Chapter 9 Corporate Strategy: Strategic Alliances and Mergers and Acquisitions

1. Chapter 9Corporate Strategy: Strategic Alliances and Mergers and Acquisitions

2. The AFI Strategy Framework Jump to Appendix 1 long image description

3. Chapter 9 Outline 9.1 How Firms Achieve Growth • The Build-Borrow-Buy Framework 9.2 Strategic Alliances • Why Do Firms Enter Strategic Alliances? • Governing Strategic Alliances • Alliance Management Capability 9.3 Mergers and Acquisitions • Why Do Firms Merge with Competitors? • Why Do Firms Acquire other Firms? • M&A and Competitive Advantage 9.4 Implications for the Strategist

4. Learning Objectives (1 of 2) LO 9-1 Apply the build-borrow-or-buy framework to guide corporate strategy. LO 9-2 Define strategic alliances, and explain why they are important to implement corporate strategy and why firms enter into them. LO 9-3 Describe three alliance governance mechanisms and evaluate their pros and cons. LO 9-4 Describe the three phases of alliance management and explain how an alliance management capability can lead to a competitive advantage. LO 9-5 Differentiate between mergers and acquisitions, and explain why firms would use either to execute corporate strategy.

5. Learning Objectives (2 of 2) LO 9-6 Define horizontal integration and evaluate the advantages and disadvantages of this option to execute corporate-level strategy. LO 9-7 Explain why firms engage in acquisitions. LO 9-8 Evaluate whether mergers and acquisitions lead to competitive advantage.

6. How Firms Achieve Growth

7. The Build-Borrow-or-Buy Framework • Conceptual model • Aids in determining whether firms should pursue: • Internal development (build) • Enter a contract / strategic alliance (borrow) • Acquire new resources, capabilities, and competencies (buy)

8. Exhibit 9.1 Guiding Corporate Strategy: The Build-Borrow-or-Buy Framework Placeholder Jump to Appendix 2 long image description

9. The Main Issues in the Build-Borrow-or-Buy Framework • Relevancy • How relevant are existing internal resources to solving the resource gap? • Tradability • How tradable are the targeted resources that may be available externally? • Closeness • How close do you need to be to your external resource partner? • Integration • How well can you integrate the targeted firm should you determine you need to acquire the resource partner?

10. Relevancy • Are the firm’s internal resources high or low in relevance? • In relation to solving the resource gap • If high, the firm should develop internally. • Internal resources are relevant if: • They are similar to those the firm needs to develop. • They are superior to those of competitors in the targeted area. • Resources are relevant if they pass the VRIO Framework (from Chapter 4).

11. Tradability • The firm creates a contract. • Allows for the transfer of ownership • Allows for use of the resource • Short-term and long-term contracts are a way to borrow resources from another company. • Ex. Licensing and franchising • Example: biotech-pharma industry: • Producers use licensing agreements to transfer knowledge and technology.

12. Closeness • Can be achieved through integrated alliances • Equity alliances • Joint ventures • Also enables the borrowing of resources

13. Integration • Mergers and acquisitions are: • The most costly • The most complex • The most difficult to reverse strategic option • Examples of post-integration failure: • Daimler-Chrysler • AOL and Time Warner • HP and Autonomy • Bank of America and Merrill Lynch

14. Strategic Alliances

15. What are Strategic Alliances? • A voluntary arrangement between firms • Involves the sharing of: • Knowledge • Resources • Capabilities with the intent of developing: • Processes • Products • Services

16. How Do Strategic Alliances Assist Firms? • They may complement a firm’s value chain. • They may focus on similar value chain activities. • They enable: • Firm’s to achieve their goals faster • Lower cost • Fewer legal repercussions • An alliance qualifies as strategic if: • It has the potential to affect a firm’s competitive advantage

17. Why Do Firms Enter Strategic Alliances? • Strengthen competitive position • Enter new markets • Hedge against uncertainty • Access critical complementary assets • Learn new capabilities

18. Strengthen Competitive Position • Strategic alliances can help: • Change industry structure to the firm’s favor • Influence industry standards • Example: IBM & Apple • Entered a strategic alliance • Desired to strengthen their competitive position • In mobile computing and business productivity apps • Put competitive pressure on rivals such as Microsoft

19. Strategy Highlight 9.1 IBM and Apple: From Big Brother to Alliance Partner • IBM was a fierce competitor with Apple (‘80s). • Then Apple dominated • 2014: Apple & IBM form a strategic partnership • Both parties benefit. • Apple sold mostly to consumers, IBM to businesses. • They plan to collaborate on business apps.

