The number of strategic alliances formed each year -especially global strategic alliances is increasing and the popularity of vertical integration is falling because so many low-cost global suppliers exist in Asian Countries.
In today’s world of unpredictable happenings, war in some parts of the world, economic slowdown, post pandemic sloppiness, looming recession, startups can try to adapt a Strategic Alliance and long-term contracting model to enhance their business productivity and to sustain themselves in the market.
Unlike short term contracts strategic alliances between buyers and suppliers are long term, cooperative relationships, both companies agree to make specialized investments to work jointly to find ways to lower costs or increase product quality so that they both gain from their relationship. A strategic alliance becomes a substitute for vertical integration because it creates a relatively stable, long-term partnership that allow both the companies to obtain some kind of benefits that result from vertical integration. How ever it also avoids the problems (bureaucratic costs) that arise from managerial inefficiencies that result when a company owns its own suppliers.
“Startup CIO’s can strategically partner with their vendors for consolidating the market position.”
Dr. Suresh Vidyasagar Menon
Startup CIO’s can strategically partner with their vendors for consolidating the market position.
There are several strategies companies can adopt to promote the success of long-term cooperative relationship and lessen the chance that one company will renege on its agreement and cheat the other. One strategy is for company that makes the specialized investment is to demand a hostage from its partner. Another is to establish credible commitment from both companies that will result in trusting and long-term relationship.
Hostage taking essentially means of guaranteeing that each partner will keep its side of the bargain, thus the companies are mutually dependent; each company holds a hostage-the specialized investment other has made.
Credible Commitments A credible commitment is a believable compromise or pledge to support the long-term relationship between companies.
Maintaining market discipline Just as a company pursuing vertical integration faces the problem that its company owned suppliers or buyers might become inefficient, a company that forms a strategic alliance with a company runs the risk that its alliance partner might become inefficient over time, resulting in higher component costs or lower quality. This also happens because the outside supplier knows it does not need to compete with other suppliers for the company’s business.
First of all, contracts including long-term contracts are periodically negotiated usually 3 to 5 years, so the supplier knows that if it fails to live up to its commitments, its partner may refuse to renew the contract.
The number of strategic alliances formed each year -especially global strategic alliances is increasing and the popularity of vertical integration is falling because so many low-cost global suppliers exist in Asian Countries.
About the Author
Dr Suresh Vidyasagar Menon has 31 years plus of overall experience in IT, around 3 Years in Auditing of ISO 27001-Information Security Standard, has executed 25 plus projects in IT and two turnkey projects for eastern railways (Liluah) and has to his credit 14 publications in International Journals of Science, Engineering & Technology and is also a awarded reviewer for 6 International Journals.
