Strategic Alliance

STRATEGIC ALLIANCE

In today's age the world is moving towards globalization. Globalization is leading to the development of a borderless world. As the globalization process is picking up pace, the customer needs are becoming more complex and sophisticated and the competitive environment in which the companies are operating is changing drastically. The market scenario is changing rapidly and the technologies and strategies are being rendered obsolete very quickly so the companies need to be up-to-date in all technologies, resources, competencies and information needed to be successful in those markets. Over the past years, there has been an increase in the number of firms forming strategic alliances. Entering into a strong relationship with another business is now considered one of the best ways to grow and develop a business. The aim of this essay is to discuss strategic alliance as a mode of entry into a foreign market and to throw light on its advantages and disadvantages.

"A strategic alliance is an agreement between two or more firms to engage in an activity on a shared basis. The outside activities of each partner are not affected by the strategic alliance, which is designed to build on the expertise of each member and the way in which they complement each other" (Mitchell. 2004. p.2). The key characteristics of a strategic alliance include coming together for firms to achieve common goals and working independently following the formation of an alliance and sharing of resources, risks and rewards. Formation of an alliance between companies involves a large number of decisions and choices. The stages involved in formation of an alliance are Strategy development, Partner assessment, Contract negotiation, Alliance operation and Alliance termination (Išoraitė, 2009, p. 44). Strategy development phase deals with studying the viability, goals and motivation for forming an alliance. It involves analyzing the main issues and challenges and formulation of strategy. Partner assessment phase deals with picking a competent partner. The selection of partner is based on criterion such as partner's management styles, resources profiles, objectives, targets, incentives and strategies. Other important factors that should be taken into consideration while selecting a partner are partner's image, reputation, knowledge, experience and credibility. Companies should choose partners with similar but complementary resources and capabilities. Potential partners should have a good reputation and the alliance should be built on mutual trust and understanding. Contract negotiation involves clearly laying out the terms and conditions and it should include risk and benefit analysis for all partners. The contract should define the roles and responsibilities of each of the partners. Alliance operation involves analyzing senior management's performance, allocation of resources, management of rewards and evaluating the performance of the alliance. Alliance termination involves ending the alliance when the objectives have been met or when the alliance fails to achieve the desired goals.

Strategic alliances provide an effective means for companies to enter new markets, spread out geographically, and acquire latest technology, skills and core competencies relatively fast. Strategic alliances have become an important basis of competitive advantage for firms. A strategic alliance can be horizontal or vertical (Stout and Beaucaire, 2005). In a horizontal strategic alliance the firms forming an alliance are from the same industry and do so in order to achieve scale of economies or to adjust to seasonal nature of work and handle core areas of expertise. Vertical alliances are formed between firms from different industries with an aim of collaborating expertise to provide best services to the clients. There are several benefits of forming a strategic alliance. A strategic alliance can make the entry in to a foreign market easier and can facilitate sharing the costs of creating and delivering new products and services. Foreign firm can use the knowledge of the local firm about the market, customer needs, suppliers etc. For example the alliance between British Airways and American Airlines in 1993 presented both the airlines with increased opportunities by providing greater access to North American and European markets. Also, in some countries there are rules which limit the foreign ownership to a certain percentage posing a need for a local partner in order to enter that market such as in Mexico the foreign investment is restricted by law to 49 percent in some industries. Strategic alliance also provides the benefit of sharing the risk between the partners in a new, instable and uncertain market. It is the best way of reduce or control risk for a company entering a new market or launching a new product. A strategic alliance allows firms to raise their leverage without bearing all the risk. For example film manufacturers Kodak and Fuji joined with camera manufacturers Nikon, Canon, and Minolta in early 1990s to develop cameras and film for an "Advanced Photo System." The alliance was soon terminated but it proved beneficial for all the partners as risks were lowered and expenses were shared by creating a common product.

A strategic alliance allows a company to use the knowledge and capabilities of the partner who is well established in the market and also helps in easy acquisition of assets. Most of the companies are proficient in