What Does It Mean When A Company Partners With Another Company?

Companies who want to improve but might not have the funds to take on certain projects are at the core of strategic alliances. Companies can use already-existing resources to leverage personal growth rather than trying to expand market opportunities on their own.

Think about Uber’s enormous customer base. Uber may want to create the best possible passenger experience, but it might not be realistic for the corporation to develop its music library with the technology to play songs on demand all by itself. Uber therefore looked to Spotify to form a strategic partnership.

Types of Strategic Alliances

Strategic alliances come in three main varieties. The amount of money that each company invests in the mutually agreed-upon joint venture varies throughout these three categories of strategic partnerships.

• Joint Enterprise: When two businesses decide to collaborate to form a completely new, independent business that each of the original businesses becomes a parent to, this is known as a joint venture. A joint venture between Microsoft and General Electric Healthcare was established in 2012 with the name Caradigm.  The goal of founding Caradigm was to establish and promote an open platform for healthcare intelligence. The rationale behind the joint venture was that GE’s healthcare IT division possessed the healthcare domain expertise, while Microsoft possessed the technological capacity to make such a platform function.
• Strategic Alliance for Equity: While the end goals of an equity strategic alliance may resemble those of a joint venture, they differ in financing since one business invests equity in the other. Panasonic made a $30 million investment in Tesla in 2010.
• The investment was made to strengthen the partnership between the two businesses and accelerate the growth of the electric vehicle market. Being one of the top producers of battery cells globally, Panasonic’s expertise complemented Tesla’s goal of utilizing cells from several battery providers in custom packaging.
• Strategic Non-Equity Alliance: When two parties recognize there is a mutual advantage and no equity transfusion is required, a non-equity strategic relationship is formed. As will be seen in the discussion of Barnes & Noble and Starbucks below, each alliance member only contributes their resources to the group so that the other party might profit from them. The two parties agree on a more basic contractual requirement to combine their resources and abilities.

How Do Value-Creating Strategic Alliances Occur?

There are numerous reasons why a business would decide to form a strategic alliance. These explanations could involve, but are not restricted to:

• Enhancing immediate financial situation: Leveraging another company’s resources to strengthen its short-term position in the market may be the easiest option for companies looking to make rapid financial impacts.
• Removing obstacles to entrance: Businesses may lack the funds necessary to join some markets. Alternatively, they can obtain access more quickly and affordably by leveraging businesses that have already made those investments.
• Acquiring improved business knowledge: Businesses might not know how well a particular business model will work. With strategic partnerships, businesses can “test run” potential outcomes and utilize that data to influence future decisions, without having to develop a whole model and self-fund an experiment.
• Dividing the cost of risk: If a business partnership fails, both partners will probably have to shoulder some of the losses. As part of the alliance agreement, each party may receive support from the other rather than bearing sole responsibility for the failure.
• Beyond present capabilities in innovation: Within the previously mentioned Panasonic/Tesla relationship, this collaboration resulted in a state-of-the-art, inventive contract that united some of the most astute specialists in electric vehicle battery technology.

Strategic alliances are crucial because they allow businesses to flourish in places where they otherwise could not due to resource constraints. Successful businesses collaborate with other businesses, whether it is to obtain resources from scarce sources, labor from experienced individuals, or to build an alliance to enter a market. This is significant because it enables a business to profit directly from the assets of another business.

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