Introduction There is notably an important trend in how organizations relate in the 21 st century. The business world, especially in the international market is characterized by strategic alliances. These alliances are in a bid to attain different organizational objectives, which may include lower costs in production, higher market penetration, acquisition of knowledge, gain in tactics used in a certain line of business, or acquisition of resources such as brands, patents, copyrights and production technology. Many companies prefer to outsource different activities instead of internalizing them. These activities are non-core; hence this leaves these companies to concentrate on the core part of being in business. All this leads to higher profits in most cases, or at least, it is the motive of majority of the alliances. The following paper looks at the two major theories that contribute to the understanding of strategic alliances concept: the transaction based approach and the resource based approach. The two theories are analyzed in detail in a bid to elaborate their explanation being the rationale of such strategic operations. Their assumptions will also be explained to ascertain any limitations. Formation of Strategic Alliances Transaction Cost Approach The above theory is directed towards minimization of costs involved in transaction of various assets. These costs may include expenditures during preparation and execution of contracts, taking care of accrued claims from legal slams or enhancing working environments. This approach outlines that strategic alliances will be formed when costs of a certain operation will be lower than when a firm internalizes the cost to its individual hierarchical structure. Transaction approach gives reasons for justification of alliances as a way to avoid spot market arrangements. Efficiency is the number one concern when there is a choice among hierarchy and market (Krugman, 2009). When production costs do not vary among firms, costs of performing transactions are the differentiating factors. A transaction between two or more firms will need huge specialized investments, and lack of certainty in unforeseen contingencies makes an agreement incomplete, paving way for opportunistic behavior. Thus, market plans will be replaced by administrative hierarchies to reduce the costs of transacting. This cooperative relation mitigates risks attributed to bilateral contracts between separate persons as well as avoiding reduced efficiency brought about by shirking and troubles of bureaucratic systems present in hierarchical firms. This means that cooperative arrangements are better governance strategies in trade because there is a reduction in intermediate transaction costs (Tallman and Fladmoe, 2002). Transaction cost can be divided into two: Ex-ante costs of preparing agreements and negotiating the same; and ex-post costs which happen after the agreement is realized. These include enforcing the contract and monitoring it. There may be losses that persons may incur due to poor choices in the mode of governance. This implies that the formation of new corporate entities, owned jointly, and acquisition of minority shareholding is appropriate. Therefore, transaction cost approach aims at increasing performance by reducing transaction costs; more hierarchical arrangements are preferred when transaction costs are high. Cooperative arrangements may be contractual; this does not involve any equity rights. Examples would b