UNIT-4

Strategic Alliances: Introduction, Strategic Alliances, Types of Strategic Alliances and Business Decisions,
Problems Involved in Strategic Alliances, Recent Strategic Alliances in India
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This Study material is mainly for Revision & overall understanding of the chapter & it shouldn’t be an
alternative or replacement of reading the actual books.
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Strategic Alliances

 Strategic alliances are agreements between two or more independent companies to cooperate in the
manufacturing, development, or sale of products and services, or other business objectives.

 Such partnerships are usually long-term in nature, with each business bringing its expertise and
resources to the table.

 In an alliance, the participating entities do not contribute resources to a legally separate joint venture
that is tasked with the objectives of the founding parties. Instead, the original entities work together
directly; since there is no mingling of resources within a legal entity, this can be either a formal or an
informal arrangement.

Alliances are business relationships. They’re about who you know in business, and like a personal network,
they supplement your capabilities and weaknesses with strengths. Each alliance is a joint venture where two
or more entities work together to achieve a shared goal while remaining separate and independent.
A strategic alliance goes a step further.
Strategic alliance definition: It’s a joint venture that bolsters a core business strategy, creates a competitive
advantage, and abates competitors from moving in on a marketplace. It allows individual companies to
achieve more together than they would have on their own.

Reasons for Strategic Alliance / Logic behind Strategic Alliance

 Gaining access to a restricted market (China)
 Gaining a foothold in new marker
 Increase the speed of development of new products
 Maintain leadership position
 Leverage upon the befits like economies of scale, lower cost
 De-risking the R&D efforts
 Gain market power (especially pricing power)
 Gain access to know-how
 Pool resources to fund large capital intensive projects
 Gaining a competitive advantage against competitors

Advantages And Disadvantages Of Strategic Alliances

Advantages of strategic alliances

 Sharing resources and expertise. A strategic alliance should combine the best both companies have to
offer. This can be a deeper understanding of the product, sales, or marketing knowledge, or even just
more hands on deck to increase speed to market.
  New-market penetration. In some cases, a strategic alliance gives access to new markets with a
solution that wouldn’t have been possible for either company on their own. For instance, companies
going global often work with a trusted local partner to get an advantage in an emerging market.
 Expanded production. When it comes to manufacturing and distributing products, strategic alliances
allow partners to increase their capabilities and scale quickly to meet demand.
 Drive innovation. With the right alliance, partners can outpace the competition with new solutions
that are a complete package for their customers. These alliances are creative and revolutionary and
change the market landscape in a dramatic way.

Strategic alliances allow partners to scale quickly, build innovative solutions for their customers, enter new
markets, and pool valuable expertise and resources. And, in a business environment that values speed and
innovation, this is a game-changer.

Disadvantages of strategic alliances

Loss of control. In an alliance, both organizations must cede some control over how their business is run and
perceived. A strategic alliance requires honesty and transparency, but that trust isn’t built overnight. Without
significant buy-in from both parties, an alliance may suffer.
Increased liability. In a joint venture or equity strategic alliance, both companies are on the hook for the
outcome. If something happens to stall production or create unhappy customers, both partners are at risk for
the loss in reputation.
For instance, in the case of Tesla and Panasonic, what was originally an advantageous relationship became
fraught when batteries weren’t produced and shipped quickly enough, causing delays in Tesla vehicle
production and shipments. Reports now say that Tesla is putting its capital behind building its own battery
technology to reduce dependence on Panasonic.
Strategic alliances can fail when partners misrepresent what they bring to the table, do not fully commit to the
partnership, or fail to bring their resources together effectively.

Types of Strategic Alliances

The strategists Yoshino and Rangan have classified the strategic alliance based on two dimensions: Extent
of organizational interaction and conflict potential among the alliance partners. Through this classification,
the strategists try to explain two things to the alliance partners:

 The extent to which the partners must interact to have the alliance work effectively.
 Understand the potential of conflict that may arise out of being competitors in the market.
On the basis of these, four types of strategic alliances emerge:

Pro-competitive Alliances

 The procompetitive alliance is characterized by low interaction and low conflict. Such alliances offer
the benefits of vertical integration, i.e. a relationship between the manufacturer and its suppliers or
distributors, without the firms actually investing the resources in the manufacturing firm or distributing
the semi-finished or finished goods.

Non-competitive Alliances

 Such alliances are characterized by high interaction and low conflict. The noncompetitive alliances are
formed between the companies that operate in the same industry but do not consider each other as
rivals. Their business operations do not coincide and are quite distinctive due to which the feeling of
competitiveness does not emerge. Often, the companies that have expanded geographically within the
industry adopt the noncompetitive alliance.

Competitive Alliances

 As the name suggests, these alliances are characterized by high interaction and high conflict. Here,
two competing firms that perceive each other as rivals come together to form an alliance and.
Therefore, the intense interaction between the two is necessary. Such alliances could be intra- or inter-
industry. Often, the foreign companies operating in India forms a competitive alliance with the local
rival companies for specific purposes.

Pre-competitive Alliance

 The precompetitive alliance is characterized by low interaction and high conflict. Such partnership
brings two firms from different, most often unrelated industries to work towards a specific activity,
 such as new product development, new technology development, or creating awareness among the
potential customers about the use of new product or idea. The joint R&D activities and advertising
campaigns are the examples of a precompetitive alliance.

Thus, the strategic alliance types are classified on the basis of interaction and the potential of conflict between
the partners to the contract.

Ways of entering into a Strategic Alliances

 Joint ventures (JV)

 Equity strategic alliances

 Non-equity strategic alliances

Joint ventures (JV)

In a joint venture, two companies come together to form a third distinct legal business entity – a “child”
company – by means of a binding contract. Companies initiate a JV through a contractual agreement between
all concerned parties. The profit and loss from the venture are shared by the participants.

