In today’s world of M & A frenzy, a simple way of achieving growth for businesses through restructuring is forging strategic business alliances. Though the circumstances in which Mergers, Acquisitions and Strategic Alliances are considered as solutions are similar, mergers or acquisitions are far different as they are permanent structural changes as to how a company fares. Besides, an acquisition or merger is mostly looked upon as a sellout by a company to another, where at least one business loses its identity. In cases where the management is not looking at losing the identity of the business, it can forge a strategic alliance with another party, to enhance business prospects.
What is a Strategic Alliance?
A strategic alliance is a partnership between businesses, in which parties combine efforts to synergise their businesses. The basic idea behind strategic alliances is to maximize your leverage in the marketplace while minimizing risk. Strategic alliances are becoming more and more a common tool for expanding the reach of your company without committing yourself to expensive internal expansions beyond your core business.
Why are strategic alliances formed?
Most of the alliances are with a competitor (e.g. Tata Motors and Fiat) or with another business, which has synergies with the existing business (e.g. Microsoft and IBM)
- Spreading costs and risks
- Improving access to financial resources
- Economies of scale and advantages of size
- Access to new technologies and customers
- Access to innovative managerial practices
- Access to new geographical area or pool of customers
- Influencing structure of the industry
- Avoiding competition
- Defensive response to blurring industry boundaries
- Creation of stronger competitive units
- Transfer of technology/skills
Circumstances that make strategic alliances a necessity
Strategic alliances are sweeping through nearly every industry and are becoming an essential driver of superior growth. Alliances range in scope from an informal business relationship based on a simple contract to a joint venture agreement in which for legal and tax purposes a new corporation or partnership is set up to manage the alliance, though both the parties continue to maintain their individual identity and its core businesses
- Among the most significant advantages of a strategic alliance is that, partners save money and reduce their risks through resource sharing.
- They give smaller companies the chance to work with larger ones to develop, manufacture, and market new products.
- They also give companies of all sizes the opportunity to increase sales, access wider markets, and enhance technological capabilities.
- Strategic alliances are one of the favored ways of private-public partnerships. In such cases, with Governments being involved, other forms of structuring like mergers, acquisitions or even joint ventures are not possible and the parties have to go ahead forging a strategic alliance.
- Microsoft Corporation and IBMMicrosoft integrated their original ‘DOS’ program with IBM’s already popular personal and commercial computers. Bill Gates negotiated a deal in which IBM computers would come pre-installed with MS DOS operating system. This gave Microsoft the positioning it required to take advantage of the explosion of the PC market.
IBM and other PC manufacturers started manufacturing millions of PCs and from a small vendor, Microsoft became the worlds largest software company. Here, Microsoft had the product and took advantage of the market which was available with IBM and other manufacturers. The manufacturers also benefited due to Microsoft, as their sales grew exponentially with the popularity of the Microsoft technology.
- Tata Motors and Fiat Motors
Tata Motors Ltd and Fiat India have entered into an alliance, under which, the dealer networks of both the companies would be shared. This alliance, which came into effect in 2006, has 42 Tata-Fiat dealerships already operational, while it is planned to increase the number to 100. Further Tata is able to use Fiat’s surplus manufacturing capacity to meet demands of its own vehicle and also able to offer full range of cars in addition to their existing models. TML is better off in facing the competition in the passenger vehicle market with Fiat cars being sold along with the Tata cars a wider range of cars being offered to the customer. Additionally, the company has also announced plans for manufacturing both Tata as well as Fiat cars and engines at a manufacturing facility to be built at Fiat’s Ranjangaon facility. Besides India, the companies will be jointly operating in the Latin American markets.
- LIC of India and Corporation Bank
LIC of India and Corporation have been strategic partners since 2001, when the Insurance giant got under control 26% of the stake in Corporation Bank. With the alliance, the network of branches of Corporation Bank would increase significantly as a result of opening up of branches in LIC premises all over India. The move will improve the network of the Bank in geographies other than Southern India. The banking activities of LIC too having gone to Corporation Bank, it means huge business for the bank. Special deposits as well as loan schemes have been designed for the employees and agents of LIC and LIC group companies. Numbers of ATMs of the bank are installed in LIC premises all over the country, increasing the ATM network exponentially.
- Reliance Retail and Nestle
Reliance Retail and FMCG major Nestle India are said to be in talks for a possible alliance in their dairy business. Nestle dairy business in India is believed to be into losses, needing restructuring. In recent times, Nestle had divested its dairy business in Malaysia and Thailand. Reliance Retail could help with the procurement, logistics and processing of Nestles dairy products, with the Reliance way of scaling up and reducing costs. Nestle in turn could be the bulk supplier of dairy products to Reliance Retail. No final word has come from either company in this regard.
- Tata Tea and Energy Brands USA
Tata Tea acquired 30% stake in the US based Energy Brands Inc, which is into the high growth business of enhanced water. The alliance gives Tata Tea presence in all the continents. The Energy Brands distribution network in the US can be utilized for other beverage brands of the Tata Tea group while the Tata Tea and Tetley network in their core markets including India can be used for the enhanced water and other brands.
- Oriental Bank of Commerce, Indian Bank and Corporation Bank
Three Indian public sector banks, Oriental Bank of Commerce, Indian Bank and Corporation Bank have entered into an alliance christened OIC with the objective of improving income streams, reducing costs, taking advantage of combined strength for bulk procurement in certain areas, upgrading systems by harnessing each others strength. The alliance is expected to mobilize volumes, leveraging on the combined size and presence in the market, while retaining the individual identity. The banks are putting in action key areas such as mitigating risk by combined decisions on lending to high worth projects, leverage on branch and IT infrastructure, ATM sharing and also to share understandings of launching new products together.
- Also interesting are alliances between Hindustan Petroleum and PepsiCo for retail of Pepsi beverages and snacks at Club HP petrol pumps, or co branded credit cards of banks and petroleum companies, retail companies, etc. These alliances have proven to be highly beneficial for all the parties.
Strategic alliances are one of the easiest as well as fastest ways to grow business, expand market share and to diversify. It is the best way to leverage on the core competencies of the business, without dilution of control over the business. This can be precursor to full-fledged merger or takeover once both the parties to the alliance are comfortable in the existing relations. The alliance may lead to further restructuring like merger, after the parties to the alliance realize the benefits of co-existence. Where merger or acquisition is either not possible or not desired, parties have the option of continuing with the alliance.