STRATEGIC ALLIANCE

A strategic alliance is a form of affiliation that involves a

mutual sharing of resources or “partnering.” In strategic
alliances, there is a “sharing” of resources and more than a
passive investment by one party in another. Rather than
seeking a change in control, the “sharing” of resources is to
be mutual among the parties, focusing on the strengths of
each.

Strategic alliances take many forms, from outsourcing a

function by one party to another (especially to jumpstart one
party’s business, pursuant to a marketing, warehousing or
distribution agreement) to jointly performing a function
pursuant to a joint agreement (such as researching or
developing a product or marketing products) to its most
developed form, a joint venture or partnership as a separate
organization. The common theme among alliances is that
each party does something better than the other, and the
alliance allows each party to focus on what it does best.

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The traditional growth strategy for an emerging or mid-size
business is to “develop it or buy it.” “Developing it” requires
raising capital in a capital transaction that, whether in the
form of a public offering or a private placement, consumes
time and resources, diverting both from otherwise doing
business. “Buying it” through a traditional merger or
acquisition also consumes time and resources, and the
assimilation required following the buy further diverts time
and resources from doing business. As a result, the current
wave in alliance formations is with emerging and mid-size
businesses that are looking to partner with larger businesses
to accelerate both parties’ growth and profitability.

If strategic alliances are managed properly they can give

the benefits of mergers and acquisitions. Alliances, if
properly structured, naturally lead to acquisitions. The
benefits are listed below:

Market Entry: A strategic alliance can ease entry into a

foreign market. First, the local firm can provide knowledge
of markets, customer preferences, distribution networks, and
suppliers. This is especially true in Eastern Europe.

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Bestfoods is a food-processing firm that sells products such
as Mazola corn oil. Bestfoods has formed strategic alliances
with firms in several Eastern European countries that, in
turn, market its products. A strategic alliance between
British Airways and American Airlines was created in 1993
and designed to give the two airlines increased access to
North American and European markets, respectively.

Sometimes, foreign countries require that a certain

percentage of ownership remain in the hands of its citizens.
For example, in Mexico, foreign investment is limited by
law to 49 percent in specified areas, including bonding
companies, firms that print and publish periodicals for
national distribution, engine and car repairs, and operation of
railway terminals. Thus, foreign firms cannot enter such
markets alone; a joint venture is required.

Sharing Risks and Expenses: Another major benefit of a

strategic alliance is that the firms involved can share risks.
For example, in the early 1990s, film manufacturers Kodak
and Fuji joined with camera manufacturers Nikon, Canon,
and Minolta to create cameras and film for an "Advanced

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Photo System." The strategic alliance was terminated in
1996 after the film and camera were developed. But it
benefited the parties, because, by developing a common
product for the market, they shared expenses and they
minimized the risks that would have been involved if two or
more of them had developed new, but noncompatible,
formats. They avoided the potential for the kinds of losses
suffered by the Sony Corp. when its Betamax format for
videocassette recorders was rejected by the public in favor of
the VHS format.

Synergistic Effects of Shared Knowledge and Expertise: A

strategic alliance can help a firm gain knowledge and
expertise. Further, when partners contribute skills, brands,
market knowledge, and assets, there is a synergistic effect.
The result is a set of resources that is more valuable than if
the firms had kept them separate. For example, in the early
1990s, Motorola initiated an alliance among various
partners, including Raytheon, Lockheed Martin, China Great
Wall, and Nippon Iridium, to develop and build a global
satellite-based communications network. This new network,
called Iridium, allowed the partners to develop and

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implement a worldwide, space-based communications
network.

Gaining Competitive Advantage: Similarly, a strategic

alliance can help a firm gain a competitive advantage. For
example, a strategic alliance can be used to take advantage
of a favorable brand image that has been established by one
of the partners. (Establishing a brand image is a lengthy,
expensive process.) It can also be used to gain shelf space
for products. For example, PepsiCo formed a joint venture
with the Thomas J. Lipton Co. to market readyto-drink teas
throughout the United States. Lipton contributed brand
recognition in teas and manufacturing expertise. PepsiCo, as
the world's second-largest soft-drink manufacturer, shared its
extensive distribution network.