What Is a Strategic Alliance: 3 Types of Strategic Alliances

A strategic alliance is an agreement between two separate companies with a common goal to take on a project for their mutual benefit. In a strategic partnership, the two companies maintain their independence. It is not to be confused with a merger, wherein two companies pool resources and form a new business entity. Instead, strategic business alliances provide each of the allied companies a competitive advantage and are an effective business strategy for acquiring greater market share. Though they are most commonly employed by big businesses as part of an overall corporate strategy, strategic partnerships can benefit small businesses as well.

There are three main types of strategic alliances.

1. 1. Joint venture: A joint venture is when two parent companies form a separate entity called a child company. Unlike in a merger, the two parent companies in a joint venture continue to operate independently outside of their child company. Each alliance partner owns a portion of the child company. Depending on the arrangement, this can be a 50:50 partnership or a majority-owned venture (when one company owns more of the new business than the other). For example, a restaurant chain and a beer manufacturer may come together to open a brewery as a joint venture. The beer manufacturer provides the brewing know-how, and the restaurant chain offers hospitality industry expertise.
2. 2. Equity strategic alliance: An equity strategic alliance is formed when one company purchases equity in another. This type of strategic partnership is common when one company could benefit from the core competencies of the other. For instance, an auto manufacturer looking to increase its output of electric vehicles could form an equity strategic alliance with an energy company specializing in lithium batteries. The partnership allows the energy company to increase its production output and gives the electric vehicle company direct access to the manufacturing process and influence in decision-making and pricing.
3. 3. Non-equity strategic alliance. A non-equity strategic alliance is when two companies become strategic partners on a contractual basis. The two companies pool resources and share core competencies on a contractual basis without making a direct financial investment in each other. Licensing agreements, where one company pays a fee to use another company’s technology, are a commonly-occurring type of non-equity strategic alliance.

There are several reasons businesses pursue strategic alliances.

1. 1. Sharing resources: Strategic business collaborations allow you to combine your strengths with your partner’s. This could take the form of gaining access to proprietary information, distribution channels, or technology.
2. 2. Entering new markets: Strategic alliances can make market penetration more efficient and less risky. This can be especially helpful for companies operating in a global business environment. When operating in a new international market, a strategic partner can provide access to supply chains, including manufacturers and distributors.
3. 3. Improving production output: Strategic alliances can help a company reach its core business objectives and develop economies of scale by quickly expanding its capacity to manufacture and distribute products.
4. 4. Innovation: A strategic alliance strategy can help companies develop new products. Working with a strategic partner can provide the opportunity to create or license new technologies.

Alliances, whether they include equity or not, can be challenging. Because these partnerships can be hard to undo, it’s essential to keep in mind these potential drawbacks before entering into a strategic alliance:

1. 1. Different priorities: All partnerships include some loss of control over business processes and decisions. However, fundamental differences in priorities and ways of operating can lead to communication issues and production hold-ups. While some of these issues are hard to know in advance, it’s best to set clear expectations of goals, objectives, and what each partner will bring to the table early on.
2. 2. Liability: If things go wrong, a company can be financially or legally liable for something that was the other partner's responsibility.
3. 3. Dependency: Companies that become overly reliant on a strategic alliance may take a significant financial hit if the partnership ends.

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