For the successful functioning of a business, one must carry out various innovative plans, strategies, and objectives to maximize profit and growth. One of which is Joint venture and strategic alliance. These two collaborative methods help the business to reach the pinnacle of success and maintain the consistency of its competence. It provides fulfillment to the consumers and creates unique ideas that also help the advanced age's overall development.
Joint Venture vs. Strategic Alliance
Both joint ventures and strategic alliances are related to commercial business needs. Joint ventures are more profitable on a long-term basis since both parties join to create an entirely new enterprise/entity. Strategic Alliance is usually a short-term joint agreement that may dissolve once the main goal is reached. Both have their share of pros and cons. All joint ventures are strategic alliances, but the strategic alliance is not a joint venture.
Difference Between Joint Venture and Strategic Alliance in Tabular Form
|Basic Of Comparison||Joint Venture||Strategic Alliance|
|Meaning||It is a collaborative arrangement of two or more companies/enterprises to create an entirely separate legal entity/company and undergo financial activities and business affairs together. Both parties have their share and control over that particular entity.||It may or may not exist.|
|Independence||Companies run together as a team. They don’t work independently.||Companies work independently. They don’t interfere in each other’s business affairs.|
|Contract||It exists to avoid any disagreements.||Microsoft and Nokia in 2011.Nike Inc. and Apple Inc in 2006.|
|Form||Strategic alliance||It is a collaboration or corporate/combined partnering but performs tasks independently.|
|Separate Legal Entity||Yes||No|
|Objective||Minimizing Risks||Maximizing Rewards|
|Examples||GE Health Care, Vistara, Tata Starbucks.||Microsoft and Nokia in 2011.Nike Inc. and Apple Inc. in 2006.|
What is a Joint Venture?
A Joint Venture is a collaborative arrangement of two or more companies that jointly create an entirely separate legal entity/company. They work as a team and handle financial risks and gains together. Together, they plan and execute all the business affairs. The main aim is to minimize the risks as much as possible and benefit the company. Since the company is created by two or more already established companies, it increases the reach of the companies in their respective foreign and domestic markets. A joint venture can be between private, government, and foreign-owned companies. Example: Vistara is a collaborated company of Indian company Tata and Singapore Airlines.
The main features of Joint Venture are:
- Multiple companies come together to form a new company.
- The companies share power and control for managing the new entity.
- The rewards and risks are shared.
- Companies can help each other by sharing advanced technologies, resources, and capital. It also avails new ideas, recommendations, suggestions, etc.
- They receive mutual benefits from each other and can give their desired inputs freely without any restriction.
- The brand name is easily established without any struggle.
- It can get access to the global market/foreign consumers.
- A contract or agreement is signed to avoid conflict.
- Most of the time, it is a long-term investment and can carry on until the company is shut down. They do have a specific goal to follow, but unlike strategic alliance, it is carried out for a longer period.
Types of Joint Venture:
- Contractual Joint Venture
- Equity-Based Joint Venture
Contractual Joint Venture
It is a joint venture where there is the creation of a separate legal entity, which may be a company, LLP(Limited liability partnership), or a firm. They collaborate to reach their specific goal under terms and conditions(legal agreement). They share their resources, innovative ideas, and technologies. They work independently, and they are not liable for each other’s profit and loss. For example, Sony and Ericsson.
Equity-Based Joint Venture
In an equity-based joint venture, an entirely new company is formed by joined ownership. All the business affairs are shared, which includes the management, responsibilities, profit and loss, and so on. They don’t work independently but work as a team. There are not many restrictions as the companies have their share and control over the new entity. Example: Vistara and Mahindra Renault Ltd.
What is a Strategic Alliance?
A strategic alliance is when two companies collaborate but do not form a separate legal entity. They don’t work together and do not interfere with each other’s business affairs. They are mainly formed to get mutual benefits. A legal contract/agreement might be signed to avoid any kind of conflict or legal complexities. Since the two companies recognize each other’s distinctive strengths and can complement each other to gain maximum profits, they come to a partnership and benefit each other. Example: Nike Inc., a renowned sportswear company, and Apple Inc., a technology company, collaborated in 2006 to give consumers the experience of technology in sportswear. They invented shoes that will be connected to the iPhone directly to track their performance.
The main features of Strategic Alliance are:
- The space capacity and the number of resources get increased as the company is dealt with more than one enterprise.
- It can be exposed to the global market.
- Accessibility to new and advanced technology can be shared by the companies.
- Gives rise to innovation and rapid development of the industry sector.
- It reduces the overall production cost of raw materials, labor, and capital.
- Most of the time, the strategic alliance is for the short term. Once the main goal is reached, it might dissolve.
Types of Strategic Alliance
- Joint Venture
- Equity Strategic Alliance
- Non-Equity Strategic Alliance
A Joint Venture is a collaborative arrangement of two or more companies that jointly create an entirely separate legal entity/company. They work as a team and handle financial risks and gains together. They together plan and execute all the business affairs. The main aim is to minimize the risks as much as possible and benefit the company. Example: Vistara.
Equity Strategic Alliance
It is formed when one company purchases a certain percentage of ownership/equity of the interested company. For Example, when a fast-food chain of burgers (A) has purchased a particular percentage (say 40%) of equity of a popular soft drink company(B). Here, we can find a common goal and a particular type of customer they both are interested in targeting.
Non-Equity Strategic Alliance
It is a contractual relationship where they have a common goal to pursue together and to do so, they share their resources, technologies, capital, and innovative knowledge. No separate legal entity is created. Example: Partnership between Spotify and Starbucks where the customers of Starbucks get the premium version of Spotify without spending an extra amount. Because of this, the number of customers of both Starbucks and Spotify increased simultaneously.
Main Difference Between Joint Venture and Strategic Alliance in Points
- A joint venture is a type of strategic alliance, but a strategic alliance is not a joint venture. It means that all joint ventures are strategic alliances, but all strategic alliances are not joint ventures.
- A joint venture creates a separate legal entity. A new company is formed by the already established company. They not only collaborate but work together and share their business affairs, responsibilities, goals, resources, profits, losses, and so on. On the other hand, strategic alliances share a common goal without creating a separate legal entity. They remain autonomous but share their resources, ideas, technologies, and products under terms and conditions without being liable for each other’s profit or loss. It is a partnership that targets a common audience/customer and operates independently. Once the main aim is reached, it may dissolve.
- The main aim of a joint venture is to minimize the potential risk by working jointly. They secure each other’s losses and grow together. It is more of a unified collaboration.
On the other hand, a strategic alliance is a more formal collaboration where the only thing that unites them is the goal. Their main aim is to maximize rewards.
- Most of the time, a joint venture is a long-term business arrangement. The strategic alliance may dissolve once the aim is fulfilled, which makes it comparatively a short-term business arrangement.
- The agreement must exist in a joint venture to prevent any legal complexities or conflicts. However, in a strategic alliance, the contract may or may not exist.
- Joint ventures have a bilateral management system since the companies have an equal share of responsibilities. The strategic alliance can have a delegated management system, especially in the case of an equity-based strategic alliance.
- The participants of joint ventures have more freedom to put their desired inputs into the company. Whereas the strategic alliance can only provide inputs that are related to the legal mutual contract or the main goal.
Both joint venture and strategic alliance have their advantages and disadvantages in the business world. They are mainly different when it comes to creating a separate legal entity. Apart from that, both the methods avail similar sets of advantages, i.e., for the success of the company and to eliminate heated competition between the rival businesses. They both can enter the global market and establish their position, but the duration differs as a joint venture may survive longer than a strategic alliance.