What is an International Strategic Alliance? 

An International Strategic Alliance (ISA) is an alliance formed by a partnership of two or many companies belonging to different domestic backgrounds at the global level. Under this, they integrate their resources for the accomplishment of common goals at a global level. These partnerships are formed for using common resources or to develop any product or service at the global level. 

Characteristics of International Strategic Alliance

  • Independence of partners: Under these two or more companies working in partnership or alliance remains independent of each other. There is no control of one company over the other.
  • Sharing of benefits: Under this, two or more companies come together for sharing of resources of each other which can mutually benefit both or more of the companies.
  • Continuous contribution: Strategic alliance is a continuous task. There is a continued contribution of resources from one company to other.
  • Value Creation: The alliance is usually formed so as to increase the strength of joining partners. When the two companies join together as one, they add more value than they would have done independently.
  • Joint Mission: The major reason for forming an alliance is to carry out joint mission targets. The companies forming an alliance should have one collaborative mission i.e. to increase the profits of the company. The joint mission so formed should be flexible enough so that it can be changed to suit the existing market trends.
  • Governance: In order to ensure that the alliance perform in an efficient manner and delivers the desired results on time, a system of check and balances needs to be adopted. The right governance ensures that the decisions are taken promptly and effectively when the need arises. It has helped in maintaining optimum operational efficiency.

Types of International Strategic Alliance

It is very important to choose the correct type of strategic alliances based on the requirement and goal of the organizations. The right strategy is very important for the success or failure of any organization.

Strategic alliances mainly fall into 3 categories:

 Joint Venture

A joint venture is a partnership created by two or more parties by pooling their common resources having a common strategy to achieve a certain goal. Joint venture can be for a certain project or for long term association. The objective of such kind of partnership is or joint the venture is specified in the beginning of its incorporation. All the risks and returns in this partnership are also shared among all the participants of the joint venture in the mutually decided manner.

 Equity Strategic Alliance

There can be two ways of equity strategic alliance which is:

  • Partial acquisition – Under this acquisition, only a part of equity is purchased by one company in another company.
  • Cross equity transactions- Under this, both companies buy equity in each other.

Non-Equity Strategic Alliance

It is based on the contractual relationship between the parties to pool their resources. It is more sort of an informal relationship, not involving any equity. The majority of the alliances are of this type only.

Cross-Border Alliance 

It is an alliance used by organizations operating in two countries. Both of the organizations have headquarters in two different countries. These alliances are made to strengthen the position of the company in the international market or to maintain its existing position. These are formed to promote the mutual interests and know-how of resources of both the companies. It is more of a resource-based alliance.

Reasons for the Formation of the International Strategic Alliance

  • To divide the risk between few companies and before entering into a foreign market, it is necessary to have practical knowledge of markets and make alliances with any local competitor which can provide strategic access to an already established market. It helps in providing the products according to the local taste and preferences. It is very important to have proper knowledge of a market and the competitors to be successful in your work.
  • There are many entries barriers imposed by the government which can be bypassed with the help of the formation of such alliances.
  • As there is a risk of instability in the new market, forming an alliance could help in the division of losses and risk among the allies.
  • To have a competitive advantage and synergy.
  • To enter into any new market, it is always beneficial to have already established modes of operations that can be taken benefit of, with the help of alliances.
  • One important factor on which the success of a strategic alliance is based is the location of the alliance and the country in which alliances are based. There are many cultural differences found in different countries that can be bypassed by studying the culture of allies. To reap the benefits of any alliance, the alliance manager needs to prioritize the social benefits of the alliance over economic benefits to make it a success

Different Ways in which alliances can be formed

Franchise—It is an agreement under which one party sells its name and idea to the other company for its use.

Research and Development—These alliances are formed for the research and development in a particular field. The research and development alliance helps in improving the quality of particular product produced or service rendered by the company

Joint Venture: —It a kind of an alliance where two parent companies join hands to establish a new company. It is formed by sharing resources through an agreement. There could be two or more companies engaged in any joint venture. These can be international alliances or national.

Outsourcing: —Under this one company outsources its major work to another company; and many more. In case of outsourcing alliance, the company outsourcing its work to other company, gets time to focus on other important tasks or activities that needs to be catered, so as to improve the financial health of the company.

Equity Strategic Alliance: An equity strategic alliance is formed when a company purchases a share in the equity capital of the other company. For- eg: If Company X purchases 35% of the equity in Company Y, an equity strategic alliance would be formed.

When to Form a Strategic Alliance

Strategic alliances are formed during all the phases of a business whether slow cycle, standard cycle, or fast cycle.  During all phases, it becomes necessary to form appropriate alliances.

Slow Cycle

During the slow cycle of the business because of internal or external reasons, the company is unable to reap the benefit of competitive advantage and is unable to introduce new products. At this time, a strategic alliance can help to reach out to new markets and customers and achieve stability.

