By the year 2025, nearly a third of the world’s total sales are projected to be generated by ecosystems. This explains the recent surge in organizations opting for inorganic growth strategies.

Among these strategies, strategic alliances and M&As are especially popular due to the growing number of baby boomers retiring and the constant macroeconomic fluctuations.

Both strategic alliances and M&A open many opportunities for businesses, such as expanding market share, improving industry survival rates, boosting market power, and enhancing the diversity of labor and skill sets across different industries.

In this article, we’ll focus on the role of strategic alliances in today’s economy, their benefits over mergers and acquisitions, and opportunities they offer to businesses.

Strategic alliance: Definition, criteria, and reasons

A strategic alliance is a business agreement between two or more entities, aimed at collaborating on a project that benefits all parties involved while maintaining their independence.

There are three main types of strategic alliances — equity strategic alliance, non-equity-based strategic alliance, and joint ventures:

  • An equity strategic alliance is an arrangement between two or more parties which implies sharing ownership in each other’s businesses.
  • A non-equity strategic alliance is a partnership between two or more entities that does not involve any exchange of ownership stakes or equity.
  • A joint venture is a business partnership type in which companies aim to pool their resources and expertise to pursue a certain strategic goal or project.
Note: Unlike a formal joint venture, a strategic alliance is less intricate and has a less binding contract. In a joint venture two or more parent companies aim to establish a separate business entity, while in strategic alliances they aim to achieve mutual goals when remaining independent organizations.

As for the duration of the strategic partnership, it can range from short-term to long-term and depends purely on the need of two or more organizations to work on a mutually beneficial project.

Among the main reasons to form a strategic partnership may be plans to gain access to a new market or increase target market, expand manufacturing capabilities and distribution channels, enhance a product line, or gain a competitive advantage over a competitor.

Strategic alliance against mergers and acquisitions: What’s the difference?

While a strategic alliance can be viewed as a precursor to a merger or acquisition, it’s important to note that they are two distinct concepts.

In essence, a strategic alliance is a low-commitment approach to collaborating with another company, with the goal of generating mutual benefit or value. Successful strategic alliances can help gain insight into other companies’ cultures and ways of operating, especially in cross-border strategic alliances, where the knowledge gained can be invaluable.

In contrast to a strategic alliance, a merger and acquisition involves a substantial investment decision that can either make or break a company in the medium term. Given the number of failed M&A transactions, it’s worth considering how much value could have been saved in each case if the parties had first attempted a strategic alliance or conducted more thorough due diligence.

So, let’s briefly overview the main differences between strategic alliances and mergers and acquisitions:

Strategic alliancesMergers and acquisitions
Transaction speedStrategic alliances create opportunities for facilitated dealmaking. In cases where there is a new market opportunity that needs to be captured quickly, tying up strategic alliances can be more beneficial and time-efficient.Depending on the scope of the deal, mergers and acquisitions can take between six months to several years to complete. When there is a need to expand market penetration quickly, companies may lose the momentum while dedicating a year or more to an M&A transaction.
Level of commitmentCompanies form strategic alliances when they want to test the waters in new markets and are unsure whether to make a mid- or long-term commitment to it with an acquisition. Working with a local player provides knowledge about the market, without the capital outlay required by an M&A transaction.Mergers and acquisitions are high-commitment transactions, especially for the buy-side. When one company purchases another and forms a separate entity, it bears full responsibility for its subsequent performance.
Ability to raise capitalA strategic alliance is typically not expensive and still offers several of the benefits of an M&A transaction, including ability to expand business relationships with alliance partners, share resources and core competencies, and gain control over a larger market share.M&A transactions could cost millions or billions of dollars, which makes them costly and inaccessible for companies with scarce financial resources.

Virtual data rooms and strategic alliances

The use of new technology allows to form a strategic alliance quickly and conveniently. This probably explains why virtual data rooms are a popular choice for such partnerships, as they offer:

  1. Secure sharing of confidential information. Strategic alliances often require the exchange of financial statements, intellectual property rights, and customer data with potential partners. Virtual data rooms provide a secure and encrypted platform for sharing such information with two or more parties. This ensures that the information remains confidential, with only authorized individuals being able to gain access to it.
  2. Improved due diligence. At the very beginning of a strategic partnership or alliance, due diligence is crucial, especially for the stronger company, to understand the strengths, weaknesses, and potential risks involved in collaborating with the other partner. Virtual data rooms provide a centralized location for structuring due diligence documents, making it easier to review and analyze the information.
  3. Enhanced transparency. Virtual data rooms increase transparency between partners in a strategic alliance. Once a company A shares the materials, a company B gains access to them easily and securely. And when all parties have access to the similarly up-to-date and relevant information, it reduces the risk of misunderstandings and conflicts, while establishing a basis for an effective strategic alliance.

