By Thomas Pietras and Christian R. Stormer
Bauknight, Pietras, & Stormer, PA.
An earlier version of this series was published in The University of South Carolina’s Business & Economic Review, Volume 47, Number 4
This is part one of a four-part series of articles about strategic alliances. In this article, we will explain what strategic alliances are and provide a few examples. The following additional issues will be covered in subsequent articles:
- Part two : Proper Strategy and Aligned Structure
- Part three : Clear Governance Rules
- Part four : Monitoring
One of the changes brought about during the past 20 years has been the proliferation of strategic business alliances. Strategic alliances are a way for companies with complementary strengths to enter a given market more effectively and efficiently than either alliance partner could manage alone. They allow companies to minimize risks relating to their technological, market or competitive environments.
These alliances take a number of forms and go by various labels. Alliances may be contracts, limited partnerships, general partnerships or corporate joint ventures, or they may take less formal forms, such as a referral network. The terms alliance, joint venture, partnership or constellation may be used to describe various relationships between one or more companies. For this series, we will use the term strategic alliance to encompass all such relationships.
Here are two examples that illustrate what different strategic alliances could look like:
- Construction Contractor A wants to bid on a large project in another state. They have the required expertise—in fact, this is one of their market advantages. However, the project is located two states away and is much larger than any project they have taken on to date. In order to improve their chances of winning the bid and in order to reduce logistical cost relating to the distance to the project site, Construction Contractor A forms a joint venture with Construction Contractor B, which is located closer to the project site. Construction Contractor B is also a larger company with more financial resources and bidding capacity. They win the bid and successfully complete the project, earning profits that neither of them likely would have earned on their own.
- Twenty electric cooperatives in South Carolina buy power from one or two large power generation entities and sell that power to their local customers. In order to improve their ability to negotiate the price of purchased electricity and to create operating efficiencies, the cooperatives form a centralized cooperative. The centralized cooperative is owned by the twenty cooperatives and is responsible for purchasing all of their power needs.
Regardless of the legal form, strategic alliances govern the ongoing, often open-ended relationship between the partnering companies that remain separately owned. The strength, as well as the potential weakness of such arrangements, lies in their flexibility and the specified commitments of the alliance members.
Strategic alliances are, in essence, marriages of unrelated parties. As with all marriages, if not managed carefully, they may unravel to the detriment of all parties involved. From our experience serving strategic alliances in a number of different industries, we believe there are four keys to successful strategic alliances: proper strategy, aligned structure, clear governance rules, and effective monitoring by all parties involved. We’ll go on to discuss the ins and outs of each of these topics in this series.