Joint Ventures and Strategic Alliance - Coursework Example

Strategic alliances and joint ventures Introduction Strategic alliance involves an agreement between two or more than two organizations. The agreement is aimed at cooperating on specific activities in the business. The aim of the alliance is to ensure that the parties to the alliance benefit from the strengths of one another. The union also enables the parties to gain a competitive advantage as compared to other companies with the same ventures. A response to globalization needs and increasing uncertainty and complexity in the business environments necessitates ventures and alliances (Culpan 2002). Strategic alliances promote knowledge sharing and expertise between the parties. It also fosters reduction of risks and costs between the parties in different areas. Such areas include relationships with suppliers and the development of new technologies. Strategic alliances are sometimes considered to have equal magnitudes as joint ventures. The difference between the two is where an alliance can accommodate parties that are competitors, and the engagement lasts for a short time as compared to a joint venture. A joint venture, therefore, is a business agreement in which the parties involved agree on certain factors towards the development of what looks like a new entity. The factors are development criteria, finite time, creation of a new entity and new assets by contribution of investment. The parties to the joint venture contribute equity. Per se, they share the expenses, assets and revenue on agreed on basis. Strategic alliances and joint ventures are critical to the organization for a number of reasons. The paper focuses on discussing these reasons and whether the reason enables the alliances and ventures to complement global mega-mergers as a global business strategy. Critical Importance of Global Strategic Alliances and Joint Ventures There are several critical reasons or important factors that necessitate for the formation of global strategic alliances and joint ventures. Per se, they are the benefits that international businesses may accrue from such alliances and ventures (Chou et al., 2014 p. 42). There are many motivational factors that may drive the firms to enter into the ventures or alliances. Per se, the use of strategic alliances and joint ventures is increasingly gaining popularity. A growing number of globally multinational firms are finding it better to carry their operations under such umbrellas. Firms argue that under such agreements, each party can bring to the table complementary strengths. Such powers enable the companies to gain significant competitive advantages (Chou et al. 2014, p. 42). Access to New Markets The firm’s knowledge of the local markets can be invaluable when it comes to international or global business. It can also be invaluable if the firm wants to get its products and services to global heights. Consequently, if a firm wants to get its products into a new market, joining with a firm that has knowledge on the local markets of the new market will facilitate its entrance (Alonso 2010, p. 14). The local partner is familiar with the local buyers and suppliers. The other advantage that will accrue from the venture or alliance is that the partners will be fully aware of their local market distribution channels. The relationship observed may be unavailable for outside firms. In every country, business laws stipulate that any business entering into their local markets should allow for local ownership. The stipulation is observed mostly in developing countries. Such developing countries hold great potential for firms entering into their markets. If firms cannot come into ventures or alliances, penetrating these markets can be very hard (Alonso 2010, p. 15). The ventures and alliances promote companies from outside to meet these stipulations and in most cases, developing countries governments find themselves entering into ventures and alliances with foreign companies for the benefit of its citizens. Entering into new markets is greatly promoted by advances in telecommunication, computer technologies and improved transportation systems. Companies that enter into ventures and alliances collect benefits of economies of scale marketing and distribution scopes (Kale & Singh 2009). The costs involved in the process of entering a new market for a single firm can be enormous. Consequently, if the firm enters into an alliance or joint venture with another firm that already has knowledge and acceptance in the new firm, the costs and logistics will go flat (Mehta et al., 2013, p. 363). International firms are better positioned when it comes to strategic alliances and ventures. They achieve the benefits of rapid entry and manage to keep the costs of rapid entry as low as they can. It is important then for firms to consider global strategic alliances in a bid to creating an entry to new markets. They enable the firms to overcome the barriers involved such as hostile government regulations (Kale & Singh 2009). Shared Risks A single firm is more prone to global difficulties and risks. Often, many global ventures and alliances are created in order to reduce the risk margin that may affect a single entity in business. Considering the saying that goes ‘two is better than one,’ the firms enter into these agreements to create softer environments through which business can be transacted (Schreiner et al. 2009). Risk sharing has become a common rationale for undertaking cooperative arrangements. In cases of newly opened markets or high uncertainty in certain industries under the firm’s