A strategic alliance is a relationship between two or more organisations that falls somewhere between the extremes of an arm’s-length sourcing arrangement on the one hand, and a full-blown acquisition on the other. It embraces things such as franchising, licensing and joint ventures.
Booz Allen & Hamilton, a firm of management consultants and an acknowledged expert in the field, defines a strategic alliance as:
A cooperative arrangement between two or more companies in which:
• a common strategy is developed in unison and a win-win attitude is adopted by all parties;
• the relationship is reciprocal, with each partner prepared to share specific strengths with the other, thus lending power to the enterprise;
• a pooling of resources, investment and risks occurs for mutual gain.
In general, there are two types of strategic alliance: a bilateral alliance (between two organisations) and a network alliance (between several organisations). The alliance between Royal Bank of Scotland and Tesco, whereby the British supermarket chain provided the Scottish bank’s services throughout its stores, is an example of the former; the Airbus consortium and the Visa card network are examples of the latter.
Strategic alliances have many advantages: they require little immediate financial commitment; they allow companies to put their toes into new markets before they get soaked; and they offer a quiet retreat should a venture not work out as the partners had hoped. However, going into something knowing that it is (literally) not a big deal, and that there is a face-saving exit route, may not be the best way to make those charged with running it hungry for success.
The most popular use for alliances is as a means to try out a foreign market. Not surprisingly, therefore, there are more alliances in Europe and Asia (where there are more foreign markets nearby) than in the United States. In some cases, alliances are used by companies because other means of entering a market are closed to them. Hence there have been many in the airline industry, where governments are sensitive about domestic carriers falling into foreign hands.
One thing crucial to a successful alliance is a degree of cultural compatibility. Companies are advised, for example, to pick on someone their own size. Alliances between the very big and the very small are hard to operate not least because of the different significance that the alliance assumes in each organisation’s scale of things.
Alliances are often said to be like marriages. The partners have to understand each other’s expectations, be sensitive to each other’s changes of mood and not be too surprised if their partnership ends in divorce. Indeed, many companies build into their alliances a sort of prenuptial contract, an agreement as to what is to happen to their joint property in the event of a subsequent divorce.
Strategic alliances grew at a phenomenal rate in the 1990s. Some companies, such as General Electric and AT&T, set up several hundred. On one estimate, IBM cemented almost 1,000 strategic alliances during the decade. Booz Allen & Hamilton reckons that more than 20,000 were formed worldwide in the period 1996–98. Accenture says that Fortune 500 companies have an average of 50–70 alliances each.
Alliances have not always been successful. In 1998 BT and AT&T agreed to bundle their international assets into a single joint venture that started off with annual revenues of $11 billion, annual operating profits of $1 billion and some 5,000 employees. In 2001 the two companies agreed to unwind the alliance—at considerable cost.