Nobody gets by in the world of business completely alone. Working with others, both formally and informally, generates opportunities for growth in any number of directions both for your own business and those you’re partnered or allied with. The best strategic alliances enable your business to grow, generate more customers and revenue, the worst alliances become more of a burden than a benefit.
What is a strategic alliance?
Alliances all stem from relationships. They could start with a networking event, a mutual acquaintance, even a chance meeting. Alliances of all kinds rely on human interaction and, for the most part, have a basis that all parties involved in the alliance are working towards a common goal.
A strategic alliance moves into a more defined definition. These alliances have a specific purpose of which there are usually three different types; a joint venture with the aim of developing a specific outcome or strategy, a partnership that creates a competitive advantage for those involved, or, an alliance that prevents competitors from having an advantage.
Creating Strategic Alliances
There are six main steps that should be taken towards launching a successful strategic alliance.
- Find out who your core customers are: Break down into identifiable sections using demographics and buying personas.
- Identify businesses who target the same customers: Ignore competitors, look for those who offer products and services that work alongside yours.
- Explore what the other company would get from an alliance with you: How will they benefit from your alliance? This makes for a much easier conversation.
- Draft a proposal then reach out: Once you know how you will both benefit, reach out and share your thoughts and ideas.
- Negotiate terms: Strategic alliances are more formal than informal partnerships, expect there to be some negotiation.
- Sign an agreement: Confirm the terms and then agree to sign together.
The 5 Criteria of a Strategic Alliance
When considering the difference between a strategic alliance and a standard partnership/alliance it’s necessary to consider five categorizing criteria. If an alliance allows for any of the following criteria to be met, then it should be considered a strategic alliance and is one that should be nurtured and guarded for the sake of the growth of the business:
1. The alliance is critical to the success of a core business goal
2. The alliance is critical to the development or maintenance of a key element of the business or offers a competitive advantage.
3. The alliance creates a block for competitors.
4. The alliance builds or continues strategic choices.
5. The alliance mitigates a large risk to the business.
If any of these criteria are met, then the strategic alliance can be categorized into one of the three types noted above.
Types of Strategic Alliance
Joint ventures are formal agreements between two companies that become controlled by a parent company. The two allied companies share resources, equity, and responsibilities according to a binding agreement. The venture has a clear objective and set of goals, any profit that is achieved is split between the two companies as agreed.
A well known joint venture was created between Microsoft and General Electric in 2011, known as the Caradigm venture the venture was launched so that a Microsoft healthcare intelligence product could be merged with various General Electric health-related tech.
Equity Strategic Alliance
More financially based, one company partially acquires another company through equity purchase or both companies acquire equity in the other creating a cross-equity transaction.
One such example would be when Tesla allied with Panasonic with the aim of accelerating battery technology for electric vehicles. Panasonic invested $30 million dollars into the alliance and has reaped the benefits since.
Non-Equity Strategic Alliance
Non-equity strategic alliances make up the majority of strategic alliances. These are alliances that don’t involve the transfer of any equity and revolve around the sharing of resources and information. They’re more informal by nature but can be just as powerful.
These alliances are more commonplace and more visible, take for example Starbucks and Kroger. Starbucks is regularly seen within Kroger markets. Starbucks pays for the rental of the space but gets a high-traffic location for a store. Kroger gets rent from Starbucks but also gets to offer Starbucks to their customers.
Benefits of Making Strategic Partnerships
There are, of course, a wide number of benefits to entering into strategic partnerships with other businesses.
Accessing new customers
When two businesses merge and share resources, one of the best things to share is your customer base. During the partnership both companies will freely and willingly advertise the other to their customers and, therefore, your business will naturally pick up new customers that you might not have had access to before.
If your business is strong enough and has a good customer base and reputation already, then it’s highly unlikely that your targeted partner will turn down a partnership with you. After all, they gain access to your customers as well. When you bring in the additional brand awareness into the equation, it’s a win-win situation. Those customers can bring further benefits when you include a referral marketing strategy, with a bigger pool of participants, the program will grow and grow.
Reaching new markets
In a similar vein to the last point, if your allied company has targeted a different sector, industry, or niche that you have previously identified, then you’ll be able to enter into this market far easier than should you decide to go it alone. You’ll be able to share learned insights, information, and routes to market with each other.