operatives, risk sharing opens the new window for firms to forge under globalization conditions. Risk sharing is also necessitated by instability of business operations in particular markets. Business competition globally has entered a new level altogether. Per se, it complicates the processes of entering a new market or launching new products or services (Schreiner et al. 2009). Research indicates that the risks involved due to high competition and difficulties of entering a new market are minimized by alliances and joint ventures. Apart from the risk shared, revenue is shared by the parties to the venture or alliance (Sompong et al. 2014, p. 518). Knowledge and Expertise Sharing It’s the nature of every firm to have areas that it is very competent and areas that are lagging behind. It is also in the nature of many companies to have expertise on various fields of operation. Formation of alliances and ventures creates a window in which the firms in the alliance and investment will accrue total benefits of knowledge and expertise from each other. A joint venture is significant in obtaining ready access to knowledge and expertise in those areas that one party may be good (Sompong et al. 2014, p. 520). The acquisition of knowledge, expertise, and information enables the individual to not only apply it to better the alliance or a joint venture but also better other projects that the company undertakes. The expertise and experience come in different ranges. It can be attributed from learning how to cope with government regulation, how to carry out production of goods and services or to learn the processes of resource acquisition and utilization (Alonso 2010, p.16). Through the acquisition of knowledge and expertise, two firms can gain from economies of scale better when in a joint venture or alliance. Economies of scale are more achievable when the recourses of the parties are put together towards a common course. The companies will be in a better position to maximize efficiencies based on the nature of their venture or alliance. Cooperative strategies facilitate the joining of small companies which give them a stronger appeal to compete with larger firms that have been in existence (Alonso 2010, p. 19). The larger companies may also benefit from small firms by acquiring the efficiencies in exchange of capital and other recourses. In cases where firms lack same strength in carrying out their business strategies, alliances are important because they create a window within which the firms may find solutions to their problems. In return, firms can produce more efficiency that will enable them to create more production capacities and broader reach top the markets. They share technological advancements and information (Cummings & Holmberg 2012, p. 136). Synergy and competitive advantages In ordinary circumstances, achieving synergy and competitive advantage may be a hindrance to the company success especially in new markets. Recent trends have led to more global alliances and more joint ventures aimed at achieving synergy and competitive advantages. A firm will do better in a new market if it joins to form an alliance with another firm other than entering the market alone (Cummings & Holmberg 2012, p. 138). Synergy and competitive advantages put a firm at the forefront when it came to international expansion, Synergy and competitive advantages also enable the company to build a better basis for carrying out research and development. Competition is made more efficient in the event of partners leveraging each other’s strengths (Alonso 2010, p. 24). It is also enhanced by bringing synergy into the process. It will be very hard to achieve it if a firm tries to enter a new market or industry alone. Entering a new market has proven to be very expensive in the retail processes. It is also a colossal time user. It is advantageous to form alliances with companies that are already established. In most cases, companies already established profit from a good reputation. The reputation can form a very strong pillar in which the companies can use to forge ahead and better their production and distribution in the new market (Cummings & Holmberg, 2012, p. 139). Partnerships enable companies to gain from each other in that they can create a brand image better than if it is one company. Alliances and ventures also help parties to win the political obstacle (Vanpoucke & Vereecke 2010, p. 6715). Per se, many political factors are imposed in new markets such that a single company may not withstand the pressures of political divides. Achieving political stability enables the parties to the venture or alliance achieves synergy and competitive advantages. For instance, in order to create a favorable brand image in a chosen consumer group may be expensive and time-consuming. As such, a company may form an alliance or a venture with another in order to create an image for its products (Vanpoucke & Vereecke 2010, p. 6715). Strategic alliances are very beneficial. They are in existence and come in different forms. The main important factor is cooperation within parties. Participation allows the parties to share facilities towards bettering their existence. Cooperation enables or makes it easy for the companies to combine their knowledge, expertise, and technology in making it through new markets and penetrating competitive zones (Cummings & Holmberg 2012, p. 146). Joint Ventures and Alliances versus Mega-Mergers Mergers exist in that company that have enough resources by other companies and make the companies fall as part of their own. When the merger is complete there is no double