The AllBusiness.com Practical Guide to Strategic Alliances & Joint Ventures

The AllBusiness.com Practical Guide to Strategic Alliances & Joint Ventures

Overview

Over the past few years, strategic alliances have proliferated. The term “strategic alliance” can in fact mean many different things, but the commonly used meaning entails a joint cooperative effort by two or more companies working towards agreed upon goals. The parties are typically in the same or related industries and are looking for strategic synergies in allying with a party in one or more of the following areas:

• Joint product development
• Joint research
• Distribution arrangement
• Co-marketing arrangement
• Investment by one company in the stock of another company, typically for a minority position
• Licensing of patent or other intellectual property

The alliance can be structured as a separate entity joint venture, with both parties making the agreed upon contributions (whether capital, technology, or services). More often, however, an alliance is promulgated as a contractual arrangement or a series of interdependent agreements.

Benefits of Strategic Alliances

Strategic alliances can be valuable and beneficial tools to implement corporate goals. While no single alliance may provide solutions for meeting all corporate goals, alliances, when properly structured, can provide the following benefits:

• Access to New Distribution Channels. An alliance can be structured to grant a company access to new distribution channels that may otherwise be difficult or costly to penetrate on its own.
• Access to New Technology. Many alliances are formed to enable one company to obtain access or rights to new technology through license or other contractual arrangements.
• Access to Capital. A prime motivation for smaller emerging companies is the ability to access new capital for growth, for development of new products or services, or for entry into new lines of business. This is typically structured as license payments or investment in the stock of the emerging company. Valuations of the company in such corporate partnering arrangements may be higher than available in venture capital financings.
• Access to International Markets. In an increasingly global economy, multinational alliances that grant access to international markets can be a significant benefit. Allying with a company that is already doing business or stationed in a foreign country, that understands the market and the culture, and that has existing business operations in the foreign country, can often be much more efficient and successful than attempting to enter those markets on the company’s sole initiative.
• Reduction of Cost and Uncertainty. Allying with a partner may reduce the significant cost and uncertainty of pursuing a new market, product, or service. Often, the company may be unable to expand on new initiatives without the backing and assistance of a strategic ally.
• Access to Manufacturing. An alliance can provide a company access to manufacturing capabilities, expertise, or capacity.
• Enhancing the Ability to Compete. An alliance can provide a company enhanced ability to compete in its existing markets and in new markets.
• Enhanced Credibility. Under an appropriate alliance, a start-up or emerging company may enhance its credibility (e.g., to the markets or to the potential investors).
• Access to New or Existing Products. An alliance can provide a company with access to new or existing products. Pharmaceutical companies in particular enter into strategic alliances with biotechnology companies to place them in a preferred position for access to new products.

Disadvantages of Strategic Alliances

There are a number of potential disadvantages to strategic alliances:

• Lack of Total Control. By nature, most strategic alliances require a measure of shared control over goals and method of implementation of the alliance. The lack of total control of the direction of the business venture can cause significant problems if there is a disagreement with the partner on fundamental decisions that arise during the course of the venture.
• High Rate of Failure. Notwithstanding good intentions by both sides in the start of an alliance, there is a high rate of failure in such transactions. The failures often come as a result of corporate cultural differences, unrealistic expectations, inability to agree on direction or on major decisions, or the inability of one party to bring to the alliance the anticipated benefits (e.g., technology, marketing, distribution) in the manner contemplated by the other party.
• Adverse Impact on the Flexibility of the Participants. Alliances can limit the flexibility of the participants to engage in other alliances, acquisitions, or other transactions. The drafting of the alliance agreements is absolutely key in this area. The alliance agreements may also prevent the parties from competing with the alliance or the other partner to the alliance.
• Overdependence on the Partner. Alliances can sometimes make one partner particularly dependent on another partner. This can be damaging in the event the other partner’s performance on behalf of the alliance deteriorates or in the event the other partner’s business suffers adverse developments.
• Commitment of Time and Resources. Successful alliances require a great deal of commitment by personnel and management and potentially significant amounts of capital and other resources. Such resources may be difficult to continually contribute and may adversely divert management’s attention from their primary responsibilities.

Comparison with Alternatives

Strategic alliances need to be evaluated in the context of the alternatives available in a particular situation. The alternatives that may be available include:

Mergers and Acquisitions

Mergers and acquisitions can enable the company to gain whatever is desired, such as access to key technology, new distribution channels, synergies...