Now, let’s see what virtual data rooms are especially popular for strategic partnerships and why.

ProviderRatingKey functionalities for strategic alliances
iDeals4.91/5Multilingual user interface available in 15 languages
Industry-leading customer support available 24/7
Built-in live chat with 30-second response time
Auto-notifications on new activity 
Advanced Q&A module
Datasite4.83/5AI-powered document search with OCR technology
Professional customer support available 24/7
Full analytics with custom dashboards and audit trails
Advanced Q&A module
Built-in redaction
Citrix4.68/5Advanced analytics with insightful click trails
Customizable watermarks
Granular user permissions
Automatic indexing
Q&A module
CapLinked4.61/5Comprehensive data room activity reports
Custom watermarking
Digital rights management
Customizable user permissions
Document version control
DealRoom4.58/5Insightful analytics functionalities
Customizable user permissions
Automatic indexing
Built-in Excel and document viewer
Two-factor authentication

Examples of strategic alliances

When it comes to characteristics of strategic alliances, it’s essential to mention that not all partnerships aimed at mutual benefits can be considered similarly “strategic“. In fact, there are five accepted criteria that must be met for a successful strategic alliance:

  • The partnership is essential to achieving the primary business objective — without it, strategic goals cannot be met.
  • The partnership is essential to creating or maintaining a business aspect that functions as a competitive advantage.
  • The partnership solidifies the ability to overcome competitive threats.
  • The partnership supports, builds, or maintains strategic decision-making.
  • The partnership considerably reduces risk, especially for a weaker partner.

As such, a strategic alliance can take various shapes and sizes, such as:

  • A natural gas or oil corporation may form a strategic alliance with a research laboratory to create better commercial value.
  • A clothing retailer may enter a strategic alliance with a specific manufacturer to maintain uniform sizing and quality.
  • A website might establish a strategic alliance with an analytics firm to enhance its marketing strategies.

The key idea of a strategic alliance is to help one company develop alongside the other company without merging with it. This is why the agreement made between Starbucks and Barnes & Noble serves as a classic strategic alliance example, where Starbucks focuses on making the coffee, while Barnes & Noble specializes in stocking the books. By sharing the expenses of the space, the two companies leverage their strengths, yielding mutual benefits.

Now, let’s review a few more examples of strategic alliances that meet all the criteria mentioned above:

  • MasterCard and Apple Pay. Apple collaborated with MasterCard when launching its Apple Pay system, which allowed customers to make contactless iPhone transactions. This strategic alliance helped MasterCard increase its brand presence by associating with a leading-edge organization, while also providing Apple with valuable support in refining and improving the system.
  • Spotify and Uber. Through their strategic alliance, Uber riders were able to access Spotify’s music streaming service during their rides. This partnership provided Uber with a competitive advantage and helped Spotify expand its customer base by encouraging Uber riders to subscribe to Spotify Premium.
  • Chevrolet and Disney. Chevrolet and Disney formed a strategic alliance to create a Walt Disney’s park attraction that allowed visitors to design and test their own personalized Chevrolet vehicles. This partnership allowed Disney to offer a unique and immersive ride experience, while also boosting brand awareness for Chevrolet.

Pros and cons of strategic alliances vs M&A

As mentioned before, strategic alliances have a lot of benefits over mergers and acquisitions, mainly due to higher transaction speed, lower commitment, and bigger ability to raise capital.

Let’s take a closer look at the main pros and cons of strategic alliances as compared to M&As.

Pros of strategic alliances over M&As

  • Less risky way for strong companies to expand market quickly. Alliances offer a less risky path to achieve scale or gain access to complementary capabilities, with phased and tested investment requiring less upfront costs.
  • More capability to succeed in a fast-paced environment. Strategic alliances offer flexibility in fast-changing, disruptive market conditions, making it easier to unwind or chart a different direction compared to M&A.
  • Higher success rates in increasingly competitive markets. Strategic alliances are an effective tool for companies that need to operate at different speeds to respond to disruptive market conditions. They provide access to strategically important partners that cannot be acquired due to their high cost or unavailability for sale.
  • Ability to create several alliances at once. Last but not least, strategic alliances allow organizations to create ecosystems of relationships with multiple important partners concurrently, which is difficult to achieve through M&A at the same pace.

Cons of strategic alliances

To fully comprehend the concept of a strategic alliance, it is crucial to take into account the potential disadvantages of strategic alliances despite the significant advantages they offer to all parties involved.

