Identify and discuss the three ways alliances can create economic value by helping firms improve the performance of their current operations

What will be an ideal response?

One way that firms can use strategic alliances to improve their current operations is to use alliances to realize economies of scale. To realize economies of scale, firms have to have a large volume of production, or at least a volume of production large enough so that the cost advantages associated with scale can be realized. When a firm cannot realize the cost savings from economies of scale all by itself, it may join in a strategic alliance with other firms. Jointly, these firms may have sufficient volume to be able to gain the cost advantages of economies of scale.

Firms can also use alliances to improve their current operations by learning from their competitors. Different firms in an industry may have different resources and capabilities and these resources can give some firms competitive advantages over other firms. Firms that are at a competitive disadvantage may want to form alliances with the firms that have an advantage in order to learn about their resources and capabilities.

Finally, firms can use alliances to improve their current operations through sharing costs and risks. This is especially valuable when the future state of the environment or the growth rate of the industry is uncertain.