What are the advantages/disadvantages of a “Strategic Alliance”?
Answer: Strategic alliances can vary from simple joint marketing agreements to full-fledged joint ventures. We do not know the specifics of your plans but typically strategic alliances are formed for the purpose of collaborating on new technology or product development, filling gaps in technical or manufacturing expertise, improving supply chain efficiency, gaining economies of scale in production and/or marketing and acquiring or improving market access via joint marketing agreements.
You and this supplier will have to analyze your target customers, marketing resources and strategies, and business goals to determine whether a strategic alliance, licensed distributorship, or standard supplier arrangement is the best solution for your situation.
While a strategic alliance can be simple or complex, all alliances should be governed by a contractual arrangement and care should be taken to ensure that your businesses intellectual property concerns are adequately addressed with non-disclosure and or confidentiality agreements and other tools before forming the alliance. One common form of strategic alliance is a joint venture, which is a contractual arrangement whereby two or more parties undertake an economic activity which is subject to joint control. Joint ventures take many different forms and structures, but generally can be classified into three broad categories: jointly controlled operations, jointly controlled assets, and jointly controlled entities. The following characteristics are common to all joint ventures: two or more ventures are bound by a contractual arrangement, and the contractual arrangement establishes joint control.
An example of a jointly controlled operation is when two or more ventures combine their operations, resources and expertise in order to manufacture, market and distribute jointly a particular product. Each venture carries out different parts of the manufacturing process, bears its own costs and takes a share of the revenue from the sale of the product based on the contractual agreement. An example of a jointly controlled asset is when two enterprises jointly control or own a property, each taking a share of the rents received and bearing a share of the expenses. With ventures involving joint control of operations or assets, the ventures typically do not establish a legal entity (i.e. corporation, partnership, LLC, etc) that is separate from themselves. On the other hand, a jointly controlled entity is a joint venture which involves the establishment of a separate legal entity in which each venture has an interest. The entity operates in the same way as other enterprises, except that a contractual arrangement between the ventures establishes joint control over the economic activity of the entity. An example of a jointly controlled entity is when two enterprises combine their activities in a particular line of business by transferring the relevant assets and liabilities into a jointly controlled entity. Ventures typically benefit from sharing costs, risk and financing. Benefits can be achieved by forging relationships with partners who are knowledgeable or possess complementary strengths. Also establishing a third party business culture can frequently spur new ideas. Some of the drawbacks are that ventures share profits and know-how. They have less control than they would with 100% ownership and their efforts and image could be hurt if they team up with a weak partner.
Just how much risk/reward there is to an individual venture will vary depending on the terms of the parties’ contractual agreement. Also, the underlying legal structure of the venture will have an impact. Although you could try your hand at preparing a joint venture agreement yourself, we strongly recommend that you contact a local attorney to review your plans and assist you in drafting an agreement. You can review discussions on the topic and sample contracts at the following websites:
Another consideration is that new products and business ideas can often be copied; therefore, you should have non disclosure agreements and other tools in place to protect your products and ideas, new and old, as you attempt to negotiate an agreement. You should consult with your local attorney to assure that you have the appropriate documents and provisions in place to protect your interest in these business discussions and arrangements.
Published: June 20, 2013