Corporate Strategy Group Project

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Why alliances

Over the past decades, firms have largely relied on Mergers and Acquisitions (M&As) to grow and / or diversify. Yet the vast majority of M&As are, at best, mild successes, and often, costly failures. Strategic alliances are therefore likely to become a more and more popular alternative to M&A. This paper briefly exposes what are the main types of alliances and why companies choose alliances. It then identifies three major challenges relative to alliances and proposes recommendations on how to address those.

Types of alliances

A strategic alliance is defined as a cooperative relationship between firms involving the sharing of resources in pursuit of a common goal1. The figure below presents alliances, on a collaboration continuum, as trade-off options between flexibility and control.

The most common forms of alliances are: licensing agreements; marketing agreements; research contracts; equity stakes; joint ventures2. Under licensing agreements, the licensor grants the use of a product or a technology to its partner against a royalty payment. Integration between the activities of the firms is minimal. Licensing agreements are widely used in the biotech industry, where biotech firms license large pharmaceutical companies. Marketing agreements are essentially a mirror image of the licensing agreements: large pharmaceutical companies provide the marketing and distribution of products manufactured by smaller research companies. In research contracts, a firm receives funding for a research activity in an identified area of application. The contract usually specifies how the outcome of the research will be managed (patent rights, responsibilities for commercialisation). Alliance by Equity stakes is often used between a large established firm and an emerging firm. It implies a certain degree of control (e.g. a seat on the board) over the latter. Joint Ventures are a more advanced form of alliance involving the creation of a new separate company jointly owned by the partners and operated by one of them or by shared resources.

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