Differences between strategic alliance vs joint venture explained.
Are you looking forward to expanding your business horizons? Do you want to join hands with one or more companies? Are you unable to decide if you should prefer a merger, strategic alliance, or joint venture?
The decision if you should go for a strategic alliance or a joint venture depends a lot on the core of your business. However, knowing the difference between strategic alliance and joint venture stays at the forefront. Here is a deep analysis of both strategic alliance vs joint venture.
What Is A Strategic Alliance?
A strategic alliance is a type of agreement in which two or more companies come together to undertake a specific task while staying independent from each other. They bring together their own capacities and resources to achieve a common goal that benefits them mutually. This common goal is achieved through expertise, knowledge, and what each company is specifically most capable of.
A strategic alliance is an informal agreement.
What Is A Joint Venture?
A joint venture is an agreement in which two or more companies come together to perform a common purpose and end the agreement after fulfilling the purpose.
For instance, many sole proprietors can come together to form a new venture or entity. Like, a chef and baker can join hands to open a new food joint. The agreement defines the type of joint venture the parties have decided to enter into. It can be a partnership, corporation, limited liability company, or so.
A joint venture is more of a formal agreement as compared to a strategic alliance. A joint venture agreement lays down everything clearly, just like in the case of any partnership agreement. It has strict governance, including the board of directors, profit sharing ratio, rights and duties of partner, objective obligations, registered office, and more.
Differences: Strategic Alliance vs Joint Venture
To know the difference between the two, here are clear points between strategic alliance vs joint venture that set them apart in many ways:
The objective of a strategic alliance is to maximize returns by making the optimal use of the resources, capital, and every other advantage each of the companies involved in the strategic alliance possesses. It works towards generating more profits out of the same.
The objective of a joint venture, on the other hand, is to minimize the risks involved when doing a business. A joint venture allows two or more companies to come and work together to mitigate the risks. For instance, an Asian company can join hands with a European company to expand its business, thus avoiding the risk of new market entry. They do so by making use of complementary assets of the already established company there.
Separate Legal Entity
A strategic alliance has no separate legal entity, i.e., a strategic alliance has no legal entity of its own. The law doesn’t re as it is a mutual agreement in an informal setting. This works as a contractual agreement and not as a legal partnership.
A joint venture, on the other hand, enjoys a separate legal entity. This means the partners of the venture are different from the business entity. In case of dissolution, the business is independent of the individual or owner. They are not responsible for the dues of the venture if it is a limited liability partnership.
A strategic alliance is formed by sharing the resources of the entities involved in the alliance.
Whereas in a joint venture, a third entity is created by combining the existing resources of the parties involved.
In the case of strategic alliance, the management is delegated, which means the existing employees authorize other persons to do the tasks or assign the respective work.
In a joint venture, the management is usually bilateral, i.e., the management is equally shared amongst the parties or as agreed upon as part of the contract. Sometimes, separate management is formed as part of the joint venture.
As mentioned, a strategic alliance is an informal agreement and may merely start through words exchanged. Therefore, there is no presence of written or legal contract/agreement in the strategic alliance.
On the contrary, a joint venture is a formal and legal agreement/contract, and all partners/entities are legally binding through it. The contracts lay down the duties and obligations assigned to each party.
The main feature of a strategic alliance is its independence. The parties involved in a strategic alliance work together by taking advantage of each other resources. However, they operate separately and independently without losing their own business entity, unlike in the case of the joint venture.
In the case of a joint venture, as two parties merge and operate as one, they work and operate by being dependent on each other and, therefore, have a separate legal entity.
In a strategic alliance, the main resources that parties in a strategic alliance take advantage of include knowledge, product, expertise, capital, goodwill, etc., to maximize profits.
Joint ventures aim to minimize risks using resources like optimum utilization of resources, risk-free or lower risk plans, leverage etc.
Involvement Of Risk
The strategic alliance has an excellent level of risk due to its no separate legal entity. It is an informal agreement with no contract, leading to conflicts and loss of trust between parties.
A joint venture is a lower-risk venture as it is a legal contract and solely aimed towards doing business with minimal risks involved.
Advantages And Disadvantages Of Strategic Alliance
The main advantage when talking about strategic alliance vs joint venture is allowing expansion of resources for a less capable business by being in a strategic alliance with a more powerful company. In return, the other company can help by sharing its expertise in marketing, sales, or just with its presence in the market.
As a result, all parties involved can speed up their productivity.
Easy To Penetrate New Market
A strategic alliance usually involves a foreign company joining hands with a local company to access a new market. Entering a new foreign market is usually impossible due to cultural differences, trade regulations, and other factors.
For instance, if you are an Australian company and want to expand your business in the USA, you can strategically partner with a local American company to penetrate the market.
Increase In Production Rate
A strategic alliance provides a visible change in the production rate. It helps companies manufacture, distribute goods and meet the demands of the consumers faster with added resources and expertise.
More Opportunities For Innovation
Two heads are better than one holds for a strategic alliance. When a company partners up with the right alliance, both companies can together come up with some impressive ideas and products. They together can outpace the competition with their revolutionary products and services created with a power of 2x.
Loss Of Control
A company in a wrong strategic alliance can lose control of its own company if not handled properly. Without a contract, it is more important for a strategic alliance to work with transparency and honesty. When in a strategic alliance, pay proper attention while choosing by building trust over a while.
A dominant alliance can make you lose control over your business productivity which may not benefit either party.
