrease or control a firm's risks.
3. Shared knowledge and expertise: Most firms are capable in some areas and deficit in other areas. Developing a strategic alliance can permit ready access to knowledge and expertise in an area that a company lacks. The information, knowledge and expertise that a firm gains can be used, not just in the joint venture project, but for other projects and purposes. The expertise and knowledge can range from learning to deal with government regulations, production knowledge, or learning how to acquire resources.
4. Synergy and competitive advantage: Strategic alliance is required to accomplish co-operation and a competitive advantage. Competition becomes more effective when associates leverage off each other's strengths, bringing synergy into the process that would be hard to achieve if attempting to enter a new market or industry alone. Other benefits that Strategic alliance offer to companies are:
I. An alliance assists to enter new international markets by overcoming political, economic and social barriers. Due to government policies and rules, it is problematic to enter into new international markets. Powerful motive to create alliances is to decrease entry barriers by joining forces with other organizations.
II. Home market competitive position is protected by alliances. Entering international markets may affect domestic market but in international market, organization force foreign competitors at home divert their resources away from expansion which protects the home market.
III. Alliances aid in increasing distribution networks by acquiring new means of distribution.
IV. Alliances reduce the manufacturing costs, other costs and risks of the project, product or services by sharing between the alliance partners.
V. Strategic alliances in business helps to gain access to imperceptible assets like brand name, expertise etc.
VI. Due to alliances, competent rivals also collaborate which helps to decrease internal and external uncertainties in environment.
VII. Strategic alliances support to broaden product line, services processes and fill product line gaps in the current products. High cost and lack of technology may force a firm to seek a foreign partner to fill their product lines.
VIII. Strategic alliances permit companies to enter new markets and to attract many potential customers which expand their market share. Organizations working in stagnant industries enter alliances to grow its presence in emerging businesses.
IX. Strategic alliances lessen the jeopardy of future competition by entering into an alliance with another firm and it demonstrates many future opportunities as well. X. Alliances permit firms to gain proficiency by realising economies of scales and vertical integration.
XI. Resources are augmented in strategic alliances. As the all partners of alliance provide resources. So the firms that have less resources of any kind they create strategic alliances.
XII. Strategic alliance is produced to gain new skills and knowledge. Gaining knowledge is one of the most significant factors in creating alliances. Collaborators in an alliance learn from each other's skills, capability, technology and technical standards.
XIII. Alliances assist to increase performance, productive capacity and existing market product and services by joint manufacturing and developing product cooperatively.
XIV. Alliances are also made by following industry trends to accomplish competitive advantages and increase revenues.
Causes of Unsuccessful Strategic Alliances:
Unsuccessful alliances cause many damages to the partners of alliance. Some of the causes are as following:
I. Problems relating control of strategy implementation is a factor in let-down of the alliance. When strategy implementation goes out of control of any of the organization in the alliance then the alliance may fail.
II. When firm depends specially on the partners of other alliances for skills, it is a disadvantage for the organization that depends on others.
III. When the perception of unequal gains prevail in alliance, partner getting less out of the alliance than those associates who gain more can cause problems and discrepancy which results in failure of alliance.
IV. When the collaborators in alliance do not manage the project properly, it creates problems when it is not planned that how, who, when and where the process should take place and how much time and resources must be committed to manage the alliance. The partners must plan and monitor the development of each step frequently.
V. Conflicts between the allies to decide the objectives and plans can cause a change in the feasibility and relation of a particular alliance.
VI. When the strategic alliances do not have control on elementary strategy and they depend upon the alliance for development of its overall business, and fail to concentrate on alliance goal and their organization goal separately then conflicts rise and partners may become rivals.
VII. It has been observed that differences in cultural values of partners may lead to failure as culture clashes and different thinking can create a situation where parties in organizations differ to some aspects of agreement.
VIII. Different cultures, environment and rules prevailing in partner organizations within same nationality also leads to failure of strategic alliances.
IX. When strategic alliances are shaped, many job positions and their reports are changed to attain the goal of alliance. There are role ambiguity and uncertainty about specific roles that may bind organizations from fulfilling their obligations created in the situation of alliance.
X. A partner may create manifold alliances with other competing organizations which may affect the alliance.
XI. Antitrust procedures leads to collapse of an alliance. It can limit the benefits of an alliance by inviting governmental involvement.
To summarize, Strategic alliances are vital tools in aggressive business environment. Management literature revealed that Strategic Alliance is an concurrence between two companies that work in similar manner in the market, that share resources to carry out a desired project for which both parties have some common interest. It can be said that strategic alliances can be formed as a single alliance between two companies and as numerous firm alliance involving more than two companies. A company can be involved in more than one alliance at the same time to gain benefits in different dimensions of its corresponding business operations and to focus objectively on current and potential markets. By developing strategic alliance, a company can develop and maintain a portfolio of alliances to gain competitive edge, access probable skills and resources, share expensive facilities like research labs, start state of the art joint manufacturing and/or distributions and enter new markets, and even though to avoid threats and weaknesses into prospects.