Strategic alliance – definition and types of strategic alliance

By: | Tags:

Definition of strategic alliance

A strategic alliance is a very useful market entry strategy. It can surely help a company expand into a new market and/or develop an advantage over its competitors. According to Johnson, Scholes, & Whittington (2006), a strategic alliance is where two or more organisations share resources and activities to pursue a strategy. According to Hitt, Ireland, & Hoskisson (2008) it is a partnership between firms whereby resources, capabilities, and core competences are combined to pursue mutual interests.

Types of strategic alliance

Companies can choose from a variety of types of strategic alliance. Franchising and joint ventures are two common methods of strategic alliance.

Franchising

It refers to ‘the granting of the right by a parent company (the franchisor) to another, independent entity (the franchisee) to do business in a prescribed manner’ (Czinkota, Rivoli, Ronkainen, 1992, p.278). McDonald’s, SUBWAY and many other companies use franchising to grow their businesses. SUBWAY has been using franchising as a growth strategy since 1974 (SUBWAY, 2013). This strategy itself is one of the major factors behind the restaurant’s global success.

However, it is worth mentioning that franchising has advantages and disadvantages from both the franchisor and the franchisee’s perspectives. The advantages for the franchisors are that they retain a lot of control in the relationship, and make substantial financial gains in terms of initial deposit and subsequent royalty payment received from the franchisees.  The disadvantages for the franchisors are that the franchisees may gain substantial knowledge of how to do the business and subsequently run their own and independent business (Czinkota, Rivoli, Ronkainen, 1992).

On the other hand, the advantages for the franchisees are that they benefit from a brand name and receive training from the parent company. The disadvantages for the franchisees are that if anything wrong happens to the parent company, the individual franchisee is likely to suffer from the chain effect. Moreover, the franchisors’ tight control inhibits the franchisee’s creativity.

Joint ventures

Joint ventures are arrangements where two or more firms ‘join forces for manufacturing, financial and marketing purposes and each has a share in both the equity and the management of the business’ (BPP Learning Media, 2010, p.171). For example, Jaguar Land Rover sealed a joint venture with Chinese company Chery Automobile in 2012, marking £1.1bn of investment in the world’s second largest economy.

Sharing costs and resources, synergistic effects, and learning from each other are some of the benefits of joint ventures. On the other hand, conflicts of interest, and disagreement over issues such as profit shares are some of the disadvantages of joint ventures. While joint ventures have some disadvantages, companies around the world often pursue joint ventures.

The article publication date: 28 September 2017

Further reading/references

BPP Learning Media (2010) Business Strategy, London: BPP Learning Media Ltd

Czinkota, M., Rivoli, P., & Ronkainen, I. (1992) International Business, 2nd edition, USA: The Dryden Press

Hitt, M., Ireland, R., Hoskisson, R. (2008) Strategic Management: Competitiveness and Globalization Cases, 8th edition, Cengage Learning

Johnson, G. Scholes, K. & Whittington, R. (2006) Exploring Corporate Strategy, 7th edition, London: Prentice Hall

Photocredit: www.shutterstock.com

Author: Joe David

Joe David has years of teaching experience both in the UK and abroad. He writes regularly online on a variety of topics. He has a keen interest in business, hospitality, and tourism management. He holds a Postgraduate Diploma in Management Studies and a Post Graduate Diploma in Marketing Management.