Strategic alliances are one of the less discussed means for companies to generate growth.
Businesses can become so entrenched in the quest of enhancing their own day-to-day operations, that they can overlook a pathway to growth that can be low risk and high return.
DealRoom is a leading strategic alliance lifecycle management software and today, we bring you an overview of strategic alliances.
Understanding Strategic Alliances
A strategic alliance is a legal commitment made by two or more companies to work together to achieve one or more common objectives. There are generally considered to be three forms of strategic alliance. In order of the level of commitment of resources, these are:
Non-equity strategic alliance
Where two or more companies commit resources for a new venture (people, technology, IP, or money) but not equity commitments.
Equity strategic alliance
Essentially the same as a non-equity strategic alliance, but where at least one of the companies involved in the alliance will acquire equity in the other company (or companies) involved in the process.
A joint venture involves the creation of a new entity – a NewCo – using the resources of those involved in the strategic alliance.
Related: Differences between typical strategic alliance and joint venture.
A fourth form of strategic alliance which might be added is a handshake agreement. This is less formal than any of the above but a handshake is still considered a legal commitment, even if the terms are more difficult to define if not written on paper.
Reasons for Creating Strategic Alliances
The reasons for creating strategic alliances depend on whether they’re with companies in the same countries or foreign entities. We look at the motives for each in turn below:
Motives for domestic strategic alliances:
- Market share: Two companies joining resources to create synergies that ultimately lead to higher market share.
- Pooling resources: This could be for any strategic objective, but usually involves capital resources (R&D is a common area for strategic alliances).
- Economies of scale: Similar to pooling resources, this enables both companies to achieve a scale impossible without the alliance – usually in the form of a JV.
- Gain access to complementary resources: In this case, the idea is to pool resources (human, upstream and downstream, capital, etc.) to achieve a common objective.
Motives for international strategic alliances:
- Gain access to new markets: Both companies in the strategic alliance can benefit from the distribution capabilities of others in new markets.
- Avoiding import barriers: Producing products within a country (through a strategic alliance) can avoid import barriers, tariffs, and other import levies.
- International synergies: Firms operating in different countries can often find synergies with companies that wouldn’t exist with companies in their home markets.
- Develop core competencies: By working on strategically important areas (e.g. R&D or new product development) with companies in foreign countries, companies can avoid giving away trade secrets to others in their home market.
Strategic Alliance vs. M&A
A strategic alliance is often seen as a first step to a merger or an acquisition, but they are quite different. To learn more, check out our M&A vs strategic alliance side-by-side comparison.
In summary, however, a strategic alliance is a lower commitment means to working with a company, perhaps getting a feel for its culture and way of working, in an effort to generate value for both sides. This is particularly true with cross border strategic alliances, where the information gained through lower risk strategic alliances can be invaluable.
By contrast, mergers and acquisitions are ‘all in’ approaches, where a company makes an investment decision that can often make or break them in the medium-term.
When we think of all the large M&A transactions that went terribly wrong, it is worth considering how much value would have been saved in each case had the participants first tried a strategic alliance of some form (more due diligence would also have helped, of course).
When Should Alliances be Preferred to M&A
Each alliance or M&A transaction is subject to its own idiosyncrasies, but in general terms, there are certain circumstances under which strategic alliances should be preferred to M&A. These include the following:
Speed of transaction
When a company needs to move fast, a strategic alliance may be preferable to M&A. Imagine the case of a ‘land grab’ in a new opportunity. In this case, the speed of tying up strategic alliances can be more beneficial than looking to acquire a business (which can take a year or more).
When a company wants to ‘hedge its bets’ a little in a new market, unsure of whether to make a mid-term commitment to it with an acquisition, a strategic alliance is an ideal solution. Working with a local player gives it knowledge into the market, without the capital outlay required by an M&A transaction.
Inability to raise capital
Many companies would be content to make more M&A transactions if their financial position would allow it. While an acquisition could cost millions (or billions) of dollars, a strategic alliance tends to cost a fraction of it, often bringing several of the benefits of the latter.
Example of a Strategic Alliance
The example of well-known fashion brands outsourcing the production of their watches to famous watchmakers is a good example of a strategic alliance. While the fashion houses gain access to technology that their fashion designers have no knowledge of, the watchmakers are, in turn able to bring on a new revenue stream, as well as gain extra notoriety for their in-house watch brands: a rare win-win situation.
An example of one such strategic alliance can be seen with Calvin Klein’s 2019 deal with Movado Group, which began distributing CK-branded watches in January 2022. Previously, Calvin Klein watches had been produced by Swiss watch maker, Swatch. This also enabled Calvin Klein to distribute its own watches through selected Swatch retail outlets, of which there are over 3,000 spread across the globe.
Is your alliance actually strategic?
