Saturday, August 29, 2009

Strategic Alliances - an important part of most business models

A strategic alliance is an agreement between two or more players to share resources or knowledge, to be beneficial to all parties involved. It is as way to supplement internal assets, capabilities and activities, with access to needed resources or processes from outside players such as suppliers, customers, competitors, companies in different industries, brand owners, universities, institutes or divisions of government.

Different forms of Strategic Alliances
Strategic Alliances can take different forms, occur within an industry or between actors in different industries, and can range from simple agreements to mergers or equity joint ventures. There are basically three types of generic strategic alliances: Non-Equity Strategic Alliances, Equity Strategic Alliances, and Joint Venture Strategic Alliances.

Non-Equity Strategic Alliances
Non-Equity Strategic Alliances can range from close working relations with suppliers, outsourcing of activities or licensing of technology and IPRs, to large R&D consortia, industry clusters and innovation networks. Informal alliances without any agreements, or based on "Gentlemen’s agreement", are common among smaller companies and within university research groups. Another form of informal non-equity alliances are geographic clusters where concentrations of interconnected players, industries, universities and government agencies co-exists, increasing local competition and productivity.

Equity Strategic Alliances
In Equity Strategic Alliances agreements are supplemented by equity investments, making the parties shareholders as well as stakeholders in each other. The investments are passive so each firm retains fully its decision power. The cross-shareholding of companies may result in a complex network where company A owns equity in company B that owns equity in C, creating direct and indirect ownership. Intuitively, when firms share profits the incentives for competing are reduced and are often done to enhance control and make takeovers more difficult.

Joint Venture Strategic Alliances
Joint ventures are distinguished from Equity Strategic Alliances in that the participating companies usually form a new and separate legal entity in which they contribute equity and other resources such as brands, technology or intellectual property. The parties agree to share revenues, expenses and control of the created company for one specific project only or a continuing business relationship.

Reasons for entering a Strategic Alliance
Firms entering strategic alliances often have multiple objectives, some of them listed below:
  • Access to intellectual property rights
  • Access to knowledge
  • Access to new technology
  • Access to new markets
  • Access to distribution skills
  • Access to manufacturing capabilities
  • Access to marketing skills
  • Access to management skills
  • Access to capital
  • Create critical mass
  • Create common standards
  • Create new businesses
  • Create synergies
  • Diversification
  • Improve agility
  • Improve quality
  • Improve R&D
  • Improve material flow
  • Improve speed to market
  • Influence structural evolution the industry
  • Inhibit competitors
  • Reduce administrative costs
  • Reduce R&D costs
  • Reduce risk and liability
  • Reduce cycle time
  • Utilize by-products
Main risks identified in the literature
There are several risks and limitations using strategic alliances. Failures are often attributed to unrealistic expectations, lack of commitment, cultural differences, strategic goal divergence and insufficient trust. Some of the risks are listed below:
  • Activities outside scope of original agreement
  • Hidden costs
  • Inefficient management
  • Information leakage
  • Loss of competencies
  • Loss of operational control
  • Partner lock-in
  • Partner product or service failure
  • Partner unable or unwilling to supply key resources
  • Partner's quality performance
  • Partner take advantage of its position
  • Partner experiences financial difficulties
Using the Business Model concept
When using the business model concept, listing or visualizing the different parts of the business model, and analyzing what is really core in the business model you often find opportunities for business model innovation using strategic alliances. What if you combine your value proposition with another company? What if you use their brand or they use yours? What if someone else delivers your products or services? What if you use external assets and capabilities to improve or create new value propositions? Could you lower your business model cost structure by using a strategic alliance? Could you create stronger control mechanisms through strategic alliances to protect profit streams from being reduced by competitors, partners or strong customers?

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