6: Strategic Alliances

What is a Strategic Alliance

A partnership between two or more businesses for mutual financial gain

Can be short or long term, and may result in the creation of a new business

Advantages of a Strategic Alliance

Shared knowledge and technology

More competitive/larger market share

Shared IP

Shared funding for projects

Quick access to new markets

Reduced competition

Disadvantages of Strategic Alliances

Having to share profits

Loss of control over some decisions

May reduce focus on core business activities

Potential resistance to change

Potential for conflict

Taking on partners’ weaknesses

Types of Strategic Alliances

Merger

• Horizontal, Vertical, Conglomerate

Acquisition

• Friendly, Hostile

Joint Venture

Outsourcing

Franchising

Merger

When two businesses agree to join together, forming one new business

This could potentially lead to job duplications, such as multiple HR departments, etc. Requiring staff layoffs and potential resistance

Horizontal

• Merging with a competitor

• Reduced competition, increased market share

Vertical

• Merging with a supplier

• Reduces expenses and creates a competitive advantage

Conglomerate

• Merging into a new, unrelated industry

• Provides easy, quick entry into a new market

Acquisition

When a business purchases another existing company

Often used as a tool for growth, reducing competition and providing a less risky entrance to a new market

Types of Acquisition

Hostile

• When a company is purchased without the directors or owners being consulted. Often, purchasing straight from the shareholders

• Shares are either purchased, or the holders are persuaded to bring in new management, who will sell the company

• This is often done by offering a higher than market price, buying shares off the open market or persuading shareholders.

Friendly

• The acquisition is made with consent from the directors, and follows a negotiated process with full disclosure to shareholders

• Shareholders will more likely support the change if it is friendly

What is Outsourcing, and the advantages

Delegating jobs to a third-party organisation to perform on behalf of the business

Advantages

• Third-party organisations often specialise in their jobs

• It is typically cheaper

• Businesses gain local knowledge, outsourcing into target markets

• Stable, reliable communication has made it easier to outsource

Joint Venture

When two or more partner companies work together to start an independent company, aimed at completing a project

The new company may only be temporary; each partner’s business owns a proportionate share and can retain focus on their core business

Potential problems with joint ventures

Resistance to change and poor communication are the key causes of failure in joint ventures

Employees must understand the need and want for change

Sharing information and not seeing partners as competitors is essential

Establishing good working relations, sharing knowledge, and expertise is also crucial

Franchising

Franchising is a continued relationship in which the Franchisor provides a licensed privilege for the franchisee to use their business model and connections

The Franchisor gets to expand internationally without spending money

The Franchisee gets to use a proven model and brand awareness

A master franchisee can be used to manage international Franchisees, acting on behalf of the Franchisor, established in target markets, to set up and fund new franchises

How to start a strategic alliance

The alliance must benefit all partners and be able to easily identify how

The need to consider how customers and staff would react

They also need to assess the strengths and determination of the partner company

Issues to resolve

The goals for the alliance

Ownership of IP

The type of alliance formed

Documentation of resources supplied by each partner