Strategic Alliance in Business: Definition, Advantages & Disadvantages

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Lesson Transcript
Instructor: Shawn Grimsley

Shawn has a masters of public administration, JD, and a BA in political science.

Businesses create strategic alliances for different reasons. In this lesson, you'll learn what a strategic alliance is and explore its advantages and disadvantages. You'll also have a chance to take a short quiz after the lesson.

Definition of Strategic Alliance

A strategic alliance in business is a relationship between two or more businesses that enables each to achieve certain strategic objectives neither would be able to achieve on their own. The strategic partners maintain their status as independent and separate entities, share the benefits and control over the partnership, and continue to make contributions to the alliance until it is terminated. Strategic alliances are often formed in the global marketplace between businesses that are based in different regions of the world.

Advantages of Strategic Alliances

Strategic alliances usually are only formed if they provide an advantage to all the parties in the alliance. These advantages can be broken down to four broad categories.

The first category is organizational advantages. You may wish to form a strategic alliance to learn necessary skills and obtain certain capabilities from your strategic partner. Strategic partners may also help you enhance your productive capacity, provide a distribution system, or extend your supply chain. Your strategic partner may provide a good or service that complements a good or service you provide, thereby creating a synergy. If you are relatively new or untried in a certain industry, having a strategic partner who is well known and respected will help add legitimacy and credibility to your venture.

A second category is economic advantage. You can reduce costs and risks by distributing them across the members of the alliance. You can also obtain greater economies of scale in an alliance, as production volume can increase, causing the cost per unit to decline. Finally, you and your partners can take advantage of co-specialization, where you bundle your specializations together, creating additional value, such as when a leading computer manufacturer bundles its desktop with a leading monitor manufacturer's monitor.

Another category includes strategic advantages. You may join with your rivals to cooperate instead of compete. You can also create alliances to create vertical integration where your partners are part of your supply chain. Strategic alliances may also be useful to create a competitive advantage by the pooling of resources and skills. This may also help with future business opportunities and the development of new products and technologies. Strategic alliances may also be used to get access to new technologies or to pursue joint research and development.

Lastly is the category of political advantages. Sometimes you need to form a strategic alliance with a local foreign business to gain entry into a foreign market either because of local prejudices or legal barriers to entry. Forming strategic alliances with politically-influential partners may also help improve your own influence and position.

Disadvantages of Strategic Alliances

Strategic alliances do come with some disadvantages and risks.

One disadvantage is sharing. Strategic alliances require you to share resources and profits, and often require you to share knowledge and skills as well. Sharing knowledge and skills can be problematic if they involve trade secrets. Agreements can be executed to protect trade secrets, but they are only as good as the willingness of parties to abide by the agreements or the courts' willingness to enforce them.

Strategic alliances may also create a potential competitor. An ally one day may become a competitor the next when it decides it no longer needs you.

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