20. Enter New Markets • Product markets • Service markets • Geographical markets • Governments such as Saudi Arabia or China may require that foreign firms have a local joint venture partner before doing business in their countries.

21. Hedge Against Uncertainty • Real-options perspective: • Approach to strategic decision making • Breaks down a larger investment decision into a set of smaller decisions • Staged sequentially over time • Allows firms to obtain information in stages

22. Access Critical Complementary Assets • Complementary assets such as: • Marketing • Manufacturing • After-sale service • Helps complete the value chain: • From upstream innovation to downstream commercialization

23. Learn New Capabilities • Firms are motivated by the desire to learn from their partners. • Co-opetition • Cooperation by competitors to achieve a strategic objective • Learning can take place at different rates. • The firm that learns more quickly is motivated to exit the alliance / reduce knowledge sharing. • Referred to as “learning races”

24. Governing Strategic Alliances • Non-Equity Alliances • Partnerships based on contracts • Examples: supply agreements, distribution agreements, and licensing agreements • Equity Alliances • One partner takes partial ownership in the other. • Joint Ventures • A standalone organization created and jointly owned by two or more parent companies

25. Exhibit 9.2 Key Characteristics of Different Alliance Types

26. Exhibit 9.3 Alliance Management Capability • The three phases of Alliance Management: • Partner selection and alliance formation • Alliance design and governance • Post-formation alliance management • Can lead to a competitive advantage

27. Partner Selection and Alliance Formation • The benefits must exceed the costs. • Five reasons for alliance formation: • To strengthen competitive position • To enter new markets • To hedge against uncertainty • To access critical complementary resources • To learn new capabilities • Partner compatibility & commitment are necessary.

28. Alliance Design and Governance • Possible governance mechanisms: • Non-equity contractual agreement • Equity alliances • Joint venture • Joining specialized complementary assets increases the likelihood that the alliance is governed hierarchically. • Inter-organization trust is critical.

29. Post-Formation Alliance Management • To create VRIO resource combinations: • Make relation-specific investments. • Establish knowledge-sharing routines. • Build interfirm trust. • Build capability through repeated experiences over time. • Repeated alliance exposure improves learning.

30. Exhibit 9.4 How to Make Alliances Work Jump to Appendix 3 long image description

31. Mergers and Acquisitions

32. Mergers and Acquisitions • Merger: • The joining of two independent companies • Forms a combined entity • Acquisition: • Purchase of one company by another • Can be friendly or unfriendly. • Hostile takeover: • The target company does not wish to be acquired.

33. Why Do Firms Merge? • Horizontal integration: • The process of merging with competitors • Leads to industry consolidation • Three main benefits: • Reduction in competitive intensity • Changes underlying industry structure in favor of surviving firms • Lower costs • Economies of scale • Increased differentiation • Fills product gaps

34. Exhibit 9.5 Sources of Value Creation and Costs in Horizontal Integration

35. Strategy Highlight 9.2 Food Fight: Kraft’s Hostile Takeover of Cadbury • In 2012, Kraft bought Cadbury for $20B • Cadbury was focused solely on candy & gum. • Cadbury had a mature distribution system overseas. • Kraft then restructured in 2012. • Separated grocery foods from snack foods • In 2015, Kraft merged with Heinz. • Is now the 5th largest food competitor in the world

36. Why Do Firms Acquire Other Firms? • To access new markets & distribution channels • To overcome entry barriers • To access new capabilities or competencies • To preempt rivals • Example: Facebook acquired: • Instagram (photo & video sharing) • WhatsApp (text messaging service) • Oculus (virtual reality headsets) • Example: Google acquired: • YouTube (video sharing) • Motorola (mobile technology) • Waze (interactive mobile maps)

37. M&A and Competitive Advantage • Benefits of mergers & acquisitions are often hard to achieve. • Anticipated synergies don’t materialize. • Other reasons to merge: • Principal-agent problems • The desire to overcome competitive disadvantage • Superior acquisition and integration capability

38. Principal – Agent Problems • Managers may have incentives to acquire. • Not for anticipated shareholder value appreciation • To build a larger empire • To receive more prestige, power, and pay • Managerial hubris: • A form of self-delusion • Managers convince themselves of their superior skills • Happens even if there’s clear evidence to the contrary

39. Implications for the Strategist

40. The Business Environment Is Constantly Changing • New opportunities come and go quickly. • Firms need to develop new resources, capabilities, or competencies. • Helps them take advantage of opportunities • Examples: • Traditional book publishers: offer online content • Bank institutions: offer online banking services • Food companies: offer organic and gluten free products

41. Firms Need to Grow To Survive & Prosper • Corporate strategy is critical to pursuing growth. • Firms must possess VRIO resources. • Firms must leverage existing resources. • Strategic alliances help execute corporate strategy.