According to an analysis by Kearney, to maximize returns, it’s highly important to recognize the key characteristics of a strategic alliance compared to other partnership types.
The following graphic shows characteristics of strategic partnership and the key differences between other types of agreements.
Pros and Cons of Strategic Alliances
- Gain access to extra resources at low cost
- Less risk than other growth methods (e.g. acquisitions)
- Proven method for companies to gain understanding of new markets
- Good way for companies to gain a better understanding of potential acquisition targets
- Can be limited to a certain timeframe to limit risk exposure
- Many of the same risks that exist in M&A exist in strategic alliances in the short-term
- There is arguably increased risk of bad faith acting in strategic alliances
- The benefits of the strategic alliance may be unequally distributed
- Even a short-term strategic alliance exposes a company to reputational risk
- Managers often feel that due diligence isn’t necessary (hint: It is)
Strategies in Building an Alliance
When building deals, make sure that you’re structuring them in a best way for the particular asset you’re trying to achieve. Post-deal, it’s all about managing risks that could emerge in executing your deal structure. There’s usually three significant areas where risks come from; Human, infrastructure, and legal risk. Human risk is the biggest threat that you need to manage.
When it comes to managing human risks, communication is key. It’s all about being transparent and breaking down barriers to be able to work together effectively. The pandemic might have affected this in a way because face-to-face is still better than virtual calls, but communication regardless is crucial.
One of the best things you can do is to create a team where everyone is comfortable interacting with their counterparts in the partner company so they can constantly work together to anticipate risks before they even arise.
“You’re most successful when nobody really notices what you’re doing. If things are going wrong, then it becomes very visible to senior management very quickly.”
Emma Barton, Director, Alliance and Integration Management at AstraZeneca
That is the single most effective way to do that. Really, we do try and look where the risks are likely to be and anticipate those as far as possible.
To help you get the strategy right, we interviewed Emma Barton on How AstraZeneca Approaches Alliances. Check out the rest of the interview on M&A Science, our parent site.
Risk in Strategic Alliances
The biggest risk inherent in strategic alliances is for executives to feel that there is no risk in closing a strategic alliance.
Having been privy to dozens of strategic alliances over the years, DealRoom can confirm that due diligence should play as large a part in strategic alliances as in any one of the myriad M&A transactions. This is as true for non-equity strategic alliances as it is for joint ventures.
Other risks in strategic alliances include:
If a new entity is formed, it needs to be established quite quickly who is responsible for the entity, who profits from it, and who is liable for its downside. This requires much of the same organization as an M&A transaction.
It’s easy to believe that an 18-month strategic alliance is low risk. Cultural differences won’t wait 18 months – they’ll happen overnight, and will start to destroy value straight away.
This is another place where an M&A management platform can iron out wrinkles far faster than waiting for a strategic alliance to expire.
‘More growth’,’market expansion’, and ‘shared knowledge’ are admirable goals, but they’re not enough in themselves. Teams of both companies need to come together to collaborate on a plan through confidentially sharing information, pointing out the opportunities to each other, and executing. It cannot be done on the back of an envelope.
Success Factors in Strategic Alliances
There are essentially three keys to strategic alliances:
Understanding what the goal is, making it measurable, and understanding what the terms of the strategic alliance should be to achieve that goal.
A lack of commitment does not mean lack of due diligence. Both sides should be fully aware of what they’re getting into. Anyone believing otherwise should look at the Swatch and Tiffany & Co. failed strategic alliance.
Strategic alliances are different to M&A in that the firms involved don’t have to be completely culturally aligned. But they do have to be aligned on the terms of the alliance, making communication extremely important.
Who does what, how, and when is important for every organization. The danger with a strategic alliance is that responsibilities are left to the counterparty. This is why organization cannot be put on a long finger.
Strategic Alliance Phases
The phases in a strategic alliance tend to follow the pattern:
- Defining the business vision and how a strategic alliance should fit that vision.
- Evaluate potential partners for the strategic alliance.
- Develop a plan of action with one or more potential partners for the alliance.
- Conduct due diligence of the partners specifically for the strategic alliance.
- Formally (legally) define the terms of the strategic alliance.
- Continued communication and collaboration with the strategic alliance partner.
DealRoom and Strategic Alliances
DealRoom has proven its value to strategic alliances over the course of a decade.
The platform provides participants with a tool that can enhance the experience for both sides of the strategic alliance. These include:
- The ability to manage the entire lifecycle of a single alliance and across the entire portfolio
- Gain spectrum of insights (via various & custom reports, analytics, filters) to mitigate risk and maximise value
- Manage and visualise all alliance projects and opportunities in one place, enabling to perform accurate cost and benefit analysis of each
- Flexibility across all lifecycle stages including ideation/discovery, diligence, negotiation, launch and operation