Horizontal vs. Vertical Strategic Alliances
Strategic alliances are a type of cooperative strategy whereby independent firms work together in a mutually beneficial way. Partners contribute resources such as products, distribution channels, project funding and knowledge toward their mutual goals. Firms enter alliances for reasons such as building economies of scale, entering new markets and sharing risk. Horizontal and vertical alliances are business-level alliances aimed at improving competitive advantage.
Horizontal strategic alliances are formed between partners operating in the same business area. The firm partners with a competitive company to improve its position against other competitors. Horizontal alliances tend to be anti-competitive, hence anti-trust law should be considered in this type of alliance. It is a strategy to sell a product in multiple markets. Research and development cooperation between microelectronic firms is a form of horizontal strategic alliance.
A vertical strategic alliance is a partnership between a firm and its supplies or distributors. Some firms utilize vertical alliances to produce their products and services. Vertical alliances deepen the relationship of the firm with suppliers through the exchange of know-how and commercial intelligence. They extend the firm’s network and benefit customers by lower prices. Suppliers become actively involved in product design and distribution arrangements. The close bond between an auto manufacturer and its suppliers is an example. A complementary vertical alliance is formed when the supplier agrees to work exclusively for the other.
Vertical alliances have higher success rates than horizontal alliances. Although contracts are used to govern vertical alliances, trust between partners makes the alliance more effective. Managing horizontal alliances is more difficult, because partners are often competitors. Firms involved in this type of alliance should be wary of opportunistic behavior. Diagonal strategic alliances are another category of alliances. Unlike horizontal and vertical alliances, diagonal alliances are formed among partners form different industries. Firms seek to create and exploit new or interdisciplinary markets by achieving synergies. Cooperation between information technology firms and banks is an example of this type of alliance.
Strategic alliance failure rates range from 50 percent to 70 percent. Choosing the right partner is an important success factor. Partners should have common intentions and compatible visions of the business. During negotiations, common goals are set and the alliance setup is decided. Corporate cultures are analyzed to map learning opportunities and to avert communication problems. A strategic alliance is not a static entity. Partners should continuously assess and redefine objectives.