Advantages and Disadvantage for Business of Entering into Strategic Alliance
In the current environment, generating sustainable value for clients and shareholders entails creating effective strategic alliances. Strategic alliances are vital building blocks for businesses to attain strong and successful market presence. Strategic alliances are nowadays a reality of life for business, an essential piece of present operations as well as future plan. However, there is always a negative side of everything and joining strategic alliances can also have its disadvantages. There are so many advantages and disadvantages of having a business join a strategic alliance (Monk, Mather, & Hackett, 1992).
One of the examples of a successful business that joined a strategic alliance is the Momek Group. The business has four departments which include maintenance, manufacturing, amendment as well as civil and engineering. Having entered into the oil and gas supply industry, the group managed to extend its market margins in terms of industry sections and geography. The group joined an alliance with a state modification and maintenance contractor which made the business thrive into high heights. The group of Momek can be depicted as an entrepreneurial success account. The Momek Group story can be used to help in understanding the advantages of a business entering into strategic alliances (Lakoff, & Willoughby, 1987).
The businesses benefit a lot because it is easy for them to enter into the market. The Momek Group has been able to enter into the foreign markets by intercontinental firms easily. Getting an entry into foreign markets further gives reimbursements such as capacity in marketing, distribution as well as economies of scale. The cost going into a worldwide market may be ahead of the competences of a single business but, going into a strategic alliance, it will be able to achieve the reimbursement of fast entry while still keeping the expenses down. Once a business enters the strategic alliances as the entry mode it helps to overcome the enduring hindrances which could comprise of an embedded competition and unfriendly government regulations (Quayle, Hunter, & Farmer 1986).
Having entered the strategic alliances, the businesses benefit from shared knowledge and expertise. A lot of businesses are competent in some departments and lack knowledge and capability in other areas; however when a business goes into a strategic alliance can permit ready access to knowledge and capability in an area that business lacks. The data, capability and the expertise that the business achieves can be used not only in the joint venture project, but for different projects and reasons. The capability and knowledge can vary from learning to take care of government regulations, invention knowledge or to learn how to obtain resources. Momek Group has been enjoying the benefit of shared knowledge and expertise, and they are a good example of the fact that learning business is a growing business (Silver, 1993).
When a business goes into a strategic alliance, it has a chance to enjoy Synergy and competitive benefits as in the case of the Momek Group. Attaining synergy and competitive benefits happen to be another reason for businesses to get into strategic alliances. As compared to entering the market on its own, getting into a strategic alliance turns out to be a way to lessen the risk of entering into the market, worldwide expansion, research and development. Competition turns out to be more efficient when partners influence off each other’s strong points, getting synergy into the process that would be difficult to attain if trying to get into a new market or industry on its own (Das, 2011).
In vending, getting into a new market is a costly and time consuming procedure. Getting into a strategic alliance with a recognized and a good reputation company can assist in creating a favorable product image and effective distribution systems. Even those companies which are well established and hold a good reputation require introducing new products to the market. Most of the times, minor companies can attain the speed to market faster than those advanced and established companies. Leveraging off the strategic alliance will assist to hold the shelf space which is essential for the achievement of any brand. Strategic alliance is an efficient and elastic approach for different businesses to share or contribute their exclusive and differentiated resources, one of which, branding is one of the most essential intangible benefit (Park, 1997).
When a business joins a strategic alliance, the business will have the access to supplementary services. One of the most important benefits of joining a strategic alliance especially with another business is the chance to give supplementary services to customers that otherwise would not be on hand. It is very important to a business’ achievement to concentrate on the on its core capabilities because once a business turns out to be the jack of all trades, it becomes the master of none. A strategic alliance allows a business to give customers a complete new realm of services without losing concentration on its potential and its specialized services.
Momek Group got into the strategic alliances in order to benefit from getting access to a geographical market. A strategic alliance is usually a means of entering a market that has the protection of public tariff, as well as other obstacles, or subjected by another business with certain merits. When a business joins a strategic alliance, it has the advantage of capturing the economy of scale in both the production and marketing of their brands. Once they form the alliance they are also able to use the same machinery as well as the equipments in the production of the products. They also have the merit of sharing the same marketing channel for all of the two products (Tjemkes, Vos, & Burgers, 2012).
When a business enters a strategic alliance, they get the benefit of sharing distribution amenities, as well as dealer networks. As for the Momek Group, they are able to make use of the same agents or dealers to lessen the logistic rate and make a way into the market more easily. They can make use of the put-together practical and financial resources in order to overcome their competitors. They also get the advantage of filling gaps in practical expertise, as well as the knowledge of the local market. This means that they get to learn a lot of technical knowledge from each other.
Once a business joins a strategic alliance especially with foreign partners, it has the merit of gaining knowledge of the partner’s market as well as building good working relationships with the government official in the host state. It is very essential to have working relationship any of those government officials due to social capitals (Black, 2002).
It is very important to have the business join the strategic alliance because it will have the privilege to achieve an agreement on essential technical standards. It gets easier for the business to set up a standard for the goods with a joint effort. The business also benefits from having a direct shared competitive energies in the direction of defeating common competitors. Joining the strategic alliance also helps the business to diminish the cost and more effective to make a way into the market by having shared research efforts, sharing of technology, sharing production and distribution amenities and marketing one another’s products.
