Management Dynamics in Strategic Alliances - Essay Example

Strategic Management Thesis ment Businesses are opting to form strategic alliance with each other as a way of realizing their other strategies. These relationships formed between interdependent organizations with mutual benefits last for as long as the relationship to be economically viable. Case study Analyzed below is the strategic alliance between Alibaba, a company whose niche is in e-commerce and supports trading between individuals-individuals, individuals-organizations and organizations-organizations. The company based in China opted to form the strategic alliance with Infomedia; a company based in India, which specializes in the phone directory services. Infomedia also considers itself as an interest publishing organization. Their strategic alliance’s formation occurred in April, 2008. The two companies sought to provide the Small, Medium Enterprises (SMEs) with quality solutions directed towards the advancement of both domestic and global trade (Das 34). Introduction Managers in most organizations are adopting strategic alliance as a way of realizing their strategies instead of retaining the old strategic make and sell strategy initially used. By definition, a strategic alliance is a relationship formed because of the availability of mutual interests between groups of interdependent organizations. These relationships last for as long as they prove to be economically viable (Das 67). In the case of Alibaba and Infomedia, both companies realized the potential benefits of supplying the SMEs with quality solutions, which pave the way for further advancement in both the domestic and global trade sectors (Yoshino and Rangan 76). However, before they decided to form a strategic alliance, management teams from both teams analyzed the following issues: • Determination of the best fit • Most suitable type of strategic alliance to be formed • Benefits to be realized • Levers used for increasing profitability a) Determination of the best fit The management bodies of both companies had the responsibility of determining whether partnering with the other company would result into a perfect fit. An analysis of whether both companies shared mutual benefits is the first step in realizing the economical viability of both organizations. Alibaba, a company, which has an established presence in e-commerce, stood to benefit from the alliance by realizing some of its expansion strategies. Alibaba’s choice to form an alliance with Infomedia, a respectable Indian based company guaranteed Alibaba a successful entry into the Indian market. On the other hand, Infomedia stood to benefit from the access into the global mainframe, a niche successfully occupied by Alibaba. Targeting the small and medium enterprises proved to be a successful strategy. This is because both Indian and Chinese business sectors comprise these businesses in large numbers. Therefore, both management teams were able to come up with strategic goals that would ensure an efficient and effective way of dealing with their competitive surroundings. The different areas analyzed in order to determine whether both companies fit included strategic, cultural, resource, and structural aspects. The realization that these companies proved to be compatible on a strategic, cultural, resources and structural level showed that two were a match and that they formed a perfect fit (Das 116). b) Type of strategic alliance Determining the strategic alliance suitable for both the organizations also proved to be an integral part for both organizations. Companies choose between horizontal and vertical types of strategic alliance. The horizontal type allows competing businesses to form an alliance that will allow each partner to gain access to various segments in the industry. Horizontal strategic alliances allow partners to learn from each other, reduce the risks, and improve efficiency. On the other hand, vertical strategic alliances involve the partnering of one or more suppliers or customers. They create extra value for the customer end while lowering the production costs. Alibaba and Infomedia’s strategic alliance chose the vertical strategic alliance type. This is because their goals involved lowering their production costs, while creating extra value for their customers. The horizontal type would not prove beneficial to them because they are not competitors or potential rivals with each other. Furthermore, their services complement each other (Das 215). c) Benefits hoped to be realized Both companies hoped to realize the following benefits. Since they were both venturing into new territories, they both hoped to avoid risks. The creation of a strategic alliance ensured that the risks encountered were spread evenly between both companies. Therefore, both companies were able to avoid substantial losses. In addition, the reduction of uncertainty occurs through the formation of alliances. They also allow both partners to redirect and focus resources to the areas each partner is more knowledgeable about and equipped to run. This ensures the proper utilization of resources during the strategic alliance. Both companies are also able to share in the rewards and the investments realized during the strategic alliance. Therefore, a company still generates profits despite being in an alliance with another company (Das 218). Strategic alliances also foster an economy of scale and scope. Partners are, therefore, able to visualize the scope and nature of the economy they are operating. This prevents them from overextending themselves, which might prove to be detrimental to both organizations. d) Levers used to increase profitability There is a variety of levers used to increase profitability. The first involves understanding the determinants of trust. Trust is an integral part in the formation and lasting of a strategic alliance. This is because partners need trust to avoid closely monitoring each other, which affects their performance as well. Establishment of trust within a business relationship ensures both companies save on future costs incurred on enforcement, monitoring, contracting and searching. As a result, investments dedicated as assets will be increased, and further sharing of knowledge would ensue. Therefore, partners ought to look out for the following factors, which prove detrimental to the establishment of trust. They include initial conditions, negotiation process, outside behavior, and reciprocal conditions. Partners need to ensure that they develop trust from the very beginning of the negotiation phase of the formation of the strategic alliance. In addition, the behavior portrayed outside of the alliance ought to reflect those present within the alliance. For example, partners ought to showcase good business ethics whether they are dealing with a potential partner or with other companies they are already in business. Secondly, partners need to be able to manage learning and knowledge. This involves the infusing of beneficial pieces of information into the organizational strategies of both partners. The exchange of new ideas reinforces trust between the partners and continues to foster a beneficial relationship between the two. Both companies also need to understand the alliance evolution. In addition, they also need to measure the performance of the alliance in the right way. Proper measuring of the performance of the alliance allows partners to detect their losses early enough. This allows them to end the alliance before it causes irreversible damage. On the other hand, performance measurement also shows whether the strategies implemented are worth maintaining (Das 230). Conclusion In conclusion, a strategic alliance can provide a variety of benefits for those within the alliance. However, risks can also be realized, especially if the performance of the alliance is not measured in the appropriate way. In addition, the development of trust must occur from the very beginning in order for the alliance to be successful. Partners should also be careful about the different factors that might affect trust between them. The decision on the alliance needed to be formed lies on the partners’ relationship to each other. Rival companies benefit most from horizontal types of strategic alliances, whereas companies hoping to lower production costs and create extra values for customers benefit from vertical types of strategic alliances (Das 223). Works Cited Das, T. K. "Management Dynamics in Strategic Alliances." City University of New York, 2012, Print. Read More