Question

5. What is a strategic alliance? Why do you think a company would enter a strategic alliance? What are the pros and cons of entering a strategic alliance? What impact do you think strategic alliances have had on the airline industry?

Answer 1

A strategic alliance is a two-business arrangement to undertake a mutually beneficial project while each retains its independence. The partnership is less complicated than a joint venture, where two firms pool resources to create a single business entity. A business can enter into a strategic alliance to expand into a new market, enhance its product line, or gain an advantage over a rival. The agreement enables two organizations to work towards a common purpose which will profit both.

As businesses partner on a project, they also share skills which are not for sale. One partner usually has technical experience and the ability to keep up with rapidly changing technological innovations. What the other partner or partners need from that partner is money, broad distribution channels, marketing experience, service networks and business reputation. Therefore, each partner provides the other with essential resources and makes use of the partnership to expand its skills to new areas

Partnerships may create economies of scale that allow participating firms to marshal a broad array of resources and achieve the critical mass required for international success. Companies with complementary skills can rely on the proven expertise of each other, rather than spending time and resources to develop what has already been achieved independently. Many foreign commercial ventures need expertise from various fields. Organizations have historically sought to build or retain all of the requisite in-house skills. Nevertheless, as technical and logistical complexity grows, companies are finding that they can not do it all alone. As a result, even the most competitive companies follow a policy to retain their core competencies.

The first group is the benefits of organisation. You may want to form a strategic partnership with your strategic partner to learn the requisite skills and get those capabilities. Often, strategic partners can help you improve your competitive ability, provide a distribution network or expand your supply chain. Your strategic partner will offer a good or a service that complements a good or a service that you provide, generating synergies. If you are relatively new or unproven in a given industry, having a well-known and trusted strategic partner will help to add legitimacy and reputation to your company.

A second group reflects an economic benefit. Through spreading these through the alliance members, you will the costs and risks. With an alliance, you can also get greater economies of scale, because the amount of production can rise, allowing the cost per unit to decrease. Finally, you and your partners can take advantage of co-specialization, where you bundle your specializations together, creating additional value, such as when a leading computer manufacturer bundles its desktop with a leading monitor manufacturer's monitor.

Disadvantages are:

Weaker presence or less equity interest in management
Fear of business exclusion without the involvement of the local partner
Less efficient communication;

Weak Distribution of Capital

Difficult to keep objectives on target over time

There are several cases where two rival companies would both be better off if they formed a strategic alliance. The partnership companies will still distinguish themselves, but at the same time they have effectively removed a competitive threat. Of course, a situation like this depends on the companies and the industry, but the lesson can be applied to a number of other cases.

"Routing and cost are the two principal determinants of customer flight selection. Consequently, the airlines' adoption of route-sharing alliances blocks the competitive threat of preferential routing in the specific markets the airline chooses to compete on. Essentially, strategic alliances within the airline industry ensure competitive parity in routing, and force other factors such as on-time departures and customer service to become the basis for competitive differentiation.

There will be several minor squabbles over routes and route sharing between airlines, and eventually it would have a detrimental impact on customers. People purchase route and cost-based plane tickets, and without the route-sharing strategic partnership, they will have fewer options to choose from while flying.

Most airlines then allow route-sharing and benefit from the alliance. It opens up more business opportunities for each company and ultimately the customer is happy because when buying an airplane ticket, he has more choices. The businesses often compete and differ from each other, but it is based on factors such as customer service rather than routes.