The business has a very high chance of getting the access to new customer base if it enters a strategic alliance. A franchise business is continually looking for new, original means to add to its customers and get closer to new potential clients, and entering into a strategic alliance presents an opportunity to do exactly that. A trusting, firm business partnership will offer the access to an entirely new client base that the franchise would not have had a way in to otherwise.
The expenditure of a global strategic alliance is usually shared equally between the businesses involved. Sharing the costs of the strategic alliances among themselves is the least expensive means for all those businesses wishing to enter into the strategic alliances (Willcocks, & Choi, 1994).
Despite a lot of advantages that come with entering into strategic alliances, there are a lot of disadvantages that can be brought by entering the strategic alliances. For instance, the strategic alliance between the General motors and the Korean Group Daewoo once showed the potentials of making it but failed in the end. The two groups signed a contract that called for each one of them to invest 50 percent in the joint venture. Their motives were that the Korean Group would benefit from the General Motors advanced engineering skills and the entry into the Market of the United States. On the other hand, General Motors would benefit from cheap labor offered by the Korean Group. By bad luck, the strategic alliance did not manage to pull through due to challenges resulted from the formation of a strategic alliance. Before long after the strategic alliance began, the Korean Group was weighed down by labor difficulties that resulted to a high rate of wages that led to termination of the alliance. Their case is an example of a failed strategic alliance and the advantages that come with it (Beamish, 1998).
The Korean Group complained that the General Motors was arrogant and that it exposed their secrets. Depending with the strategic alliance the business enters into, the business partner can take advantage of the business by failing to accomplish its end of the negotiation. This means that the partner could be stealing from the business if it happens to have an access to the business’ property, materials or computers thus revealing trade secrets. The major mistake most of the businesses make when entering strategic alliances is failing to list most of the worst possible results which range from partner faults to outright acts of malfeasance (Burton, 2004).
The strategic alliance between the two companies did not work since the Korean Group had a bad reputation of manufacturing poor quality cars. If a business forms a public alliance with another company, the other company’s bad public relations can ruin the business reputation. Even if the partnering business accomplishes all its requirements to the business and loyally supports it, the partner might still be engaged in other acts of a bad reputation that might damage the reputation of the other business. Also, in some cases a partner may set up cooperative relationships with rival businesses. In this occasion, the present strategic alliance may be held back.
Both General Motors and the Korean Group suffered from the lack of total control over their businesses. Once a business enters into a strategic alliance, it may suffer from lack of total control over the whole business as well as other issues concerning it. Strategic alliance performance usually goes beyond the control of a single party. Therefore, this issue is likely to bother most of the businesses. Some businesses depending on its other partners for skills can be a potential negative aspect to one who is dependent. Strategic alliances entail the sharing and control of the same goal and implementation strategy to attaining them. Failing to have control over the business can generate important difficulties if there happens to misapprehensions or differences between the strategic alliance partners.
General Motors obstructed the Korean Group’s attempt to increase sales in parts of the Europe with the intention of benefiting solely. There is a probability of high rate of failure when a business enters the strategic alliance. This happens especially when the business enters the strategic alliance without good intentions from both sides. There is a possibility of lack of success in these transactions. These transactions may fail due to differences in the managerial culture, non realistic anticipations, failure to have the same opinion on the direction or decisions or failure of a party to bring the anticipated benefits, for instance, distribution channels and clients.
There can be unfavorable impact on the flexibility of the parties in some cases of business entering into strategic alliances. Strategic alliances may limit the elasticity of parties, not allowing them to take part any other alliance, acquisitions, amalgamations or other contracts. General Motors did not want the Korean Group to make sales in Europe and United States. The absolute key in this is the commitments formulated by the involved parties of the strategic alliance by signing a contract. The contract may be positioned to prohibit the competition to the partner or to the competitor depending on the partner. Strategic alliances sometimes may result to dependence against the other partner. This has effects on the performance of the partner as well as the entire performance of the businesses, and this leads eventually to the failure of the weak partner.
Joining of businesses to strategic alliances result to a lot of commitment of time as well as the resources. Those successful strategic alliances entail a strong assurance to employees, management and a considerable sum of capital and other resources. From time to time, it turns out to be very hard for partners to invest time in partnership resources. It can also distract the attention of managers from happenings outside the strategic alliance. On the other hand, uncertainty concerning specific roles may put obstacles which may hinder the businesses from attaining their obligations to the strategic alliance (Zey, 1991).
As in the case of the General Motors and Daewoo, It turns out to be very hard for the strategic alliance to work if the participants refuse to share the same time horizons, profit goals, levels of assurance, as well as the same cultures. It very difficult to get high quality partners to contribute in a strategic alliance, therefore, it entails a considerable commitment of resources. There is also an issue of the parties involved getting unequal profits. Some of the partners in the strategic alliance may earn more than the other partners, and this can result to difficulties for the partner getting fewer amounts out of the strategic alliance.
When a business enters into the strategic alliances, it can result to disparities in the cultural values. Businesses that hold different cultures may suffer from cultural conflicts after the formation the strategic alliance. There is a high rate of joint venture formation among the partners of different cultures. These strategic alliances usually face difficulties due to the cultural conflicts among the partners. Different business cultures among firms of the same nationality also have an effect on the failure of the strategic alliances.
Strategic alliances are strong tools for attaining business goals. In order to improve opportunities for the alliances to work successfully, the businesses must follow organized procedures until the end. This is because the alliances can have as many disadvantages as the advantages if it is not well set.
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