ownership. The initial owners cease to be the owners and those that have acquired the company become the new owners. The mega-merging of companies is aimed at creating monopolies. If compared to the joint venture or strategic alliances, the latter have come to replace mega-mergers. Strategic alliances and joint ventures are meant to carry out the functions that are meant to be carried out by mega-mergers (Vanpoucke & Vereecke 2010, p. 6715). Merger mergers were initially meant to affect market reach and eliminate unwanted competitions in the industry. As such, the pros and cons of mergers indicate that they are not in the public interest. They are found to be beneficial to the shareholders and top executives. As much as they are advantageous in their ways, joint ventures and strategic alliances have come to replace their existence (Mehta et al. 2013, p. 366). There are several reasons as to why strategic alliances and joint ventures have come to replace the existence of mergers. A merger is constructed to build a monopoly for the company. Elimination of competition deteriorates the quality of products and services that the company produces (Kale & Singh 2009). Monopoly will also lead to consumer exploitation through increment of prices. When a monopoly is in operation, certain factors such as price discrimination by the available sellers heighten. Government control becomes limited because there is only a major company dealing in the line of business. The customer bargaining power is eliminated (Mehta et al. 2013, p. 367). Mergers lead to the elimination of choices especially to the consumer. The greater effect witnessed in many mergers is the loss of jobs by its employees. The main reason is that the acquiring company leads to stripping the acquired company of its assets and taking over its management. In case the management does not like the operations of the acquired company, it sacks all the employees and creates its methods of administration (Kale & Singh 2009). Mergers are not known to make economies of scale but rather they generate diseconomy of scale. The increment in size is what mostly creates the diseconomy of scale. The degree of control and the swiftness in the leadership before merging eliminates motivation of workers and leads to a weaker leadership. Hence, joint ventures and strategic alliances come in handy to eliminate the disadvantages of mega-mergers and enhance their advantages in the creation of a new breed of global businesses (Bucklin & Sengupta 1993, p. 38). Conclusion Strategic alliance involves an agreement between two or more than two organizations. The agreement is aimed at cooperating on specific activities in the business. A joint venture, therefore, is a business agreement in which the parties involved agree on certain factors towards the development of what looks like a new entity. The difference between the two is where an alliance can accommodate parties that are competitors, and the engagement lasts for a short time as compared to a joint venture. Several critical reasons or relevant factors necessitate for the formation of global strategic alliances and joint ventures. The costs involved in the process of entering a new market for a single firm can be enormous. Consequently, if the firm enters into an alliance or joint venture with another firm that already has knowledge and acceptance in the new firm, the costs and logistics will go quiet. Apart from the risk shared, revenue is shared by the parties to the venture or partnership. Subsequently, the popularity involved under cooperative strategies increases as projected risks increases. Formation of alliances and ventures creates a window in which the firms in the alliance and venture will accrue total benefits of knowledge and expertise from each other. Strategic alliances and joint ventures are meant to carry out the functions that are meant to be carried out by mega-mergers. References Alonso, A 2010, Importance of Relationships among Small Accommodation Operations around the City of Perth, Tourism & Hospitality Research, vol. 10, no.1, pp. 14-24. Bucklin, L, & Sengupta, S 1993, Organizing successful co-marketing alliances, Journal of Marketing, vol. 57, no. 2, pp. 32. Chou, T, Ou, C, & Tsai, S 2014, Value of strategic alliances: Evidence from the bond market, Journal Of Banking And Finance, vol. 42, pp. 42-59. Culpan, R 2002, Global Business Alliances: Theory and Practice, Greenwood Publishing Group, New York. Cummings, J, & Holmberg, S 2012, Best-fit Alliance Partners: The Use of Critical Success Factors in a Comprehensive Partner Selection Process, Long Range Planning, vol. 45, pp. 136-159. Kale, P, & Singh, H 2009, Managing Strategic Alliances: What Do We Know Now, and Where Do We Go From Here?, Academy Of Management Perspectives, vol. 23, no. 3, pp. 45-62. Mehta, R, Takao, I, Mazur, J, & Anderson, R 2013, Determinants and Consequences of Cooperation in International Strategic Distribution Channel Alliances, Contemporary Management Research, vol. 9, no. 4, pp. 363-367. Schreiner, M, Kale, P, & Corsten, D 2009, What really is alliance management capability and how does it impact alliance outcomes and success?, Strategic Management Journal, vol. 30, no. 13, pp. 1395-1419. Sompong, K, Igel, B, & Smith, H 2014, Strategic Alliance Motivation for Technology Commercialization and Product Development, Management Research Review, vol. 37, no. 6, p. 518. Vanpoucke, E, & Vereecke, A 2010, The Predictive Value Of Behavioral Characteristics On The Success Of Strategic Alliances, International Journal Of Production Research, vol. 48, no. 22, pp. 6715-6738. Read More