A Strategic alliance is a partnership where two or more companies decide to cooperate for their mutual benefit by combining their resources- financial, managerial, and technological as well as their competitive advantages. Although forming an alliance could be beneficial to a business, but there are also some risks of strategic alliances in business.
A global strategic alliance means cooperation between international companies and it can take various forms, such as co-funding of research projects, sharing of production facilities and marketing of each others products using current distribution networks.
What are the Main Disadvantages of Strategic Alliance ?
- Cultural and Language Barriers: Cultural conflict is probably the most significant challenge which businesses in alliances experience today. These cultural problems include language, egos, and different attitudes to business can make it tough. The first thing which can cause problems is the language barrier which they might face. It is crucial for the businesses that are functioning jointly to be able to communicate and understand each other well or they will likely fail. Language barriers sometimes can be a source for delays and frustrations. Communication problems might also occur because job definitions are much more specific in Western companies compared to Asian companies.
- Uneven Alliances: When the decision powers are distributed very uneven, the weaker alliance partner may be compelled to act in line with the will of the more powerful partners even if it is actually not willing to do so.
Figure: Pitfalls of Strategic Alliances between Companies
- Lack of Trust: In several alliances one partner will point the failure finger at the other partnering company. Transferring the blame will not solve the issue, but increases the stress between the alliance partners and usually ruins the alliance. Building trust is an essential and yet most challenging element of a successful alliance. Only people can trust each other, not the company. For this reason, alliances must be formed to improve trust between individuals. Quite a few alliances didn’t work because of the lack of trust leading to unsolved issues, lack of understanding, and despondent relationships.
- Damage to Goodwill: In case you create an alliance with another organization, the other business’s poor public relations can harm your organization’s reputation. Even if your alliance partner satisfies all of its obligations to you and faithfully promotes your business, it might still be linked to other acts of bad faith which may stain your organization.
- Differences in Management Styles: Failing to understand and adjust to “new style” of management is an obstacle to success in an alliance. Adjustments are needed in management style to run successful alliances. The adaptation of a new style of management needs a change in corporate culture, which should be initiated and nurtured by the top management. Some other challenges which may occur between businesses in alliances are different attitudes among the companies. For example, one partner may deliver its good or service behind schedule, or do a bad job producing their goods or service, which can result in distrust between the two alliance partners.
- Potential for Conflicts: The understanding reached among the partners is crystallized into an agreement of alliance. Having said that, no agreement will be able to capture every detail of an understanding. The complexity grows when a situation originates that is unexpected or not provided for in the agreement. This can create conflict over goals, domain, and techniques that must be followed in the alliance activity among the partners and could possibly lead to setbacks to the alliance.
Watch a Video on Disadvantages of Strategic Alliance in Business
- Loss of Autonomy: The business gets focused not only to a goal of its own but that of the other business. This demands cost in terms of goal displacement. The business at the same time loses the independence and hence its ability to unilaterally handle the outcomes. All the partners in an alliance have control over the performance of the assigned tasks. No partner, hence, can unilaterally control the result of an alliance activity. The business may not be able to use its own time-tested technology, if the alliance partner refuses to subscribe to it.
Read Also: Advantages and Disadvantages of Strategic Alliance
It may have to use the dominant partner’s technology, that could be different, or the combination of its own technology and its partner’s. This is very likely to have its affect on the stability of the business since it gets exposed to the uncertainty of using new technology.
The number of firms using nonequity partner programs has grown dramatically over the past several years. Such programs can have positive and negative results. This chart explores the benefits and drawbacks of nonequity (or “income”) partner programs across five important firm management attributes.
Click here to enlarge the chart.
Editor's note: Also read "How to speed the path to partner," by Chris Baysden, in the March 2014 issue of the JofA.
Companies run their businesses in a market comprised of various competitors. The presence of other competitive businesses is good for your business and customers. Because healthy competition keeps you on track and customers would have more choices. Sometimes, businesses and companies join hands and share resources in order to deal with a certain situation.
What is Strategic Alliance?
A strategic alliance is an agreement between two or more business entities where they could enjoy the benefits while maintaining their independence. The nature of strategic partnership could be short or long-term depending upon the agreement. However, the agreement of strategic alliance is usually less complicated than a joint venture where businesses create something new.
The strategic alliance could be formal or informal; it clarifies the roles and responsibilities of each partner in order to achieve mutual goals and benefits. The profit would determine the time period of alliance among partners. The alliance could help businesses to be efficient in their processes.
Reasons behind Forming Strategic Alliance
Businesses create a strategic alliance for various reasons, and they’re as follows;
- Achieve a competitive edge against the common competitor
- To collect resources to create a larger fund
- Learning the know-how of the new technology
- Achieving a price competitive edge
- Minimizing the risk factor of research and development
- Achieve economies of scale and cost reduction
- Maintaining the top leading role
- Speed up the process of the product development
- Entering into the new market
- Entering into the restricted market like the Chinese market
Types of strategic Alliances with detailed Examples
Horizontal Strategic Alliance
A horizontal strategic alliance is an agreement and alliance among companies that are operating their business in the same industry. The alliance is among the businesses that used to be the competitors; they join hands and share resources to achieve a competitive edge in the market.
