STRATEGIC ALLIANCE 

A strategic alliance is an agreement between two or more parties to pursue a set of agreed upon objectives needed while remaining independent organizations. Partners may provide the strategic alliance with resources such as products, distribution channels, manufacturing capability, project funding, capital equipment, knowledge, expertise, or intellectual property. The alliance is a cooperation or collaboration which aims for a synergy where each partner hopes that the benefits from the alliance will be greater than those from individual efforts. The alliance often involves technology transfer (access to knowledge and expertise), economic specialization, shared expenses and shared risk.

Advantages

The advantages of forming a strategic alliance include:

·         Allowing each partner to concentrate on their competitive advantage.

·         Learning from partners and developing competencies that may be more widely exploited elsewhere.

·         Adequate suitability of the resources and competencies of an organization for it to survive.

·         To reduce political risk while entering into a new market

.

Disadvantages

·         Risk of losing control over proprietary information, especially regarding complex transactions requiring extensive coordination and intensive information sharing.

·         Coordination difficulties due to informal cooperation settings and highly costly dispute resolution.

·         Agency costs: As the benefit of monitoring the alliance's activities effectively is not fully captured by any firm, a free rider problem arises (the free rider problem seems to be less pronounced in settings with multiple strategic alliances due to reputation effects).

·         Influence costs because of the absence of a formal hierarchy and administration within the strategic alliance.

 Strategy Development

·         High impediments to comprehensive contracting resulting in a major degree of contract incompleteness

·         High complexity minimizing the auxiliary potential of the body of law for resolving issues not specified in the contract

·         Both allies have to invest in relationship-specific assets resulting in potential for mutual hold-ups.

·         Excessive cost for one party to develop the expertise to carry the transaction itself (e.g. due to experience curve)

·         Transitory or uncertain character of market opportunity making a merger or vertical integration unattractive

·         Need for a local party in a country due to regulatory environment (as is often the case in China)