Question

1. Discuss the main circumstances in which strategic alliances can create value for the partners.

Answer 1

Strategic alliances are agreements between partering firms to create sustainable value for their customers.

There are 3 broad types of strategic alliances. These are Joint Ventures, Equity Alliances and Non-equity alliances.

Joint venture is formed when 2 firms unite and establish a new child firm. FI both the companies own 50% each of the child firm, then it is known as 50-50 JV.

An equity strategic alliance is formed when one firm buys certain equity of another firm. This gives the buyer firm control over bought firm and thus a strategic alliance is formed.

Non-equity alliances are basically agreements between firms to use pooled resources, capabilities for their joint development.

Strategic Alliances create value for partners in the following ways:

1. Improving current operations: Successful strategic alliances result in economies of scale which helps drive down operational costs. In addition, the development costs and risks are shared between partners giving strategic advantage in the market. Also, the firms have the opportunity to learn from one another and grow combinedly.

2. Changing competitive environment: The partnering firms can create tacit collusion and develop new technological standards by pooling their resources and capabilities. This can help to change the dynamic environment of the competition and a new standard can be set in the market.

3. Easing entry and exit of companies: Companies can form strategic partnerships to easily enter a new industry. Also, a new entrant can form a strategic alliance with a company already in the industry and slowly take over that company, allowing it to exit the industry smoothly.