November 4, 2019
Types of Strategic Alliances to Build Your Business
Strategic alliances are great way to rapidly expand your business and generally require less commitment than mergers and acquisitions where changes in ownership are required. The key motivation for alliances is to reduce the risk to both companies through the sharing of resources, access to prospective clients, knowledge sharing, and creating gains in scale and/or productivity.
There are four types of alliances: scale, access, complementary, and collusive.
Scale alliances require partners to work together to achieve advantages they could not easily achieve on their own. It may be better bargaining opportunities to reduce the cost of raw materials, or it could mean using one organization to “white-label” the manufacture of the original company’s products for resale in order to achieve more throughput.
Access alliances typically require one organization that needs the capabilities of the other organization in order to expand their market. For example in many countries, market entry can only be done through a local firm. This local company is exclusively allowed to sell your company’s products and services or you may have a number of companies within the country reselling your products. Local companies in other countries or regions may also want to license your patents, branding, or other intellectual property, expanding your market. Other ways access alliances work are through the ability to share client lists and sell complementary products or services to each other’s client lists.
Complementary alliances are used when one organizations identifies a gap or weakness within their structure or product offering that requires aligning with an organization that has those capabilities and has other weaknesses where the original company is strong. One example of this would be financial services, where one organization is registered for brokerage but not investment banking. A growing investment banking firm would be ideal to partner with in order to better serve each other’s clients with additional services.
Collusive alliances involve any number of companies to combine into cartels, reducing competition in the marketplace, increasing bargaining power with suppliers and price fixing. These types of alliances are more negatively-perceived, especially by regulators. DeBeers Diamonds and OPEC are typical examples of these types of alliances.
There are many potential advantages:
- Faster speed of access to new product launches or market areas
- Instant increased market share / increased market power
- Economies of scale (perhaps by combining production capacity)
- Securing new or better sales or distribution channels
- Increased control of supply chain and vendor price negotiations
- Decreased competition (by taking them over or partnering with them)
- Acquire intangible assets (brands, patents, trademarks)
- Overcome barriers to entry to target new markets
- To take advantage of deregulation in an industry / market
…but they don’t come without risk. Alliances can turn out to be one-sided. Market changes may make alliances less desirable or make your alliance irrelevant. Your partner may go bankrupt, launch competing products, or become a pariah due to scandal or bad press. Growing a company can be done in many different ways. The most used ways are through internal growth or external growth through acquisitions and alliances. But starting out with a Product/Market Expansion Grid is always a great way to begin planning how you will take your company to the next level.