The Competitive Advantage of Strategic Alliances: Companies Profiting from Partnerships with Competing and Noncompeting Companies

George Nakos

INTRODUCTION

In an increasingly complicated global business environment, companies have discovered that it is impossible to go alone. The tool that firms from large multinationals to small- and medium-sized enterprises have found to be successful in helping them navigate treacherous foreign markets is the formation of strategic alliances. In an interconnected world, a networked company that has the ability to locate and form the appropriate strategic partnerships will be able to gain a sustainable competitive advantage. The proliferation of strategic alliances in multiple industries, from health care to computer research is changing the way business is conducted internationally and small and large business need to be aware of these developments. A "capacity to collaborate" that a company may possess has become an important asset that differentiates it in the marketplace.1

Companies that do not have the ability to cooperate or are reluctant to form networks and alliances are operating at a competitive disadvantage.

A strategic alliance is an interorganizational cooperative agreement that leads to the allocation of resources and skills by two or more organizations for the achievement of common goals, as well as goals unique to individual partners.2 A wide variety of partnerships exist and a company may engage in distinctive partnerships for a multitude of reasons. For example, a firm can engage in sales partnerships with either intermediate customers or ultimate customers; supplier partnerships with goods suppliers or services suppliers; lateral partnerships with competitors, nonprofit organizations, and various government entities; or even internal partnerships among the various business units of a firm, its functional departments, and the employees of the company.3

Companies engage in alliances because they expect to gain benefits and improve their competitive advantage. Alliances provide firms with a wide variety of tangible and intangible benefits. An alliance can supply a company with a more effective way of entering foreign markets, an ability to circumvent foreign market barriers, a way to defend its home market from foreign and domestic intruders, or an inexpensive approach of extending its product line. At the same time, a firm incurs certain costs by engaging in strategic alliances and it needs to do a thorough cost-benefit analysis prior to selecting potential partners. These drawbacks include the managerial time that the firm spends in negotiations; loss of freedom to act alone in the areas of common agreement; potential loss of proprietary technology to the partner that may be used later on to directly compete against the products of the company; relying too much on a partnership and as a result not developing internal capabilities necessary to compete successfully in an industry; and the liquidation costs of a potential partnership termination which can be huge and very expensive for many companies to handle.4

Strategic alliances also differ in the scope and importance for a particular firm. An alliance can be extremely important and whether this will be a successful partnership may determine the future survival of a company. In this type of all-encompassing alliance, two companies may attempt to integrate all their functional areas. Many airlines in recent years have signed very close alliances that have integrated them with other airlines. For example, Delta Airlines has signed a very wide cooperative agreement with Air France, the European carrier. This type of agreement requires a high level of cooperation from almost all the functional areas of the two companies. It is also a very risky partnership because both parties have a huge investment and if the partnership is not successful both parties will suffer a substantial loss. On the other hand, in most cases, the vast majority of alliances usually concentrate in one particular function of a company. The Japanese carmaker Toyota announced in August 2011 a strategic alliance with Ford Motor Company to jointly develop a gas-electric hybrid fuel system for sport utility vehicles and pick-up trucks. The new alliance's main goal is to keep large vehicles affordable while they meet stricter fuel efficiency rules mandated by new U.S. federal government guidelines.5 This type of partnership, although important for both companies, involves cooperation of only certain functional areas of the two corporations. Although they will be cooperating in these areas, the two companies will still be fierce competitors.

This chapter will explore the growth of strategic alliances in recent years, the reasons that motivate companies to enter into partnerships with firms in domestic and foreign markets, and the potential competitive advantage that a company can gain from a strategic alliance. In addition, the advantages and disadvantages of engaging in alliances with competitors and not competitors will be investigated.