Creating a strategic alliance can have its drawbacks, including:

  • Uncertainty over who drives the relationship and a lack of clarity regarding the power balance, leading to a slower decision-making process and a lack of clear direction, unlike the clear balance of power in a classic M&A.
  • Lower financial investment, often resulting in a lower priority level on the C-Level agenda. In fact, about one in four respondents to a recent KPMG survey reported that no upfront financial investment was made in their alliances. Additionally, only 20% of respondents indicated that an upfront investment that was made exceeded US$100 million. In comparison, the investment in an M&A deal totals on average $416 million.
  • Mismatched strategic ambitions and timelines, which lead to poor collaboration results due to a lack of transparency regarding the initial objectives, priorities, and time horizons..
  • Lesser commitment due to a present exit option. Alliances are typically formed for a limited period of time with a potential for early exit, which can reduce the perceived importance and commitment given to the collaboration.

Key motives for creating strategic alliances

According to the KPMG report, the three main motives behind alliances are scale, co-access to new markets or channels, and co-specialization, which involves pooling complementary skills to create new products or services. The third category is becoming increasingly popular, but it is also more challenging to execute.

It is also essential to note that the motives for creating strategic alliances vary depending on whether they have a domestic or cross-border nature. Let’s take a close look at each category.

Motives for a domestic strategic alliance include:

  1. Increased market share. Two companies can pool resources to create synergies that ultimately lead to a higher market share.
  2. Expanding resources. This involves combining resources, usually capital and research and development (R&D), to achieve a strategic objective.
  3. Access to complementary resources. Two companies can combine resources such as human, upstream and downstream, and capital to achieve a common objective.
  4. Economies of scale. Two companies can achieve a scale that would be impossible without the alliance, typically in the form of a joint venture (JV).

Motives for international strategic alliances are:

  1. Getting access to new markets. In the alliance, two companies can commonly benefit from distribution capabilities of their partners in new markets.
  2. Developing core competencies. By collaboratively working on R&D or new product development with partners in foreign countries, two businesses can avoid giving away trade secrets to the competitors in their home market.
  3. Avoiding cultural integration risks. By forming a strategic alliance, companies can collaborate as independent organizations, avoiding the need for bridging cultural differences, which are common for international collaborations.
  4. Reaching international synergies. Firms operating in different countries can often find synergies with partners that wouldn’t exist in their home markets.
  5. Avoiding import limitations. Producing products domestically within a strategic alliance can help avoid import barriers, tariffs, and other limitations.

Best practices for building successful alliances

While a strategic alliance opens up unique opportunities and is potentially more viable than M&A, not all strategic alliances and joint ventures succeed. In fact,

For a strategic alliance to work, alignment of strategic plans, commercial ambitions, and business and operating models is critical.

According to KPMG survey cited above, among the common reasons why alliances fail to meet their objectives are:

  • Changes in market circumstances
  • Cultural differences
  • Lack of commitment
  • Incompatible goals

Naturally, these factors stem from the inability to align the three core elements of an effective alliance:

  1. A clear and mutually valuable strategic and commercial direction. Before collaborating, companies should carefully challenge the importance of doing so. They should identify the core capabilities they want to preserve and determine the additional capabilities they need to acquire through building, buying, or partnering to meet market changes. At this stage, it is crucial to ensure clear links between alliance strategy and corporate strategy to avoid conflicts with the company’s overall goals and financial constraints.
  2. A detailed business model that defines the customers, markets, and propositions the alliance will pursue. To ensure the success of a joint venture, three key issues should be considered at the C-level agenda — maintaining momentum, translating strategic goals into a clear business plan, and addressing financial modeling and profit-sharing aspects. Strong commitment from both parties is essential for making progress, and a clear, detailed business plan that reflects the relative contributions to incremental revenue should be developed.
  3. A flexible operating model that is based on the business model. To avoid the risk of correcting or unwinding an alliance, it’s crucial to agree on a lean operating model and a realistic timetable that can scale up or down as needed. Some key questions to consider before implementation include identifying necessary processes and technology infrastructure, establishing governance and risk controls, defining necessary resources for daily operations, addressing cultural differences, and establishing incentives for success.

Key takeaways

  • A strategic alliance is a cooperative arrangement between two or more companies that involves sharing resources, capabilities, and risks in pursuit of a mutual benefit.
  • There are three types of strategic alliances, including equity strategic alliance, non-equity strategic alliance, and joint venture. Non-equity strategic alliances usually don’t involve any exchange of stakes, while the other two types of strategic alliances do involve an option to share resources.
  • Strategic alliances are commonly preferred to M&As because they offer a less risky way for companies to expand their business relationships with an ability to form several partnerships at once, while boosting chances to succeed in a highly competitive, fast-paced domestic and international business environment.
  • Virtual data rooms serve as a universal solution for forming strategic alliances or partnerships. They make it easy to store, exchange, structure, and share information internally and externally, while avoiding any security risks.