In: Finance
Note:- There are three separate questions but as per answering guidelines, only the first question can be answered.
Solution:-
While organic growth and business combinations (M&A) are the two commonly followed methods adopted to grow a business, another alternative which is used by businesses is strategic alliance. This sort of arrangement allows two companies to enter into a strategic partnership wherein the two partners continue to operate independently yet benefitting from each other in certain ways. This happens when two firms want to leverage certain assets of each other, yet don't want to combine their businesses.
Example of strategic alliance:
A US automobile manufacturers enters into a alliance with an Indian automobile company to use its manufacturing capabilities and dealer network to produce and sell their cars in the Indian market.
Profitability Ratios:
Sometimes, the strategic alliances are a win-win result for both parties, however at other times it may be beneficial for one partner and no so much for the other. One way to analyse the risks of strategic alliances is through profitability ratios which includes the following five major financial metric:-
The potential risks in a strategic alliance with respect to profitability metrics are as follows:-
Best indicator for the effectiveness of strategic alliance:
While all the profitability ratios are good indicators of how good the strategic alliance is, the best among the lot is return on capital employed (ROCE). This is because the purpose of any business, investment, strategic decision is to generate high returns on capital invested and it gives a great picture of the overall effectiveness. Since, this is the broader goal behind all business decisions, looking at ROCE would best give the overall picture of how effective the strategic alliance is. If the ROCE goes up after strategic alliance, it means that the alliance is beneficial for the company and vice-versa.