Corporate Strategy: Acquisitions, Alliances, and Networks

1. Corporate Strategy: Acquisitions, Alliances, and Networks Instructor: Dr.Gehan Shanmuganathan

2. LO 9-1Differentiate between mergers and acquisitions, and explain why firms would use either as a vehicle for corporate strategy. LO 9-2Define horizontal integration and evaluate the advantages and disadvantages of this corporate level strategy. LO 9-3 Evaluate whether mergers and acquisitions lead to competitive advantage. LO 9-4 Define strategic alliances, and explain why they are important corporate strategy vehicles and why firms enter into them. LO 9-5 Describe three alliance governance mechanisms and evaluate their pros and cons. LO 9-6 Describe the three phases of alliance management, and explain how an alliance management capability can lead to a competitive advantage. LO 9-7 Define strategic networks and evaluate the advantages and disadvantages of different network positions. 9-2

3. Facebook: From Dorm Room to Dominant Social Network ChapterCase9 • Facebook: “most powerful and transformative social change” • Started by Mark Zuckerberg in 2004 • Overcame the first-mover advantage held by MySpace • True global strategy: more users first, profits later • Adding different functions to go after a wide range of users • Innovative network marketing approach • Word of mouth through online social network • Frequently attacked for insufficient protection of users’ privacy • Needs a sustainable business model 9-3

4. Integrating Companies: Mergers and Acquisitions • Merger: combining two companies • Friendly approach • Ex: Disney & Pixar • Generally similar in size • Acquisition: purchase or takeover a company • Can be friendly or unfriendly • Hostile takeover • Ex: Vodafone buys Mannesmann Dell Makeover Video 9-4

5. Horizontal Integration: Merging with Competitors Horizontal integration: process of merging and acquiring competitors HP buys Compaq in 2002 Pfizer buys Wyeth in 2009 Live Nation buys Ticketmaster in 2010 Benefits: Reduce competitive intensity Lower costs Boost differentiation Access to new markets and distribution channels 9-5

6. STRATEGY HIGHLIGHT 9.1 Food Fight: Kraft Hostile Take- over of Cadbury • Kraft acquired Cadbury in UK • Hostile takeover, $20 billion deal • Cadbury has strong position in emerging economies • Perfected distribution system in countries like India • Kraft faces strong rivalries worldwide, including China • The acquisition forces Hershey and other competitors to rethink their strategies • Hershey 90% revenues from U.S. market 1–6 9-6

7. Mergers and Acquisitions Many M&As actually destroy shareholder value! When there is value, it often goes to the acquiree Acquirers tend to pay a premium Why still desire M&As? Overcome competitive disadvantage Superior acquisition and integration capability Principal–agent problems 9-7

8. EXHIBIT 9.3 Value Destruction in M&A: The Worst Offenders Shareholder value destroyed based on up to 3 years post-merger analysis compared to overall stock market 9-8

9. Strategic Alliances to Challenge Amazon STRATEGY HIGHLIGHT 9.2 • Amazon’s Kindle • E-reader selling content below cost • Content providers do not want fixed price for e-books ($9.99) • Similar strategy Amazon used for printed books earlier • Apple’s iPad • Allied with major publishers • Let publishers set the prices directly • Apple worked with publishers to increase the bargaining power over customers 1–9 9-9

10. Why Do Firms Enter Strategic Alliances? Strengthen competitive position Apple vs. Amazon Enter new markets Local partner for global growth Microsoft partners with Yahoo on search Hedge against uncertainty Real options approach Roche invests in Genentech 1990 & buys it in 2009 Access critical complementary assets Pixar partners with Disney Learn new capabilities GM & Toyota (NUMMI) – formed in1984 9-10

11. Governing Strategic Alliances Governing mechanisms: Contractual agreements for non-equity alliances Based on contracts Equity alliances One firm takes partial ownership in the other Joint ventures Standalone organization owned by 2 or more firms 9-11

12. Alliance Management Capability A firm’s ability to effectively manage three alliance related tasks concurrently. 30 to 70% of all alliances yield disappointing results Partner selection and alliance formation Alliance design and governance Post-formation alliance management 9-12

13. Strategic Networks Social structure with multiple organizations Network nodes – the organizations Network ties – the links between organizations Network achieves goals that cannot be done by only one firm Example - Star Alliance 1st global airline network Air Canada, Air China, Continental Airlines, Lufthansa, Singapore Airlines, United Airlines, etc. Seamless travel on 25 international airlines 9-13

14. Firms Embedded in Strategic Networks EXHIBIT 9.8 A hypothetical strategic network. Firm B is in a key position - knowledge broker 9-14

15. CHAPTERCASE 9/ Consider This… • The success of Facebook relies on: • Complementary apps • Signed strategic relationship with Zynga (FarmVille, etc. ) • Zynga games are available in many portals • Allied with 7-11 for marketing • Networking with Apple, Android, MSN…etc. • What are the major differences between Facebook and MySpace? What are the implications? • What are your suggestions for Zynga to manage its numerous network relationships? • What do you see as the advantages and disadvantages of Zynga’s network strategy? 9-15