Strategic alliances form a vital part of today's business environment. The sheer variety of collaborative forms is notable - which include R&D coalitions, marketing and distribution agreements, franchising, co-production agreements, licensing, consortiums and joint ventures. Here we define a strategic alliance as a cooperative agreement between two or more autonomous firms pursuing common objectives or working towards solving common problems through a period of sustained interaction. A distinction is commonly made between 'formal' and 'informal' inter-firm alliances. Informal alliances involve voluntary contact and interaction while in formal alliances cooperation is governed by a contractual agreement. The advantage of formal alliances is the ability to put in place IPR clauses, confidentially agreements and other contractual measures designed to safeguard the firm against knowledge spill-over. However, these measures are costly to instigate and police. By contrast, a key attraction of informal relationships is their low co-ordination costs. Informal know-how trading is relatively simple, uncomplicated and more flexible, and has been observed in a number of industries. A number of factors affecting firms' decisions to cooperate or not cooperate within strategic alliances have been raised in the literature. In this paper we consider three factors in particular: the relative costs of coordinating activity through strategic alliances vis-a-vis the costs of coordinating activity in-house, the degree of uncertainty present in the competitive environment, and the feedback between individual decision-making and industry structure. Whereas discussion of the first two factors is well developed in the strategic alliance literature, the third factor has hitherto only been addressed indirectly. The contribution to this under-researched area represents an important contribution of this paper to the current discourse. In order to focus the discussion, the paper considers the formation of horizontal inter-firm strategic alliances in dynamic product markets. These markets are characterised by rapid rates of technological change, a high degree of market uncertainty, and high rewards (supernormal profits) for successful firms offset by shortening life cycles.
