Strategic Alliance

An informal or formal agreement between two or more companies with a common business objective is a strategic alliance. Strategic alliances can take forms ranging from informal cooperation to joint ownership of worldwide operations. Some contractual agreements are also treated as strategic alliances when those agreements involve a long-term, continual strategic partnership and thereby provide strategic gains for partners.

Strategic alliances are being used for many different purposes by the partners involved. A long-term and trust-based agreement between a manufacturer and supplier firm is considered a strategic alliance because it is beyond going to open market and choosing the best deal each time and affords mutually rewarding cost savings, consistency, and quality improvements for the manufacturer and stable sales and certainty for the suppliers. In banking, the “exporting” of services through alliance partners rather than direct investment or contracting (licensing) was common. That is, banks use correspondents with whom they maintain parallel (corresponding) balances of deposits and offer services to each other s clients in each country. Large banks tend to have many such relationships around the world, in addition to any overseas affiliates they may operate. Additionally, banks will use multiple-bank alliances to provide automatic teller machine (ATM) access to their clients in many locations, operate credit card alliances through Visa and MasterCard to offer such services globally to their clients, working closely with actual or potential competitors. Banks also often contract out parts of their activities to alliance partners in a vertical deintegration context, for example, contracting out their mortgage loan servicing activity to specialist firms or selling off their mortgages to intermediaries that create mortgage-backed bonds in a secondary market.

Penetrating foreign markets is a primary objective of many companies entering strategic alliances; others are aimed at defending home markets. Another focus is the spreading of the risk and cost inherent in production and development efforts. Technology companies have joined forces to win over markets to their operating standard. Each form of alliance is distinct in terms of the amount of commitment required, the extent of equity involved, and, therefore, the degree of control each partner has, as well as the number of partners.

In informal strategic alliances, partners work together without a binding agreement. This arrangement often takes the form of visits to exchange information about new products, processes, and technology or may take the more formal form of the exchange of personnel for limited periods of time. Such partners are unlikely to compete for markets and tend to be of modest size, making collaboration advantageous if not absolutely necessary. The relationships are based on mutual trust and friendship, and may lead to more formal arrangements, [Page 1509]such as contractual agreements or joint projects.

Formal, contractual agreements between strategic alliance partners may be used for joint research and development (R&D), joint marketing, joint production, or outsourcing. Contract manufacturing allows the corporation to separate the physical production of goods from the research and development and marketing stages, especially if the latter are the core competencies of the firm. Such contracting improves company focus on higher value-added activities, provides access to world-class capabilities, and allows partners to reduce their operating costs. Contract manufacturing provides many companies, especially in developing countries, the opportunity to gain the necessary experience in product design and manufacturing technology to allow them to function in world markets.

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