In 2014, taxi-giant Uber partnered with leading music software, Spotify in order to give passengers the option to play their own music during a ride.
Not only was this a brilliant PR move, but the strategic alliance has facilitated growth in the popularity (and profitability) of both companies. Uber has grown its annual revenue by 22 times to $11 billion since 2014, with Spotify increasing from $1.3 billion to $7.8 billion in 2020.
Of course, there have been various other strategies in place to cause such gains. But the successful strategic partnerships should not be underrated. In this guide, you’ll learn what a strategic alliance actually is, the different types and success factors, and how to form your own.
Introduction to strategic alliances
To recap, a strategic alliance is defined as an informal collaboration between two or more companies. While they are typically legally binding, integration between the entities occurs at a surface level and can be dissolved. This means that strategic alliances are different from joint ventures.
A special mention must be given to the difference between symmetric and asymmetric alliances. In symmetric alliances, the same types of resources are shared. For example, companies performing research and development cooperation by sharing data would fall under a symmetric alliance.
Alternatively, asymmetric alliances refer to the sharing of different resources. For example, one company may share supply chain management tactics, while the other creates the product.
Let’s get into some other types of strategic alliances.
Horizontal strategic alliances
A horizontal strategic alliance refers to the partnership of two or more entities in the same business area or industry.
In fast cycle industries, the competitive advantage is difficult to hold over time. It requires a repeated or consistent release schedule of new products and services. Think about companies in the clothing industry who seem like they are launching new collections all the time, with their competitors also debuting almost identical selections.
Therefore, such horizontal strategic alliances enable companies to overcome the issue of lack of protection surrounding any competitive advantage. This type of strategic network streamlines market penetration, alongside shrinking the burden of R&D expenses to enable scale and link alliances.
Companies entering into a horizontal alliance do so to scale quickly and reduce the impact of competitors (since they become stakeholders in alternative market participants). But the importance of partner relationship management should not be underestimated.
Vertical strategic alliances
Alternatively, a vertical strategic alliance refers to a partnership between a firm and one of its distribution channels. They are also known by the term: ‘buyer supplier relationships‘.
A vertical alliance is a cooperative strategy focused on integrating extra functions of the supply chain into your in-house product or service. It’s likely to present as a cross-industry partnership, advancing technological alliances on one side, rather than to pursue mutual benefits.
For example, a number of Fintech companies have reportedly acquired media channels in recent months. This should aid the distribution of their content marketing efforts while scaling their online audience and viewership.
Vertical alliances aim to protect the core advantages of a company by integrating more products or services in-house.
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Advantages and disadvantages
In general, vertical or horizontal alliances are beneficial for the companies that enter into them. They provide more legal and operational flexibility than a traditional joint venture partnership. This is because, despite the alliance, one company does not usually depend on the other.
Remaining independent allows both parties to keep their branding and reputation, meaning that sales should not be affected or penalised. However, in the case where operational activities are drastically different, you may encounter some issues. Clunky and dysfunctional management clashes will lead to efficiency problems throughout the entire collaboration.
Trust issues can also be rife when merging parties are either skeptical or too involved. In fact, trust issues were cited as one of the major reasons for failure in the 2016 strategic alliance between Staples and Office Depot.
Therefore, it’s wise to seek strategic alliances for collaboration purposes, but only merge the departments or operations that are necessary in order to keep control of your original share.
How to form a strategic alliance
The first step to forming a successful strategic alliance is remaining independent organizations. This is crucial, as while an alliance can be a key strategic resource, your overall business strategy can remain outside of the partnership. Consider the “need to know” and work from there.
Secondly, such trustable organizational relationships occur more positively when risk is reduced. Equity joint ventures are more legally binding and involved. Instead, reduce risk by ensuring your contracts and documentation outline the relationships clearly.
Next, consider whether your company should focus on a horizontal or vertical alliance. Remember, strategic alliance partners make deals in order to improve market power compared to their competitors. So, examine your upstream and downstream partners to try to identify possible horizontal and vertical alliances.
Once you decide on and approach a potential partner, addressing major technological challenges will be key. As mentioned, previous alliance portfolios suggest that operational differences can be a major barrier to success. The goal here is to achieve organizational cooperation to create a foundation for triumph.
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