Business Insights

In perspective

Strategic Alliances: Do they improve profitability?

September 14, 2017

Strategic alliances are business agreements between two companies that want to obtain a mutual benefit through collaboration and sharing of resources, with each maintaining full autonomy. 

In the vocabulary of today´s business world, the word “strategic” really stands out, but we have to reflect on it before its use, especially when referring to business alliances. 

It is true that partnerships, either between two firms or between a firm and an investment group can add value, it is important to distinguish between strategic alliances and the conventional type.

Strategic alliances allow one organization to utilize resources and knowledge from each other, and for both to have new business opportunities. Therefore, mergers, acquisitions, license partnerships and franchises do not fall into this category.

Commitment and investment

A strategic alliance requires a great level of commitment and investment, and thus requires a high degree of involvement. If it is structured appropriately, it can increase production, lower costs and increase profitability, among other advantages.

Nevertheless, inappropriate management or its dissolution ahead of time can create a significant negative impact on the firm´s or fund´s capacity to reach its business goals.

Distinguishing Factors

These are the five factors that make an alliance truly strategic:

  • It is vital for the success of a goal or main business objective.
  • It is critical for developing or sustaining a central competency or another competitive advantage
  • It blocks a competitive threat
  • It creates or sustains strategic options for the firm
  • It mitigates significant risk for the business

Additionally, it is imperative that both partners be aware which of these criteria are viewed as strategic from the other side, or else a lack of understanding of the other´s expectations can lead to a relationship that does not work.

Critical elements for success

With strategic alliances, the key is transparency and accountability. Shared metrics are essential for success in the short, medium and long term, as they align the focus of its partners, resulting in mutual trust.

This trust is required when resources and risks are shared. Once an alliance is formed, companies can reach common objectives that would otherwise be impossible to reach on their own.

Success will come as a result of each entity adding value jointly, for customers and respective shareholders.