Business Alliances

Business alliances such as joint ventures, strategic alliances, equity partnerships, licensing, franchising alliances, and network alliances have grown significantly. In many situations, well designed business alliances are viable alternatives to mergers and acquisitions. They have become commonplace in diverse fields like high-technology, media and entertainment, automobiles, pharmaceuticals, oil exploration and financial services. Here are some conspicuous examples:

* General Motors and Toyota entered into a unprecedented joint venture agreement in the 1980s.
* Merck has over 100 R&D alliances with a variety of entities.
* In 1999, IBM announced business alliances worth $30 billion with companies like Cisco and Dell computers
* Oracle has over 15,000 alliances with its business partners.

Common Forms of business Alliances:

Business alliances come in a variety of forms. The more commonly used forms are: joint ventures, strategic alliances, equity partnerships, licensing franchising alliances and network alliances.

Joint ventures: A joint venture (JV) is set up as an independent legal entity in which two or more separate organizations participate.

The JV agreement spells out how ownership, operational responsibilities, and financial risk and rewards will be shared by the cooperating members. Needless to add, each member preserves its own corporate identity and autonomy.

Strategic Alliances: A strategic alliance is a cooperative relationship like the JV. However, it does not, unlike a JV result in the creation of a separate legal entity. A strategic alliance is for grant of marketing rights. A strategic alliance may be a precursor to a JV or even an acquisition.

Equity Partnership: Besides having the characteristics of a strategic alliance an equity partnership also involves one party taking a minority equity stake in the other party.

Licensing: There are two popular types of licensing. The first type involves licensing a specific technology product or process; the second type involves licensing a trademark or copy right.

Franchising Alliance: A firm may grant rights to sell goods and services to multiple licenses operating in different geographical locations.

Network Alliances: A network alliance is a web of inter-connecting alliances among companies that often transcends national and industrial boundaries. Under such arrangements two companies may collaborate in one market but compete in another. Such alliances are common in multimedia, computer, airline, and telecommunication industries.

Rationale for Business alliances: Business alliances are motivated by a desire to share risk and gain access to new markets, reduce costs, receive favorable regulatory treatment or acquire (or exit) a business.

Sharing Risks and Resources: Developing new technology can be a very risky and expensive proposition. Further, such endeavors require pooling technical capabilities of different organizations. Hence, firms in high technology industries form business alliances so that diverse know how can be pooled, adequate funding can be arranged and capable risk sharing mechanisms can be worked out.

Access to New Market: The cost of accessing a new market may be prohibitive because huge outlays are required on advertising promotion, warehousing and distribution. To solve this problem, a company may enter into an alliance to market its products or services through the sales force, distribution outlets or Internet site of another firm.

Cost Reduction: Business alliances can help in reducing cost through sharing or combining of facilities in joint manufacturing operations and mutually beneficial purchaser supplier relationships.

Favorable Regulatory Treatment: Regulatory authorities like the Department of Justice in the US generally look upon JVs more favorably than mergers or acquisitions.

Prelude to Acquisition or exit: A JV or strategic alliance may be a prelude to acquire another company. Alternatively it, may be used as a means of or exiting a business.