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Strategic alliances represents a shift from achieving strategic competitiveness and above-average returns through competitive strategy (establishing strong positions against external challenges, minimizing weaknesses, and maximizing core competencies) to achieving them through cooperative strategies.

 

There are a number of justifications or rationales for strategic alliances.  These reasons vary by market situation--slow-cycle, standard-cycle or fast-cycle and are given in the below.

 

Reasons for entering alliances in slow-cycle markets

• gaining access to a market that is not open to other entry strategies
• establishing a franchise in a new market
• maintaining market stability

 

Reasons for entering alliances in standard-cycle markets

• gaining market power
• gaining access to complementary resources
• overcoming trade barriers
• meeting competitive challenges from other competitors
• pooling resources for very large capital projects
• learning new business techniques

 

Reasons for entering alliances in fast-cycle markets

• speeding up the development of goods/services
• speeding up new market entry
• maintaining market leadership
• forming an industry technology standard
• sharing risky R&D expenses
• overcoming uncertainty

 

A strategic alliance is the primary cooperative strategy and represents a partnership between companies whereby companies' resources, capabilities, and core competencies are combined to pursue mutual interests to develop, manufacture, or distribute goods or services.  They represent explicit forms of relationships between companies.

 

Types of Alliances

 

There are three basic types of explicit strategic alliances:

 

1. A joint venture is an alliance where a new, independent company is formed from two or more partners, with each partner company contributing assets.

 

2. An equity strategic alliance is an alliance where partner companies own unequal shares of equity in the venture and are considered to be superior at passing on know-how between companies because they are closer to hierarchical control than nonequity alliances.   For example, Ford Motor Company and Mazda Motor Corporation formed a long-standing equity strategic alliance.

 

3. A nonequity strategic alliance is an alliance where a contract is given to supply, produce, or distribute a company's products without any equity sharing.  Other types of nonequity strategic alliances include licensing, distribution agreements, supply contracts, and marketing agreements (such as code-sharing agreements among airlines).  For example, OPEC seeks to manage the price and output of oil companies in member countries.

 

These strategic alliances represent explicit alliances.  However, there also are implicit cooperative alliances such as tacit collusion, which exists when several companies in an industry tacitly cooperate to reduce industry output below the potential competitive level to maintain higher-than-competitive-level prices.  Another form of tacit collusion is mutual forbearance, which is a recognition of interdependence.  These forms of cooperative alliances are illegal unless regulated by the government, which is currently the case in the power industry.

 

The number of companies with multiple alliances continues to increase.  Companies use alliance networks as a foundation for a network cooperative strategy for several reasons:

• to share complementary resources, capabilities, and competencies
• to exploit emerging technologies
• to share the risk and cost of large capital investments
• to keep pace with or establish industry standards

 

This last reason is particularly important in the computing and telecommunications industries, in which the standard-setter can potentially dominate (consider Windows and Intel in the personal computer industry). 

 

Alliance networks are also important in industries in which rapid change and company reinvention are necessary for long-term survival.  Networked companies can gain exposure to an array of developing technologies and provide the company with strategic, technical, and operational options for experimentation.

 

There are several issues that should be addressed when forming an alliance network:

• determining whether the alliance should be horizontal or vertical 
• deciding the number of companies to be networked so that effectiveness and efficiency are maximized
• determining how to minimize member company conflicts
• specifying the strategic intent of the alliance so that all members benefit
• determining how the network will be managed 

 

Failure to address these issues reduces the potential for alliance success. 

 

Because companies that are cooperating also may be competing with each other, significant risks accompany cooperative strategies.  These risks include:

• poor contract development that may result in one (or more) of the partners acting opportunistically and taking advantage of other venture partners
• misrepresentation of partner companies' competencies by misstating or exaggerating an intangible resource such as knowledge of local market conditions
• failure of partner companies to make complementary resources available to the venture
• being held hostage through specific investments (whose value is associated only with the venture or partner), especially if laws in a foreign country do not protect investments in the case of nationalization (or re-nationalization with a change in governments)
• misunderstanding a partner's strategic intent

 

In addition to the risk that a partner may cheat or act opportunistically, there also are competitive risks to cooperative strategies, such as: the capability to form and manage a joint venture effectively, the capability to collaborate, the ability to identify trustworthy venture partners. Trust between partners increases the likelihood of alliance success and may be the most efficient mechanism for governing economic transactions. Trust creates confidence between partners that actions taken will serve both parties' interests. Trust increases the probability that a company will understand its partner's actual strategic intent as it participates in an alliance, which leads to more predictable partner actions. If both partners are trustworthy, companies are able to allocate fewer resources to monitor and control the alliance.

 

Trust is valuable, rare, imperfectly imitable, and often nonsubstitutable, thus yielding competitive advantage when forming and using cooperative strategies. Partner trustworthiness reduces the company's concern about the inability to control or influence each operational aspect of an alliance through a contractual agreement.

 

The two basic approaches to managing cooperative strategies that come out of this discussion are: cost-minimization and value-creation maximization.

 

1)       The cost minimization approach requires companies to develop capabilities to create effective partner contracts and contract monitoring capabilities. However, these contracts have drawbacks. Writing protective contracts and developing effective monitoring systems are costly. Protective contracts and monitoring, by shielding parts of each organization from the other, may limit opportunism and preclude the organizations from taking advantage of unforseen opportunities.

 

2)       The value-maximization approach requires partners with complementary assets and emphasizes trusting relationships. As a strategic asset, trust can enable partner companies to reduce the cost of contracting and monitoring because the probability of opportunistic behavior is reduced if partners are able to trust each other.

 

Trust also may enable the venture to take advantage of unforeseen opportunities.  Thus, because trust will enable partner companies to reduce venture related contracting and monitoring costs-and add to the venture's flexibility, a venture between partners that can be trusted is more likely to be able to both reduce costs and add or create value.