Non-equity alliances

Ex. 5‑10 Non-equity alliance

Keywords: independent firms, cooperation, alliance

Such alliances are also called non-equity alliances. In a non-equity alliance, the companies are completely independent, and the strategic decisions of the companies are made by the shareholders or the management. For success and longevity of an alliance it is very important that the general strategy of the alliance corresponds to the strategy of the individual member of the alliance or at least does not radically contradict it. A non-equity alliance is a relatively unsustainable entity, because regardless of the benefits that arise from cooperation, each organization in the alliance works to create benefits for its shareholders (Exhibit 5-10). Participating in an alliance brings not only benefits, but also demands from the organization costs, adaptation to others, dedication to things that are not necessarily on the way with the organization’s vision and long-term strategy. For example, the organization’s strategy may be the highest possible return to shareholders and profit in the short term, while the alliance aims for market dominance and chooses pricing in the short term focused on market capture, but not on profit. Alliances without ownership ties between partners are not very stable in the long term, although airline alliances, for example, have existed for more than twenty years. Sometimes such alliances are formed for a specific project. To carry out a large infrastructural project, such as the construction of a railway line, the construction of a nuclear power plant or, for example, the invention of a new medicine or vaccine, consortia of independent companies from different countries are often created. Cooperation in this type of project alliance between partners can be based on vertical and horizontal connections. Such alliances usually operate based on a consortium agreement or joint venture agreement without establishing a new legal entity. For instance, if a customer in the infrastructural project requires, such an alliance can also establish a legal entity dedicated to the implementation of the project. The main feature of a project alliance is its defined duration. Just as every project has a planned beginning and end, a project alliance also has a planned end. Delays in the implementation of projects extend the life of alliances until the project achieves its intended result.
If a non-equity alliance is created for an indefinite period, the alliance partners are usually ready to be in the alliance until the benefits of participation exceed the costs of participation and until it satisfies the shareholders of each partner. Non-equity alliances sometimes register as an association of independent members. Although international cartels are prohibited locally, they can also be considered non-equity alliances by the nature of their activity.
The success of a non-equity alliance is usually measured individually by each alliance partner. Even if the alliance partners have established an association, it is financed by membership fees only to maintain the secretariat and finance the main functions. The association itself is not a profit-making entity. If certain members of a non-equity alliance experience significant benefits, such as, increased profits due to partnership in the alliance, and some of the members do not have an increase in profits, the alliance is at the risk of collapsing. Even if the overall cumulative result of all members of the alliance is very good, but since the partners in a non-equity alliance are not connected by capital ties, each member of the alliance does not directly experience the financial benefit of the partner. The only valid arguments for the shareholders of each partner to remain in the alliances is the individual benefit that they receive. In this way, non-equity alliances are very different from equity alliances, in which the partner’s benefit is also considered as the organization ‘s benefit, if they are related.
The balance of the size of the alliance partners is very important for the sustainability of non-equity alliances. If there is one large dominant partner in the alliance, and the others are its small suppliers or partners in horizontal relations, there is always a threat that the large partner will impose its conditions on the small ones. Non-equity alliances between partners of this unbalanced size are a common route to the emergence of an equity alliance. In non-equity alliances, the large partner often tries cooperation with the alliance partners, and when it is beneficial and to keep the alliance partners in the alliance, it often acquires the small partners, and the alliance becomes equity based. If there are several large partners of a similar size in a non-equity alliance, cooperation often turns into a merger. Corporate expansion through international acquisitions and mergers became especially popular in the last decade of the 20th century. More about international investments is described in chapter 6 of the book.
A very important factor determining the sustainability and longevity of non-financial alliances is trust, values and cultural similarity (Zollo et al., 2002). Indeed, there are two approaches to the sustainability factors of alliances. The first approach is based on the economic paradigm. The economic paradigm states that if in an alliance each partner receives benefits and has a higher profit due to cooperation; such an alliance will survive and will continue to exist as long as these benefits exist. According to this paradigm, when economic benefits disappear, alliance partners who do not benefit will withdraw from the alliance. The second approach is based on the paradigm that if there is mutual trust in the alliance and the alliance partners have the same values, then this alliance will function even if there is no economic benefit. This explains why some alliances fail in the face of economic decline or crisis, while other alliances endure economic hardship and survive. Economic difficulties are often temporary. Various financial crises, pandemics affect the markets and there are periods when there will be no economic benefit from the alliance, so if the alliance partners are connected only by economic benefit, it is likely that in such cases the alliance will crumble at the first difficulty.