A strategic alliance within the field of business refers to a mutual agreement between two or more firms to work together to achieve shared objectives. The coalition is key to realizing the shared goals, which would otherwise be unattainable if one firm was to commit to the objectives independently. Through a strategic alliance that enjoys different benefits, the alliance is also prone to some risks. If Southwest Airlines were to enter into a strategic partnership based on profitability ratios, it would be inclined to some risks.
Some of the risks of forming alliances based on the firm’s profitability ratios include the firm’s size, timing problems, and failure to consider the long-term strategies of the firm. In regards to the organization’s size, small firms tend to record higher profitability ratios than larger firms. However, in a real sense, larger businesses are more profitable compared to smaller firms. In regards to the timing problem, the profitability of some firms is based on seasonal factors.
This situation means that the ratios might be below at different times, while at other times, the business might record low ratios. The timing risk also indicates that the services or products of the company might be profitable at a particular time while also at risk of being absolute in the future. Another threat to forming strategic alliances based on profitability ratios is that profitability ratios do not consider the prevailing long-term activities of the organization that might deem it profitable in the future.
Amongst the five ratios, leverage ratios are the most likely to show immediate information to analyze the effectiveness of a strategic alliance. The leverage ratios outline the sources of the organization’s capital, either from shareholder equity or debt. The balance is also essential in providing a long-term outline regarding the financial position of the organization.