Question

Why do firms form an alliance? What are the pros and cons of this strategic move?

Answer 1

Firms form an alliance beacuse:

1. To eliminate competition: One of the main motive behind forming alliance is to eliminate the competition in the market and to create such environment which helps in reducing the risk of competition.
2. Entry in the new market: Another main reason behind alliance formation is that when a firm or company tries to enter into the foreign market or another relevant market to expand the business and to earn more profits.
3. Reduces Risks: The formation of alliance helps in reducing risk or threats of competitors and helps in building a strong firm or company against other competitors.

​​Pros and Cons of strategic alliance are as follows:

Pros:-

1. It helps in expanding the customer base and helps to reach out more and more customers.
2. It also helps in expanding networks of a firm as two firms work together.
3. It helps in adopting new techniques and some positive aspects from other firm while working together.
4. Strategic alliance helps in expanding the business and helps to achieve the goals in quick span of time.

Cons:-

1. Strategic alliance may lead to rise in conflicts in terms of ownership.
2. It also reduces competition in the market which is a disadvantage for the customers as monopoly can be there in the market.
3. Delay in decision making is there as two companies work together and conflicts in ideas and working culture can be there.
4. It act as a barrier for the new companies to enter into the market.