A strategic alliance involves doing business independently. However, when sharing resources, a company becomes dependant on another one in some way or another. If a company fails to provide the right recourses on time, this can cause a rift in the workings and eventually lead to a loss of reputation.
For instance, Tesla’s dependence on Panasonic for delivering electric batteries caused them a delay in vehicle production.
Advantages And Disadvantages Of The Joint Venture
Easy To Bring Capital
A joint venture leads to creating a new entity by combining the capital brought in by the parties involved. This allows easy collection of initial capital, thereby reducing the financial burden of each company.
Shared Expertise And Expenses
The companies in a joint venture can reduce their financial burden by dividing the expenses, bringing down the overall costs. Also, each company brings in its expertise, knowledge, and know-how that leverages the overall output of the venture.
Enhanced Market Visibility And Credibility
A small company joining hands with a large company can help a small company gain market visibility quickly. When expanding its business horizons through joint ventures, a well-known brand always attracts media houses to cover the news. This benefits the small company in terms of their brand image, market visibility and increases their credibility.
Ability To Face Competition
A joint venture helps in facing severe competition in the same market niche. When there is cutthroat competition within a market and increased pricing pressure, joining a company can help tackle the competition better. The 2x power makes it easier to dominate the market and eradicate all competitors in the area.
High Economies Of Scale
A joint venture between a small and large company also enjoys high economies of scale as an increase in output leads t the lowering of the overall cost. The operational synergy resulting from the joint contribution of both companies helps the venture to grow better.
The companies in a joint venture suffer when their objectives of being in a joint venture aren’t clear. The contract does not mention the real purpose of entering into a partnership. Moreover, when the goals are not communicated to the company’s employees, the joint venture suffers.
Another problem that arises in a joint venture is based upon cultural differences. If a European company joins hands with an Asian company, they are bound to have some cultural differences that can hamper a joint venture’s success.
Thus, a company should be in a joint venture within a similar corporate culture, or they should eliminate the cultural barriers that arise.
Imbalance In Sharing Of Resources
Sometimes when a company believes he contributes more of his resources for the joint venture than another party, conflict of interest may arise. Despite having an upper advantage in the joint venture, such a company may feel it unfair to share equal profits resulting out of the joint venture.
However, one can solve such a conflict of interests through a proper and free flow of communication amongst the parties.
When Is Strategic Alliance Dissolved?
Strategic alliances are mutual relationships and are destined to be terminated at one point in time. They have no fixed period and can be dissolved with the mutual consent of the parties involved. This usually happens when the strategic alliance is no longer fruitful.
The committed partners of an alliance can decide to dissolve it when it is underperforming by implementing a series of steps. Here are the common reasons behind the dissolution of a strategic partnership:
When the alliance partners are unable to manage the operations due to mismanagement, cultural differences, and other solid reasons, the strategic alliance loses its meaning.
Lack Of Resources
When the alliance partners realize there is a lack of resources, structures, and procedures needed to carry out the operations effectively. An alliance reaches a state of dissolution when they are unable to measure the result.
In case when another company acquires a partner company, and another alliance partner loses its value, the alliance becomes mismatched and on the verge of dissolution.
Suppose a company comes into a strategic alliance with the company to take advantage of a technology the partner company possesses. However, as time passes, the technology becomes obsolete as new technology makes its appearance in the market. In such a case, the partner at a loss can choose to end the alliance.
When Is A Joint Venture Dissolved?
Usually, a joint venture lasts for an extended period as compared to a strategic alliance. However, at some point in time, the joint venture also has to be dissolved when the purpose is fulfilled or not.
Objective Is Achieved
A joint venture is ended on the correct terms when the purpose or the objective of the joint venture is fulfilled. Thus, when it reaches its expiry date,
Misalignment Of Objectives
Like in the case of strategic alliance, a joint venture can also come to an end if the objectives of the partners firms are no longer favorable for each other to work together. When a partnership harms the partner firms more than good, it leads to dissolution. This could include the increase in financial, legal, and trust issues within the companies.
No Longer Profitable
Joint ventures minimize the risks when doing business. When such an objective is not achieved or if the joint venture isn’t contributing to any positive change in the partners’ profits, it is better to end it.
Changes In Policies
Other reasons that lead to the dissolution of joint ventures include changes in economic policy, political conditions, market conditions, etc.
Top Major Strategic Alliance Examples
- The strategic partnership between Uber and Spotify allows Uber to have an advantage over other ride-sharing businesses to provide its customers with the experience of personalized music while on the ride.
- A strategic partnership between Target and Starbucks allows visitors at Target to enjoy their favorite Starbucks drink while on a shopping spree.
- The strategic alliance between Red Bull and GoPro is also going strong as they team up to organize a skydiving event that only used a GoPro camera to record it. Their alliance has further started the Red Bull extreme sports events known as the Red Bull Rampage.
Top Major Joint Ventures Examples
- Nascar joined hands with the motor esports program, iRacing, during the pandemic. They together created a replica or virtual version similar to live racing events.
- RenewAge, a construction company aimed at constructing renewable and energy-efficient solutions, entered into a joint venture with Loop, an electric vehicle charging company. Together, they aim to make over 10000 e-charging stations, seeing an increase in the demand for electric cars.
- Ventec Life Systems joined hands with General Motors to produce a state-of-the-art ventilator system when Covid-19 was on the rise. They together aimed at manufacturing a portable unit involving a ventilator, nebulizer, cough assist, suction pump, and oxygen concentrator all in one unit.
This sums up the differences between strategic alliance vs joint venture. Both partnership models come with their own pros and cons. It is necessary to consider your requirements before making a choice.
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