Strategic Alliances Advantages and Disadvantages

Strategic alliance is defined as an agreement between two different companies. The terms, conditions and forms of a strategic alliance can differ dramatically, but they typically reflect a formal agreement between the companies that stops short of creating a joint venture. The companies agree to share resources, in which they presumably have comparative advantage, to undertake a mutually beneficial project (Investopedia, 2015). There are many advantages to strategic aliances, but there are also some disadvantages as well.

Advantages

Typically, firms engage in strategic alliances when they have resources that the other firm does not have, and when the resources of the two companies are put together, they allow the two companies to exploit an opportunity that they would not be able to exploit individually. Strategic alliances are common in some industries. One such industry is the technolgoy business. Strategic alliances in technology typically take the form of smaller companies with intellectual property rights that need the financial resources and distribution capabilities of a larger company to bring to market. This is also common among pharmaceutical companies and mining ventures as well, where similar situations exist. The advantage here is that the assets and resources of each company are mutually valuable, and represent a market opportunity. Larger companies may have market access and financial resources, but may struggle with innovation. Such a company would then enter into various types of strategic alliance with a smaller company that might have valuable intellectual property, but may lack the means to develop its ideas for market (Kotabe & Swan, 1995). . Strategic alliances, therefore, play an important role in getting innovations tomarket. In such a situation, one firm has a rare commodity -- intellectual property -- that is subject to protection. The other firm has the money, production and distribution capacity that the smaller firm would be unable to create for itself.

Intellectual property is one asset class that can be difficult to buy, and thus makes a good basis for strategic advantage. Market access is another. Many strategic alliances form as a means of entering foreign markets, especially ones where the barriers to entry are high. In some cases, the barrier is formal, but in other situations the barrier is informal. The company seeking to enter the market, however, may lack the connections or expertise needed to thrive in that market (Cojohari, no date).

A good example of a strategic alliance for market entry would be Starbucks, which often uses local partners that have experience running quick service franchise operations to help with market entry. This strategy allowed the company to enter the Chinese and Japanese markets quickly and expand rapidly. They are now working with the Tata conglomerate, one of India's biggest companies, to enter that major market. Starbucks has successful systems and products, but it lacks an understanding of how to operate in the complex Indian market. Tata, on the other hand, has tremendous influence in India, in addition to its expertise at doing business in the country. The two companies signed a Memorandum of Understanding that helped to define the terms and conditions under which Tata would contribute to Starbucks' Indian market entry, giving Tata a potentially substantial retail property, and Starbucks access to one of the biggest markets in the world (Starbucks, 2011).