Reviewed by Aug 27, 2020| Updated on
Strategic alliance refers to an agreement or arrangement between two or more parties to carry out projects for their common benefit. The arrangement may be in the form of a partnership similar to a joint enterprise.
The purpose of a strategic alliance may be to expand the business operations, to enter new markets by partnering with a domestic player, or technological improvements.
Understanding Strategic Alliance
A strategic alliance could be a formal alliance or an informal alliance. An informal alliance may lead to disputes between parties. A formal alliance enables a clear definition of the nature and purpose of the alliance or partnership.
The method of sharing the revenues, profits or losses is spelt out in the agreement. The period of the agreement can be as per the requirements of the alliance.
A strategic alliance can boost technological improvements or process improvements in designing or manufacturing products. The partners can also leverage each other’s strengths and collaborate to achieve common goals. Strategic alliances also help the partners in growing organically.
Strategic alliances facilitate sharing of platforms, resources, distribution networks, raw materials and so on. For example, two auto manufacturers can collaborate to share the showroom resources and distribution networks to sell each other’s products.
Strategic alliances do not require a merger of two entities or combining capital. The entity can remain independent and yet collaborate on their business front.
The risks associated with strategic alliances include the differences in the style of management of two companies, their ideology and philosophy. There may be conflicts arising from differences between the parties. Hence, a formal agreement helps in sharing resources, building confidence and sharing information.
Strategic alliances may develop into long-term business partnerships. One party may offer technological support, while the other party offers the platform for market penetration.
Strategic alliances may be short-term or long-term, small or big in size, depending on the business requirements of the parties. A long-term alliance may make the parties appear as one in the eyes of the public. The parties become dependent on each other in such alliances.