42. Strategic Alliances and Acquisitions is a Strategic Tool • Should be managed at the corporate level • Helps harness spillovers between the different corporate development activities • To coordinate the firm’s portfolio of alliances • To leverage relationships • To successfully engage in mergers and acquisitions • Relational capability • The successful management of both strategic alliances and mergers and acquisitions

43. Chapter 9 Summary

44. Take Away Concepts (1 of 8) LO 9-1 Apply the build-borrow-or-buy framework to guide corporate strategy. • The build-borrow-or-buy framework provides a conceptual model that aids strategists in deciding whether to pursue internal development (build), enter a contract arrangement or strategic alliance (borrow), or acquire new resources, capabilities, and competencies (buy). • Firms that are able to learn how to select the right pathways to obtain new resources are more likely to gain and sustain a competitive advantage.

45. Take Away Concepts (2 of 8) LO 9-2 Define strategic alliances, and explain why they are important to implement corporate strategy and why firms enter into them. • Strategic alliances have the goal of sharing knowledge, resources, and capabilities to develop processes, products, or services. • An alliance qualifies as strategic if it has the potential to affect a firm’s competitive advantage by increasing value and/or lowering costs. • The most common reasons why firms enter alliances are to (1) strengthen competitive position, (2) enter new markets, (3) hedge against uncertainty, (4) access critical complementary resources, and (5) learn new capabilities.

46. Take Away Concepts (3 of 8) LO 9-3 Describe three alliance governance mechanisms and evaluate their pros and cons. • Alliances can be governed by the following mechanisms: contractual agreements for non-equity alliances, equity alliances, and joint ventures. • There are pros and cons of each alliance governance mechanism, shown in detail in Exhibit 9.2; with highlights as follows: • Non-equity alliance’s pros: flexible, fast, easy to get in and out; cons: weak ties, lack of trust/commitment. • Equity alliance’s pros: stronger ties, potential for trust/commitment, window into new technology (option value); cons: less flexible, slower, can entail significant investment. • Joint venture pros: strongest tie, trust/commitment most likely, may be required by institutional setting; cons: potentially long negotiations and significant investments, long-term solution, managers may have two reporting lines (two bosses).

47. Take Away Concepts (4 of 8) LO 9-4 Describe the three phases of alliance management and explain how an alliance management capability can lead to a competitive advantage. • An alliance management capability consists of a firm’s ability to effectively manage alliance-related tasks through three phases: (1) partner selection and alliance formation, (2) alliance design and governance, and (3) post-formation alliance management. • An alliance management capability can be a source of competitive advantage as better management of alliances leads to more likely superior performance. • Firms build a superior alliance management capability through “learning -by -doing” and by establishing a dedicated alliance function.

48. Take Away Concepts (5 of 8) LO 9-5 Differentiate between mergers and acquisitions, and explain why firms would use either to execute corporate strategy. • A merger describes the joining of two independent companies to form a combined entity. • An acquisition describes the purchase or takeover of one company by another. It can be friendly or hostile. • Although there is a distinction between mergers and acquisitions, many observers simply use the umbrella term “mergers and acquisitions,” or M&A. • Firms can use M&A activity for competitive advantage when they possess a superior relational capability, which is often built on superior alliance management capability.

49. Take Away Concepts (6 of 8) LO 9-6 Define horizontal integration and evaluate the advantages and disadvantages of this option to execute corporate-level strategy. • Horizontal integration is the process of merging with competitors, leading to industry consolidation. • As a corporate strategy, firms use horizontal integration to (1) reduce competitive intensity, (2) lower costs, and (3) increase differentiation.

50. Take Away Concepts (7 of 8) LO 9-7 Explain why firms engage in acquisitions. • Firms engage in acquisitions to (1) access new markets and distributions channels, (2) gain access to a new capability or competency, and (3) preempt rivals.