Standard Cycle

During standard cycle, company is launching products every few years and unable to become leader. In this case, strategic alliance can help in gaining more market share, economies of scale, competitive advantage.

Fast Cycle

Under this, company needs to come up with new products on a continuous basis to survive in the market. In this case, strategic alliances are formed for developing products and increased market penetration.

Life Cycle of an International Strategic Alliance

 Stage 1 - Formation

It consists of major steps which are as below:

  • Development of proper strategy
  • Assessment of potential partner
  • Negotiating the terms and conditions of the strategic contract 

Stage 2 – Operation

Under this all the functions of the alliance develop. Alliance now becomes the new organization. The aim of organization is to meet the desired goals. It also requires good, strong and strategic leadership.

Stage 3 - End

Strategic alliance comes to end through many ways:

Natural end- When the objectives of its formations are fulfilled, it automatically comes to an end. After that no tasks are pending, so operations of organization come to an end.

Extension - Under this after the actual reason ends, organization extends the cooperation for further work like new product development etc.

Premature termination - Under this, the alliance comes to an end before completing its objectives.

Exclusive continuation - Under this one partner decided to discontinue from the alliance, but other one decided to continue the alliance.

Takeover of partner - Under these bigger companies takes over the smaller ones. When bigger company acquire the smaller ones, the strategic alliance gets ended.

Challenges in Forming a Successful International Strategic Alliance

  • It is very difficult to find a suitable and trustworthy ally with whom the strategic alliance can be formed and can run for a long time.
  • It is difficult to find a fully compatible organization to form the alliance with. All the structural and organizational needs have to be fulfilled. Both the organizations should have aligned and similar goals. To avoid any internal conflict, there should be utmost level of trust between the organizations. Alliance should be equally beneficial for both or all the parties to the alliance so as to maintain the balance between them.
  • The distances between the organizations forming part of the alliance is a very important challenge. The more the distance, more are the cultural differences, and more is the chance of failure. To avoid this, technology can play a vital role
  • Government interference is a major hindrance in growth of any strategic alliance as government can impose heavy taxes and certain laws and regulations which can act as hindrance to the growth.

Advantages and Disadvantages of Strategic Alliance

There are many advantages of strategic alliances which can be mentioned below: 

  • Entry to new market - Strategic alliance gives ally the entry to the new market.  It is very difficult to enter into any new market without any existing local ally.
  • Increased production- It allows the partners to increase their efficiencies and help in increasing production by taking benefit of economies of scale.
  • Increased level of innovation- By forming an alliance, you can form more resources than you were capable of developing alone. It leads to greater level of innovation and providing customers with more value and better results.
  • Sharing of resources- A strategic alliances helps the organization to share their best resources which helps both in reaching their goals.
  • Fulfilment of goals- It is easier to achieve goals when two companies are working together instead of working alone. It helps in expansion of markets, increasing customer base and help introduction into the new markets. 

There are many disadvantages of strategic alliances which can be mentioned below: 

 Increase in risk and liabilities – Both companies are impacted by the work done by another company. Both have to bear the risk and losses incurred by one company.

Conflicts in ownership - When two companies work together, it is a matter of conflict regarding the rights on the products. It is difficult to define the individual ownership which can be a matter of conflict.

Cultural difference – There are differences between the culture of two companies operating in different countries and locations which can create clashes between the two. 

Risks Associated with International Strategic Alliances

  • Financial difficulties experienced by partners
  • Inefficiency of management
  • Risk of leak of information
  • Quality performance of partners
  • Partners can take advantage of their position
  • There are many hidden costs linked with alliance
  • Partner unable to provide resources
  • Lock-in period of partners
  • There are many activities done by the partners which are outside the scope of the contract.
  • Wrong alliance can lead to loss of competencies of partners

Context and Applications

This topic is important in the examination of undergraduate and graduate courses related to economics and other fields.

Want more help with your accounting homework?

We've got you covered with step-by-step solutions to millions of textbook problems, subject matter experts on standby 24/7 when you're stumped, and more.
Check out a sample accounting Q&A solution here!

*Response times may vary by subject and question complexity. Median response time is 34 minutes for paid subscribers and may be longer for promotional offers.

Search. Solve. Succeed!

Study smarter access to millions of step-by step textbook solutions, our Q&A library, and AI powered Math Solver. Plus, you get 30 questions to ask an expert each month.

Tagged in

Financial Management

International Strategic Alliance Homework Questions from Fellow Students

Browse our recently answered International Strategic Alliance homework questions.

Search. Solve. Succeed!

Study smarter access to millions of step-by step textbook solutions, our Q&A library, and AI powered Math Solver. Plus, you get 30 questions to ask an expert each month.

Tagged in

Financial Management