Why would a company seek an alliance over some other form of market entry?

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justaguide | College Teacher | (Level 2) Distinguished Educator

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When a company seeks to gain entry into a new market, there are many obstacles that it faces. They include factors like existing players having economies of scale; when a new company makes an entry it usually starts off on a small scale. There are large capital requirements in setting up entire production facilities. Existing customers of companies already in the market and producing similar goods to the new company may find the switching costs associated with moving custom to the new company are too high to warrant a shift. New companies would also have to spend a lot of resources in setting up completely new channels of accessing raw materials, distributing their products, etc. In many cases, especially where the entry of foreign companies is involved, there could be several restrictions placed by the government.

An alliance is a good way of navigating around several of these problems. The company already in the market will have a sound production mechanism with access to suppliers and distributors; it has a customer loyalty; and is largely free from government regulations.

A new company seeking market entry can use these strengths in an alliance. They can in turn infuse funds for the combined entity to expand and bring in new research and technology to improve products and efficiency. An alliance saves a new company from many of the risks associated with entry into a new market while allowing enjoyment of the benefits.

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