Joint ventures are usually formed with certain defined objectives and are not necessarily intended to function
as a long-term partnership.

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.

Equity strategic alliances

Equity strategic alliance is when a business shares and equity of the other business. Two businesses purchase
shares and equity of each other firm. Such a transaction is also known as partial acquisition. An equity
strategic alliance is also formed when each participating organization purchases equity in each other’s
business in a cross-equity transaction.

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.
Non-equity strategic alliances

A non-equity strategic alliance is created when two or more companies sign a contractual relationship to pool
their resources and capabilities together. There are no child entities or shared equity. For this reason, non-
equity strategic alliances are one of the most common. It’s usually informal and flexible than a regular form of
partnership and equity.

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.

Problems Involved in Strategic Alliances

 Barriers in work culture and language: 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.

 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.

 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.

 Vulnerability: Getting into a strategic alliance give authority to the partner to get a peek into the
internal business procedure. This puts the partners in a vulnerable situation. For example, if you
partner has access to your computers and data they can steal valuable information and can use it
against you or they can steal your human resource too by offering better salaries to your talented
employees they can lure them into joining their businesses.

Therefore, it is important for companies to stay alert and don’t disclose everything to their alliance
partner.

Recent Strategic Alliances in India

1. Starbucks and TATA in India.

2. Maruti and Suzuki
3. Spotify and Uber
4. Google and Luxottica

Starbucks and TATA in India

Tata Starbucks Private Limited, formerly known as Tata Starbucks Limited, is a 50:50 joint venture company,
owned by Tata Consumer Products and Starbucks Corporation, that owns and operates Starbucks outlets in
India.

The partnership aims to take advantage of the various businesses running under the Tata group. The group's
business spans across hotels, retail chain, steel, chemical, tea, software and automobiles among others. This
partnership could provide Starbucks instant access to Tata's vast presence through out India.

Maruti and Suzuki

The alliance of Suzuki Motor Corporation of Japan and Maruti Udyog Ltd. of India is a good
example of strategic partnership. Suzuki had the resources while Maruti had the capital and a
better understanding of the Indian market. As a result, Maruti Suzuki has been a leader in the
Indian automobile market for years now.

Spotify and Uber

People with premium Spotify accounts will be able to listen to their own music in cars booked through Uber,
the firms have announced. The partnership means that users will be able to link their two accounts within the
Uber app and build music playlists for their journeys.

The harmonious pairing between Spotify and Uber is a specific kind of collaboration: a strategic partnership. A
strategic partnership is a symbiotic relationship between two entities which, ideally, create a mutually
advantageous environment.

Google and Luxottica

Luxottica and Google are pioneers in their respective domains, syncing up their high-tech developers with
fashion designers and eyewear professionals. The two giants will combine their strengths to establish a team
of experts devoted to working on Glass products' design, development, tooling, and engineering. They
will gain sustained competitive advantage in high-fashion, lifestyle and innovative technology.

Luxottica legacy, expertise and excellence in eyewear make it the most premium brand in this category. The
evolving technology and emergence of smart glasses appear to be lucrative propositions for the company.
Thus, what better company than Google to have a strategic partnership which is one of the leading technology
giants of this century. Partnering with Google, Luxottica will have the first-mover advantage and harness the
vast blue ocean in eyewear. The unique expertise, deep knowledge and quality of Luxottica and the cutting-
edge technology of Google will give birth to a new generation of revolutionary devices.

Starbucks and Barnes & Noble

Starbucks formed another successful in-store partnership with Barnes & Noble. While many larger brick-
and-mortar bookstores haven’t survived the tough competition from Amazon, Barnes & Noble has seen
continued success.

One reason is the co-branded Starbucks “B&N Cafes” inside most Barnes & Noble locations. A hot beverage
and a good read have always paired well, which gives book enthusiasts have another reason to visit a
physical Barnes & Noble store instead of buying online or from a competitor.

And at the same time, Starbucks gets to expand its audience even wider and boost sales by setting itself
apart from competitors.

Red Bull and GoPro

In 2012, Red Bull partnered with GoPro to support a record-breaking skydive from a balloon. Red Bull
sponsored the dive, and the skydiver wore a GoPro camera to capture it.
The two brands later formed a long-term strategic alliance for Red Bull extreme sports events, such as the
Red Bull Rampage. Only GoPro cameras are used to capture an athlete’s point-of-view shots at these events.

The Red Bull/GoPro strategic partnership is so successful because the brands have similar adrenaline-
seeking audiences. Thanks to this strategic alliance, both brands now have an even stronger association with
high-level thrills.

Louis Vuitton and BMW

Despite being in different industries, Louis Vuitton and BMW are both exclusive luxury brands focused on
craftsmanship.

Those who can afford a BMW vehicle can probably also afford a Louis Vuitton bag. Because of their shared
audience and values, the two brands partnered up to create a collection of Louis Vuitton bags custom made
to pair with the BMW i8 sports car.
According to Patrick-Louis Vuitton, Head of Special Orders at Louis Vuitton, “This collaboration with BMW
epitomizes our shared values and creativity, technological innovation and style.”

Apple Pay and MasterCard

When Apple released the Apple Pay system for contactless transactions, it was poised to change the way
people used their credit cards forever.

But first, Apple needed credit card companies to partner with them and support the technology. MasterCard
was the first company to do so. So when Apple Pay launched, only MasterCard customers could pair their
card with an iPhone and make payments without actually having their physical card with them.

By forming a strategic alliance with Apple early on, MasterCard connected itself with a company known to
be on the cutting edge. This successful strategic alliance example also paid off later, when Apple partnered
with MasterCard again in the launch of their Apple Card credit card.