What are the two types of strategic alliances?

What is a strategic alliance?

As a fast-growing company, you will likely come to a point when you want to team up with others to accelerate growth or move in new directions. There are amazing possibilities in forming partnerships with other like-minded firms.

Such partnerships are often called “strategic partnerships” or “strategic alliances,” which makes them sound far more like something from Star Wars than a bunch of people chit-chatting in a conference room. But who are we to argue with business-speak that makes us sound intergalactic?

Firms create strategic alliances for a variety of reasons from creating economies of scale to expanding into new markets to pooling risk. These alliances can be formed in many different ways; the only commonality among the diverse arrangements that go by this name is that they are by definition mutually beneficial for those involved.

Strategic alliance vs. joint venture

Generally speaking, people tend to amalgamate the terms strategic alliance and joint venture. However, using the terms conjointly can create misunderstandings and potential confusion among colleagues. So, what is the difference between strategic alliance and joint venture?

Strategic alliance is a cooperative partnership – and alliance – between two or more businesses that aim to achieve mutually beneficial goals while remaining totally different entities (autonomous in all other business operations). The most important benefit of a strategic alliance is that the separate entities may share resources to achieve their shared brand goals – combining knowledge, experience, distribution channels, and ultimately filling gaps in their respective operations.

A joint venture is substantially the same type of business or entity, whereas two or more companies sign a contractual agreement to create a third, jointly owned business. For example, Company A and Company B sign a contractual agreement to form company C. This third company acts as a unique entity owned by the two businesses as a joint venture, and they each share profits as well as losses.

Strategic alliances are usually divided into two main types: horizontal and vertical.

What is a horizontal alliance?

A horizontal alliance is a partnership between businesses that operate as competitors in the same area. Competitors team up to mutually improve their positioning in the market in some way. This can mean pursuing economies of scale, working together to sell a product in more than one market, or cooperating on research and development.

Not surprisingly, this type of activity can run afoul of anti-trust law, especially in the case of mergers and acquisitions.

What is a vertical alliance?

A vertical alliance is a partnership involving collaboration among companies in the same supply chain; for example, a firm might team up with its supplier or distributor to reduce risk or get lower prices. Vertical alliances benefit the partners by deepening the relationship, cementing long-term commitments, and enabling collaboration on design and distribution. These are also known as channel partnerships or supply chain partnerships.

Anti-trust concerns are not as strong in vertical alliances; these partnerships are typically harder to analyze for anti-competitiveness since the partners aren’t competitors.

Which type of strategic alliance is best for your startup?

While the type of strategic alliance you pursue is most likely to be based on your competitive goals and business needs, it is worth noting that vertical alliances are more often successful than horizontal alliances. Trust is easier to develop when the partners are not competitors; horizontal alliances may be tarnished by opportunism or even double-dealing.

If neither of these types of strategic alliances meet your needs, look at another option: a diagonal partnership. A diagonal strategic alliance is a partnership between companies operating in different industries. This kind of partnership can be very helpful to companies looking to move into a new market.

What to look for before forming a strategic alliance

When creating a strategic alliance, which partner you choose may be the most important thing to consider. Potential partners should be transparent with each other, pursuing common goals, and have aligned visions and values. Most importantly, you should work well together and like working together.

Keep an eagle eye out for red flags and management concerns during the negotiation process. When cooperating with another entity, you take on new risks. You lose some control of your reputation; if your partner firm does something boneheaded, you will also be associated with that poor decision. You may even have legal liability for your partner’s actions. Also, if you haven’t negotiated well or set up accountability systems, you may end up with an unequal relationship.

How to form a strategic alliance

Cover all the bases during negotiations so both partners have a clear understanding of the arrangement you’re agreeing to. Create joint goals and decide who will do what. Map your corporate decision-making and communication pathways to make sure that these will align. Set up systems or procedures to track and monitor progress and hold each other accountable.

Finally, establish a regular schedule of reevaluations when you can make needed adjustments. Partnerships are not fixed in stone, and should constantly be refined and tweaked to keep them healthy and useful.

If you launch your partnership thoughtfully and guide it carefully, there’s no telling how much benefit you can gain or where these relationships might be able to take you.

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