Strategic alliances and acquisitions: benefits, drawbacks, and firm growth

Alliances

Strategic Alliances and Growth

In this modern era when the corporate world is full of competition and every organization is running for its own benefits and generating revenues, alliances and acquisitions are of immense importance. Different firm shave different criteria's of entering into alliances or acquisitions and it primarily depends upon the present situation of the business as well as on the nature of the business. An alliance is an agreement under which two or more than two organizations decide to achieve and work for a mutual goal and objective. Alliances are usually short-term in nature and in this type of agreement, none of the organization becomes dependent on the other organization, but, they remain independent. On the other hand, acquisitions occur when either one or more than one organization is in the worst condition and other organization acquires it. Due to this reason, the organization which acquires the other organization receives the reputation of that organization (either good or bad), besides receiving its liabilities, assets and other resources. Those companies that sell their services and products to the customers directly are a good example of alliances (Gancel, Rodgers, & Raynaud, pg. 45,2002).

In addition to this, a detailed analysis is essential before entering into any agreement. Apart from this fact, there are a number of reasons due to which companies seek to enter into these agreements. These reasons and conditions are described below:

Alliances can be of two types that are either with internal allies or with external allies. Companies usually seek for alliances in case of high rate of competition when the company has good innovative products and ideas but its competitors in the market are more powerful with respect to innovation and productivity. For instance, a manufacturing firm, which is facing competition, will always seek for new and innovative ways of rapid, low cost and customized manufacturing. In such a situation, an organization should enter into an alliance. However, just entering into an alliance will not provide the solution to queries. The most significant point is to enter with the right allies at the right time. In case of a manufacturing firm, the most appropriate ally is that manufacturing firm which has new ideas of innovation and productivity. Entering into an alliance will only benefit the firm if it makes an agreement with that ally which can provide assistance in achieving future goals and objectives.

In addition to this, it is also imperative to know that what the ally wants, that is a good alliance with the right ally can only be achieved if both the parties are competent to fulfill the needs of each other. Thus, firms should enter into alliance when they needs assistance from others and can provide assistance as well .Entering into an alliance will reduce competition and help both the parties in achieving targets.

As far as acquisitions are concerned, many reasons exist due to which firms should enter into this type of an agreement. Acquisitions are often considered as an investment by the organization who acquires the other organization (Ulijn, pg. 23,2010). It is because of the fact that the organizations are acquired with the intent of managing them with the innovative capabilities so that the benefits can be harvested. Apart from this, it is imperative that the acquisitions are planned in a systematic way so that the benefits can be achieved. Besides this, another factor, which is important, is that of evaluation. If the evaluation of firms results in a positive way that is if the firms find it competent of gaining benefits from the other firm in the long run than it should enter into an acquisition agreement.

Alliances and acquisitions are an important part of the business in the twenty first century but both of these agreements have its own benefits and drawbacks. These advantages and disadvantages of each of them are as follows:

An Alliance

The basic and the foremost benefit of alliance is that it helps both the parties. If one firm has lack of resources and such resources are available with the other firm then in such circumstance, alliance provides an opportunity to use the resource collectively. The alliance agreement does not aims at bringing loss to any of the firm and due to this reason both the parties have to provide some sort of benefit to each other. In addition to this, another benefit of alliance is that it assists in reaching and capturing the target customers more easily. Healthy promotional activities can be conducted with the help of alliance and customers can be served with more value added services. Apart from this, time as well as cost can be saved in the marketing process with the help of alliance (DePamphilis, pg. 103, 2011).

Besides having certain advantages, some drawbacks are also associated with alliance. One drawback is related with the efforts of the firms, since alliance is an amalgamation of efforts from all the parties, failure from any of the firm will affect the goals of every other firm in engaged in the contract. Similar is the case of reputation. It means that if any one of the firm loses its reputation in the market, it will ultimately affect the reputation of the other firms in the contract. Not only is this, but also as mentioned above that evaluation is the basic element of an alliance. This evaluation is related to the ally and failure to evaluate an ally will result in long-term losses for the firms. Besides this, some risk of privacy is also associated with alliance.

Strategy adopted by E-bay for growth in China

E-bay is the world most popular online trading business center, which has its roots in the best countries of the world. E-bay adopted the strategies of acquisition and alliance to enter China. Since China was a country in which internet flourished highly and most of the people were highly aware of e-commerce, therefore, E-bay's decision to enter China was an effective decision. Apart from this, the strategy adopted by E-bay to enter China was also an effective strategy because there was a huge competition over there and it would not have been possible for E-bay to enter into China by any other means.

E-bay was aware of the fact that there are number of risks associated with the entrance in China such as corruption, slow speed internet, currency issues etc. Due to this reason, the first step taken by E-bay was tremendous because at the initial stage it did not fully enter into the new country but, it invested in the first online auction website of China named as Each Net in the year 2002. After that, Each Net modified certain features of E-bay in accordance with the Chinese market. After noticing the success, E-bay took a clever step of investing more in Each Net and this acquisition gave great success to e-bay in the Chinese market. In addition to this, the alliances of E-bay with the greatest internet portals also proved as a tool for its success. These portals were Sohu, Net Ease and Sina.

Though E-bay initially achieved great success in China but due to the presence of a large number of competitors, a remarkable decline came in E-bay Each Net. These big competitors were Tao Bao and Alibaba. These competitors were domestic and therefore they easily captured the Chinese market and defeated E-bay Each Net. These competitors were aware of the fact that Chinese people prefer to buy from those brands, which are well-known in their country since years. Besides this, another reason for the supremacy of Tao Bao in the eye of the customers is it is free of cost services and E-bay on the other hand charge fee for its services. In addition to this, the Chinese people prefer the brands that they trust more and since Tao Bao had a good payment method and it was well-known in China since several years, therefore Tao Bao were preferred by the customers in place of E-bay Each Net.

However, E-bay modified its payment system lately, but it did not affect largely on the sales of E-bay because this method was not introduced from the beginning. Apart from this, several other factors such as decision-making, customer service and management are also the key reasons for the decline of E-bay in China. Tao Bao in the meantime achieved at the highest position in the market and became the pioneer.

E-bay's strategy of entering into China through Each Net was a good strategy but it did not work in every region of the country. It is because of the fact that E-bay did not tailor itself appropriately according to the Chinese market, though it is a world famous brand. Tao Bao made Skype its ally and achieved further growth by creating a Skype version in Chinese. After that, Tao Bao realized that E-bay can also become useful for it therefore in the year 2006, Tao Bao entered into a joint venture with E-bay. It is because Tao Bao needs assistance from the E-bay due to its mobile commerce and E-bay needed Tao Bao due to its renowned and trustful name in the market. In this way, E-bay's entrance into a joint venture with Tao Bao proved to be a turning point for E-bay (Lu, 19, 2006).