The strategic business partnership alliance between Nissan and Renault is a very good example of a horizontal strategic alliance. This helped both companies to limit the research and development cost, rationalize the logistic cost, and achieve economies of scale through bulk production.
Vertical Strategic Alliance
A vertical strategic alliance is stretching your business upward, downward, or both of the supply chain. For instance, an automobile manufacturing company makes a business partnership with a foreign distribution network while entering into a new market in another country.
An ink manufacturing company makes a strategic alliance with the pigment manufacturer so that the company would have a consistent supply of raw material pigment.
Joint Venture
Two companies share resources and create a new company through an agreement. In other words, the joint venture is a Child Company of two big parent businesses. It could be short-term or long-term, but it has clear goals and objectives, and the partner companies share their profit.
Google and GSK made a strategic alliance in 2016 to fund the research of treating a patient with electrical signals. The joint venture attracted the attention of many other firms and they share their resources in the development of the product.
Equity Strategic Alliance
Equity strategic alliance is when a business shares and equity of the other business. Two businesses purchase shares and equity of each other firm.
The relationship between Panasonic and Tesla is a very good example of an equity alliance. Panasonic invested 30 million dollars in battery technology for electric vehicles. It resulted in the form of establishment of a lithium-ion battery plant in Nevada.
Non-Equity Strategic Alliance
A non-equity strategic alliance is when businesses make an alliance and agreement where they share resources without creating any separate business. It’s usually informal and flexible than a regular form of partnership and equity. A great number of companies usually make a non-equity alliance.
The purpose of such a type of business alliance is to gain an advantage in sales, marketing, production, and research and development.
How to Make a Successful Strategic Partnership
Here’s how you can build a successful partnership by keeping in mind the following steps;
Your focus should on cost reduction, developing new products, and approaching more customers.
- The strategic business alliance should develop your core business competencies.
- It should minimize the potential competitive threat.
- It limits the risk factors that could hurt your business.
Advantages of Strategic Alliance
- New Perception. When two well-established businesses make strategic business partnership alliances, it sends a positive message in the market. Both companies could take advantage of each other’s reputation.
- Improves Existing Resources. It would help the employees of both companies to learn from each other skill and experience. They don’t have to hire any external trainers and mentors to train their staff.
- Lower Competition. The alliance sends a strong message to the competitors that both firms are here to stay and face the competition.
- Lower Risk. Business education teaches us that we have to do anything and everything. In reality, anything and everything brings a lot of uncertainties, baggage, risks, and liabilities. The partnership alliance helps you to reduce the risk factor.
- Affordable. Mergers and acquisitions are costly alternatives. Whereas strategic alliance provides businesses autonomy on the various operation of the company, they only have to share limited resources for mutual benefit.
- Intellectual Capital. When the two powerheads combine their capabilities, it goes much deeper than complimenting resources. Sometimes, it results in form of extraordinary intellectual developments.
- Expansion. When two businesses make strategic partnership alliances, then they don’t have to outsource various processes. They can develop it in-house, and it allows them to expand their resources.
- New Market. The strategic partnership alliance allows businesses to enter into the newer markets by partnering up with foreign companies. The new market would bring a lot of new opportunities and open new doors.
- New Clients & Skill. When you make a strategic alliance with a well-established business, then it would expand your client base and provide you an opportunity to learn new skills and update your skillset.
Disadvantages of Strategic Alliance
- Conflict. No contract and business partnership agreement cover everything. Whenever any uncertain incident happens that isn’t in the contract, then it creates a conflict of interest among members. It’s because they respond differently towards the same thing.
- Different Management Styles. The management style of different organizations is different, and it creates a unique type of workplace culture in an organization. In the case of a strategic partnership alliance, companies have to readjust their management in order to create a different type of workplace culture. It doesn’t happen often in reality.
- Impacting your Goodwill. When you make a business alliance with the other brand, then the public brand image and reputation impact your business. The customer market would start to question your credibility after the alliance.
- Trust Issues. Many partners in the strategic alliance tend to blame and point fingers at the partners. The blame game creates an atmosphere of distrust, tension, and stress both at the management level and among the workers. You can trust a person, but trusting a company with hundreds of people is a completely different thing.
- Uneven Relationship. One partner in the strategic alliances is usually weak, and it gives an upper hand to the strong partner. The weak partner has no choice but to agree in the decision market process of the alliance.
- Cultural Barrier. When a strategic business partnership alliance goes beyond the border and in a completely different geography, then it creates cultural and linguistic barriers. They create frustration and work delays. For instance, western companies are very specific about the job roles and responsibilities than Asian companies.