# Strategic Alliances Explained: Types, Benefits, and Examples

## What Is a Strategic Alliance?

Strategic alliances bring together two or more companies to harness shared resources for a common goal, all while maintaining their independence. These alliances can help businesses enter new markets, expand product lines, or compete more effectively.

For instance, Uber and Spotify teamed up to enhance the customer experience by combining Uber's vast user base with Spotify's technological prowess. Such alliances create opportunities neither company could capitalize on alone.

### Key Takeaways

*   A strategic alliance allows companies to share resources for mutual benefit while maintaining their independence.  
    
*   Strategic alliances can help companies expand into new markets, diversify revenue streams, and gain access to new expertise.  
    
*   Types of strategic alliances include joint ventures, equity alliances, and non-equity alliances, each with distinct financial arrangements.  
    
*   Successful strategic alliances rely on strong communication, trust, and clear objectives between the partnering entities.  
    
*   While strategic alliances can enhance company image and diversify risks, they may also lead to conflicts and unequal benefits.  
    

![Strategic Alliance: An arrangement between two companies to undertake a mutually beneficial project while each retains its independence. ](https://www.investopedia.com/thmb/5iUsuLPEaTaawnBza_TZBm6p1AI=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/TermDefinitions_StrategicAlliance__V1_CT-ca4069b08cc041648db7e3e8f3129de9.jpg)

*— Investopedia / Crea Taylor*

## The Role and Benefits of Strategic Alliances

At the heart of strategic alliances lies companies that are striving to grow but may not have the resources to embark on certain initiatives. Instead of going it alone, they can look for other companies with the needed resources or expertise to partner with.

Consider the massive client base of [Uber](https://www.investopedia.com/articles/personal-finance/111015/story-uber.asp). While Uber had an interest in making the ridership experience as pleasant as possible, single-handedly building out its own repository of music that riders could enjoy on demand would have been a costly challenge. So Uber turned to Spotify to enter into a strategic alliance.

Spotify, for its part, could boast of a well-developed technological product that was ready for a wider consumer audience (exactly what Uber had to offer). By forming a strategic alliance in which Uber provided the consumers and Spotify the technology, the two companies came together to create a market opportunity that neither could have achieved on its own.

> **Important**
>
> Though less formal than some other types of business arrangements, a strategic alliance typically involves contracts that spell out the obligations of each alliance member.

## Real-World Strategic Alliance Examples

Strategic alliances can come in many sizes and forms. Some generic examples:

*   An oil and natural gas company might form a strategic alliance with a research laboratory to develop more commercially viable recovery processes.
*   A clothing retailer might form a strategic alliance with a single manufacturer to ensure consistent quality and sizing.
*   A website could form a strategic alliance with an analytics company to improve its marketing efforts.

## Exploring Different Types of Strategic Alliances

There are three primary forms of strategic alliances:

### Joint Ventures

A [joint venture](https://www.investopedia.com/terms/j/jointventure.asp) occurs when two companies come together to create an entirely new, separate company that each of the existing companies becomes a parent to.

For example, in 2012, Microsoft and General Electric Healthcare signed a joint agreement to create a new, third company called Caradigm, with each of them owning 50%. Caradigm's mission was to develop and market an open healthcare intelligence platform. The idea behind the joint venture was that Microsoft had the technical capability of making such a platform work, while GE's healthcare IT division had the expertise on the healthcare side.

In 2016, GE Healthcare bought out Microsoft's share in the company. Then, in 2018, it sold the entirety of Caradigm to Inspirata.

### Equity Strategic Alliances

An [equity](https://www.investopedia.com/terms/e/equity.asp) strategic alliance may have similar outcome goals as a joint venture. However, it is funded differently in that one company makes an equity investment into another.

For example, in 2010, Panasonic invested $30 million in the automaker [Tesla](https://www.investopedia.com/articles/personal-finance/061915/story-behind-teslas-success.asp) by purchasing shares of Tesla common stock in a [private placement](https://www.investopedia.com/terms/p/privateplacement.asp). The investment was intended to build a stronger alliance between the two companies and to help expand Panasonic's footprint in the electric vehicle market. As one of the world's leading battery cell manufacturers, Panasonic's skill set blended strongly with Tesla's ambition to improve its battery packs and reduce its costs.

The relationship between the two companies continues to this day.

### Non-Equity Strategic Alliances

In a non-equity strategic alliance, two entities come together without an exchange of equity. Each company simply brings its resources to the alliance for the mutual benefit of both. The relationship between Barnes & Noble and Starbucks is one highly visible example. Starbucks brews the coffee. Barnes & Noble stocks the books. Both companies do what they do best while sharing the costs of retail space to the their mutual benefit.

## Creating Value Through Strategic Alliances

There are many reasons that a company might choose to enter into a strategic alliance. They include:

*   **Improving short-term finances.** Companies seeking quick financial gains can use another company's resources to boost their short-term market position.
*   **Eliminating barriers to entry.** Companies lacking capital can partner with those that have invested in specific markets to gain quicker, cheaper access.
*   **Gaining better business insights.** Companies may have no idea how a certain [business model](https://www.investopedia.com/terms/b/businessmodel.asp) will perform. Instead of building and funding a model themselves, companies can use strategic alliances to "test run" scenarios for future decision making.
*   **Sharing financial risk.** If a venture fails, both parties typically share the financial burden. This alliance agreement provides mutual support, reducing individual risk.
*   **Innovating beyond current capabilities.** The Panasonic/Tesla alliance combined top experts in electric vehicles and batteries, boosting innovation for both companies.

