Difference Between Joint Venture and Strategic Alliance

Edited by Diffzy | Updated on: September 02, 2023

       

Difference Between Joint Venture and Strategic Alliance

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Introduction

A formal agreement between two or more parties to run a business and split the profits is called a partnership. A business partnership is a structure for managing a business that is owned and occasionally operated by two or more individuals or organisations. Profits and losses are divided among the partners. A written agreement between two or more people or businesses, which most frequently creates a business partnership, is the basis for this type of legal connection. Each partner makes a financial investment in the company, shares in any gains, and takes a portion of any losses.

Joint Venture vs. Strategic Alliance

A Joint Venture is an agreement between two or more businesses to pool their resources to complete a task or project. A Strategic Alliance is a form of contract between two businesses that enables them to benefit from a certain project together while retaining their independent identities outside of it. Both sides join forces for a particular goal, a brand-new project, or any other business in a joint venture. Each party in a joint venture is liable for the profit or loss and any associated costs. A strategic alliance enables two organisations to collaborate on a shared or related objective. A strategic alliance can be for the short term or long term and is in the best interest of all the companies.

Difference Between Joint Venture and Strategic Alliance in Tabular Form

Basis of comparisonJoint VentureStrategic Alliance
MeaningA Joint Venture is a type of commercial agreement where two or more businesses pool their resources to work on a single project or service.A Strategic Alliance is a form of arrangement between two businesses to share the rewards of a certain project while still preserving their independence from one another outside the project’s purview.
Independent OrganisationOnce a Joint Venture is formed, no independent businesses remain.In Strategic Alliance, separate and independent businesses still function.
GoalFormed to reduce the risks and dangers.Formed to increase profits
Contractual agreementA written contract outlining all the terms and conditions of the partnership is required.There is no need for a written contractual agreement
Legal entityThe joint venture is a separate legal entityThe strategic alliance is not a separate legal entity
Form ofIt’s a form of Strategic AllianceIt involves collaboration and cooperating
Form of managementBilateralDelegated

What is a Joint Venture?

A business agreement involving two or more parties is referred to as a Joint Venture. It happens when two or more parties decide to sign a contract to carry out a certain business project. The Joint Venture seeks to pool resources and combine strengths in order to gain a competitive edge and reduce risks.

In a joint venture, companies join forces to accomplish business objectives that would be more difficult or expensive to complete alone. When a joint venture is formed with the right partner, it enables one party to take advantage of the other partner’s resources to enter new markets, share resources to strengthen their position in the present market or expand into new businesses.

A joint venture has a lot of flexibility and can adapt to the needs of the company. The terms and conditions of the agreement between the companies should be specific with regard to the activities that will be performed by them. This promotes clarity and prevents ambiguity among the stakeholders. The agreement also aids in defining the precise scope of work that each party is required to do.

Types of Joint Venture

There are four types of joint venture:

Project-Based Joint Venture

Project-based joint venture is a kind of joint venture which involves a firm entering into an agreement to carry out a certain task or project. The mission of the project could be anything, such as getting a specific service that will be provided jointly. Companies often engage in these collaborations for a single, distinct reason, and they end once the targeted project is completed. Simply said, they are the kinds of joint venture that are constrained by a certain goal, for a particular project, or by time.

Functional-Based Joint Venture

The functional-based joint venture brings together two or more businesses in an arrangement for mutual benefit, or mutual on the basis of synergy, which is functional expertise in one or more areas that, when combined can help the businesses work effectively and efficiently. Prior to entering into a joint venture agreement, organisations and companies should carefully consider if they can effectively do the same task as a team.

Vertical Joint Venture

This is a form of joint venture where the parties have opted to work together despite being at various stages of the same product. The multiple stages of producing a single product in the industry are merged in this joint venture to produce economies of scale, which lowers the cost per unit of the product by streamlining the entire process. This kind of joint venture has a better success rate and positive connections between the buyer and supplier, both of which aid businesses by enabling them to provide customers with high-quality goods and services at competitive prices.

Horizontal Joint Venture

This kind of joint venture involves businesses that are fierce rivals and marker comparable goods. They join forces in a joint venture to produce a good that can be offered to both their own customers and the customers of the rival company at the same time. Because partnerships between the parties that are in the same field of business have formed, the management of this sort of joint venture is particularly onerous and frequently results in disagreements. Additionally, because the partners in this sort of joint venture operate in similar industries, the parties experience opportunistic behaviour.

What is a Strategic Alliance?

A strategic alliance is a form of contract between two businesses so that they can both profit from a specific project. Both companies consent to pool their resources in order to execute the project more effectively and with a bigger profit margin. Additionally, outside the purview of the project, both businesses continue to operate independently.

An official partnership between two or more businesses that commit resources to achieving a common set of objectives is known as a strategic alliance. These objectives frequently involve gaining access to new markets, sharing intellectual property, infrastructure, technology, or human resources, or simply integrating lines of similar goods or services. A strategic alliance should ultimately be a win-win collaboration that adds benefits for both parties.

Types of Strategic Alliance

There are three types of strategic alliance.

Joint Venture

When the parent corporations create a new child company, a joint venture is formed. In a joint venture, as opposed to a merger, the two parent companies carry on their own tasks and projects outside of their child or joint company. Each alliance partner has a stake in the offspring business. This may be a 50-50 partnership or a majority-owned business, depending on the agreement.

Equity Strategic Alliance

When one business invests in another, they form an equity strategic alliance. This kind of strategic alliance is frequent when one company can profit from the complementary strengths of the other. For instance, an automaker wanting to enhance its production of electric vehicles might join up with an energy firm that specialises in lithium batteries to form an equity strategic alliance. The agreement gives the electric firm direct access to the manufacturing process as well as control over pricing and decision-making, enabling the energy company to improve production output.

Non-Equity Strategic Alliance

When two businesses join forces strategically on a contractual basis, this is known as a non-equity strategic alliance. Without making a direct financial investment in one another, the two businesses contractually pool their resources and jointly use their key strengths. Licensing agreements, in which one business pays another to use its technology, are a typical kind of non-equity strategic alliance.

Main Difference Between Joint Venture and Strategic Alliance in Points

  • In a joint venture, two or more companies pool their resources to work on a single project or service, whereas in a strategic alliance, two companies agree to share the benefits of a particular project while maintaining their independence from one another outside the project’s scope.
  •  There are no individual enterprises left after the creation of a joint venture. Unlike Strategic Alliance, which continues to run separate independent firms.
  •  To lessen the risks and dangers, joint ventures are developed, whereas a strategic alliance is created to boost earnings.
  •  In contrast to a strategic alliance, which does not require a formal contractual agreement, a joint venture requires a written agreement describing all the terms and conditions of the partnership.
  •  A joint venture is a distinct legal entity, although a strategic alliance is not.
  •  An example of a strategic alliance is a joint venture. Conversely, a strategic alliance entails cooperation and collaboration.
  •  The form of management in the joint venture is bilateral, whereas in a strategic alliance, management is delegated.

Conclusion

An agreement between two or more businesses to combine their resources to finish a task or project is known as a joint venture. A strategic alliance is a type of agreement between two companies that allows them to work together on a specific project while yet maintaining their own identities outside of it.


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"Difference Between Joint Venture and Strategic Alliance." Diffzy.com, 2024. Fri. 23 Feb. 2024. <https://www.diffzy.com/article/difference-between-joint-venture-and-strategic-alliance>.



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