Added value for your customers
By picking the right strategic partnership, you’ll not only benefit the business itself but also your current, loyal customers. Many alliances create exclusive offers for the other business’s customers, this not only creates new custom but benefits the customers themselves. Looking after and increasing the benefits for your loyal customers only creates benefits, including opportunities for happy customers to become brand ambassadors and leading to an increase in word of mouth marketing.
Lowering the amount it costs to get new customers is always a helpful benefit to have. Strategic partnerships do so by reducing advertising costs to a whole host of potential new customers, reduced training costs where information is shared, and the potential to have a near minimal cost of acquisition if loyal customers to the partner company purchase from you upon completion of the partnership.
Partnerships with established and well-known companies create a high amount of trust in your business through shared kudos. If people already trust Brand A and then see that your business is allied with them, that trust passes on. This is especially true for startups without huge brand awareness. These types of partnerships are harder to come by but often offer the biggest rewards.
Pitfalls of Strategic Partnerships
There are two common issues that arise when it comes to strategic alliances and partnerships. One is the loss of some control (potentially within your own company), another is that there can be increased liability.
When an alliance is formed, naturally there will be some decisions made over how the project and potentially the businesses will be run. If you’re very set in your ways, this can be difficult to deal with. If you’re flexible and remember the benefits often outweigh the potential loss of control, you’ll do well.
Increased liability is more noticeable in joint ventures or equity-based strategic alliances. Whilst it’s easy to focus on potential shared profit, any losses incurred need to be shared and dealt with as agreed in the initial partnership agreement.
Issues tend to arise when parties aren’t completely transparent with each other. Misrepresenting what you can bring to the table, what you can offer their customers or your ability to complete a project will cause friction and potentially rifts between the two companies.
5 Strategic Alliance Examples
WBUR, Reddit, and Wistia
Not your usual strategic alliance, but one which aimed to benefit the customers of all parties involved. The Boston NPR news station, WBUR teamed up with Reddit and Wistia with the aim of exploring some of Reddit’s lesser known communities, uncovering hard to reach stories, and sharing information that might otherwise be missed.
Gusto and Xero
Gusto, a small business payroll provider, and Xero, an accountancy software company, found that they had a massive overlap in customers and that, in fact, many of their customers were using both platforms within their businesses. The two companies formed a strategic alliance with the aim of sharing integrations that made life easier for their customers. The move further benefitted New Zealand-based Xero who were able to get a stronger foothold in the US through Gusto. Plus neither needed to consider developing a payroll or accounting platform to create an all in one solution.
Walmart and Shopify
It might seem odd that an eCommerce giant would ally with a physical store giant, but with the aim of targeting the behemoth that is Amazon, Walmart and Shopify did exactly that. Their alliance aimed to get Walmart to further grow its online presence to small Shopify based businesses. This would increase promotion and distribution whilst also allowing users to keep using the simplicity of Shopify.
This was, at least, the initial plan for the partnership, but in recent times there have been rumours that the partnership was a way to open the door for Walmart to eventually acquire Shopify in its entirety.
DJI and 3D Robotics
With an aim of entering into the construction market, 3D Robotics developed their own flagship drone, the launch failed and foothold was never realised. The software that was developed to map sites and provide 3D imagery was the best on the market but the hardware wasn’t delivering. A strategic partnership was created between 3D Robotics and leading drone manufacturer DJI, where DJI would run the software on their drones. The partnership meant customers could use drones they already owned (through DJI) and could use the best software, further allowing 3D Robotics to enter the market at large.
Uber and Checkr
In lieu of having employees that work specifically for the likes of gig economy companies such as Uber, businesses instead carry out extensive background checks on each contractor to ensure that they meet the company’s level of expectation and are an appropriate person. This includes criminal background checks, driving records and more. The issue was that these checks were completed at a point in time but didn’t consider anything that would happen after the initial check was carried out.
Checkr sought to combat this issue and partnered with Uber to launch an initiative called the Continuous Check. The software would now automatically bring up any red flags as they were committed, making a safer and more efficient platform for Uber and massively increasing the value of Checkr.
Strategic alliances, when formed with a complementary business partner, can be extremely powerful and lead to great things for all parties involved. Not only that, they can be hugely beneficial for your customers too.
- Establish if your partnership could be strategic using the five core criteria
- Plan your approach to a strategy and be ready for negotiation
- Consider if a partnership based around equity is suitable or not.
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