> **Fast Fact**
>
> Strategic alliances often form between companies with varying business or product cycles. For example, companies with short cycles may seek companies that have made long-term investments to aid in the rapid development of a product that would otherwise require more time.

## Steps to Forming a Successful Strategic Alliance

Forming a strategic alliance requires creativity, forward thinking, and savvy business sense. Though strategic alliances can differ in many respects, most involve some common steps:

*   **Brainstorm potential partners.** Strategic alliances often join companies from different industries. Look for companies needing your strengths or offering complementary services. Conversely, consider the weaknesses of your own company and what types of entities could bring you the resources to help bridge the gap.
*   **Outline alliance proposals.** Strategic alliances must make sense for both parties. A company that wants to initiate one needs to a propose a plan whose financial and strategic benefits to the other company are clear.
*   **Mutually determine goals.** Both sides of a strategic alliance should have the opportunity to provide input on what the revenue and profit targets and operational strategy will be.
*   **Finalize the plan.** Once both parties are on board, the strategic alliance can be formalized with the necessary legal documents, spelling out what is expected of each of them and what happens if one or the other fails to live up to its side of the bargain. This plan also acts as the roadmap for decision making in the future as the newly formed alliance moved forward.

## Pros and Cons of Strategic Alliances

As with any major business decision, strategic alliances have potential upsides and downsides that are worth thinking through.

### Pros of a Strategic Alliance

A strategic alliance can help a company seize new opportunities, like gaining clients, entering new markets, or launching products, boosting revenue and profitability.

Strategic alliances are also a way to diversify a company's [revenue stream](https://www.investopedia.com/terms/r/revenue.asp) and mitigate company-wide financial risk. Alliances can also mitigate risk because companies with expertise in different areas give each other access to the resources to solve unique challenges or navigate unfamiliar business scenarios.

Finally, strategic alliances can benefit a company's image if it partners with another well-respected company, especially one that has an established presence in different markets.

### Cons of a Strategic Alliance

A strategic alliance is most likely to succeed if there is strong communication between the partners. This means both parties must continually expend resources to manage the alliance and ensure that both sides are in sync and in agreement. In addition, if there are major disagreements between the alliance members, they may waste resources on resolving conflicts that would not have occurred had there been no alliance.

In a strategic alliance, one company might benefit more, creating imbalance and possible reliance on the other's resources or expertise.

Just as a strategic alliance can sometimes burnish a company's public image, the opposite can also happen. One company's misdeeds can harm the other's reputation, even though it may have had nothing to do with them.

Pros

*   May result in gaining customers, especially ones in unfamiliar markets
    
*   May generate additional revenue and increase profitability
    
*   May diversify a company's revenue stream
    
*   May reduce operational risk of a company due to the addition of unique expertise and assets
    
*   May positively influence the image the company
    

Cons

*   May require more work in collaborating and communicating with larger teams
    
*   May result in costly conflicts should the alliance members disagree on strategy
    
*   May result in one side getting a better deal than the other (even if this wasn't what was planned)
    
*   May negatively influence the image of the company
    

## Why Are Strategic Alliances Important?

Strategic alliances are important because they enable a company to benefit by leveraging the assets of another company.

## What Is the Difference Between a Partnership and a Strategic Alliance?

An alliance is a collaboration between two companies in which each company is expected to profit or benefit from the agreement. A [partnership](https://www.investopedia.com/terms/p/partnership.asp) is a more formal type of agreement in which partners combine to create a single, shared economic interest.

## What Is the Difference Between an Alliance and an Acquisition?

In an alliance, two companies agree to cooperate on a particular project. In an [acquisition](https://www.investopedia.com/terms/a/acquisition.asp) one company simply buys the other.

## What Is the Most Important Factor in a Strategic Alliance?

A strategic alliance creates a relationship between two entities. For this reason, the most important factor in the success or failure of an alliance is maintaining the trust and effective collaboration between their teams. The alliance must be guided by clear objectives to make sure both sides stay on the same page.

## The Bottom Line

Strategic alliances empower companies to leverage each other's strengths, access new markets, and innovate beyond their capabilities, but selecting the right partner is crucial. Clear objectives and mutual understanding drive successful collaborations. Companies should ensure balanced benefits, as alliances can either enhance or harm reputations and financial outcomes.

> **Article Sources**
>
> 1.  Uber. "[Your Ride, Your Music](https://www.uber.com/newsroom/ridermusic/)."
>     
> 2.  Microsoft. "[Microsoft and GE Healthcare Complete Joint Venture Agreement](https://news.microsoft.com/2012/06/06/microsoft-and-ge-healthcare-complete-joint-venture-agreement/)."
>     
> 3.  ZDNET. "[Microsoft Quietly Sold Its Stake in Caradigm Health Venture With GE](https://www.zdnet.com/article/microsoft-quietly-sold-its-stake-in-caradigm-health-venture-with-ge/)."
>     
> 4.  Inspirata. "[Award-Winning Platform to Accelerate Development of Cancer Information Data Trust](https://www.inspirata.com/inspirata-acquires-health-analytics-company-caradigm/)."
>     
> 5.  Tesla. "[Panasonic Invests $30 Million in Tesla](https://www.tesla.com/blog/panasonic-invests-30-million-tesla)."
>     
> 6.  Global Fleet. "[Mass(ive) Production and Price Cuts: How Did the Tesla - Panasonic Alliance Thrive Over the Years?](https://www.globalfleet.com/en/manufacturers/global/analysis/massive-production-and-price-cuts-how-did-tesla-panasonic-alliance-thrive-over-years?t%5B0%5D=Tesla&t%5B1%5D=Electrification&curl=1)"