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CHAPTER 9

Corporate Strategy: Strategic Alliances,

Mergers and Acquisitions

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The AFI Strategy Framework

Exhibit 1.3 Jump to Appendix 1 long image description

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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.

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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.

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§9.1 How Firms Achieve Growth

Build

• Internal development

Borrow

• Enter a contract / strategic alliance

Buy

• Acquire new resources, capabilities, and competencies

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The Build‐Borrow‐or‐Buy Framework

Source: Adapted from L. Capron and W. Mitchell (2012), Build, Borrow, or Buy: Solving the Growth Dilemma (Boston, MA: Harvard Business Review Press). Exhibit 9.1

Jump to Appendix 2 long image description

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Main Issues in the Build‐Borrow‐or‐Buy Framework

• Relevancy – How relevant are the firm’s 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?

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Relevance

Are the firm’s internal resources highly relevant?

• If so, the firm should develop internally.

Internal resources are relevant if:

• They are similar to those the firm needs.

• They are superior to those of competitors.

• They pass the VRIO Framework.

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Tradability

The firm creates a contract to:

• Transfer ownership

• Allow use of the resource

Contracts support borrowing resources

• Ex. Licensing and franchising

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Closeness

M&As are complex and costly.

• Used only when extreme closeness is needed

Closeness can be achieved through alliances.

• Equity alliances

• Joint ventures

• This enables resource borrowing

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Integration

Conditions for integrating the target firm:

• Low relevancy

• Low tradability

• High need for closeness

Consider other options first

• Examples of post integration failures abound

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§9.2 Strategic Alliances

What are strategic alliances?

• A voluntary arrangement between firms

• Involves the sharing of knowledge, resources, capabilities

• To develop processes, products, services

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Why Strategic Alliances Are Attractive

Firm goals can be achieved faster and at lower costs.

• Complement or augment the value chain

• Less complex legally

• Can help a firm gain and sustain a competitive advantage

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Why Do Firms Enter Strategic Alliances? (1 of 2)

Strengthen competitive position

• Change industry structure, influence standards

Enter new markets

• Product, service, or geographic markets

Hedge against uncertainty

• Real options perspective

• Breaks down investment into smaller decisions

• Staged sequentially over time

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Why Do Firms Enter Strategic Alliances? (2 of 2)

Access critical complementary assets

• Marketing, manufacturing, after‐sale service

• Helps complete the value chain

Learn new capabilities

• Co‐opetition: cooperation among competitors

• Learning races: to exit the alliance quickly

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Strategic Alliances Can Be Governed By:

Non‐Equity Alliances

• Partnerships based on contracts

Equity Alliances

• One partner takes partial ownership in the other.

Joint Ventures

• A standalone organization

• Jointly owned by two or more companies

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Key Characteristics of Different Alliance Types

Alliance Type Governance Mechanism

Frequency Type of

Knowledge Exchanged

Pros Cons Examples

Non-equity (supply, licensing, and distribution agreements)

Contract Most common

Explicit • Flexible • Fast • Easy to

initiate and terminate

• Weak tie • Lack of trust

and commitment

• Genentech–Lilly (exclusive) licensing agreement for Humulin

• Microsoft–IBM (nonexclusive) licensing agreement for MS-DOS

Equity (purchase of an equity stake or corporate venture capital, CVC investment)

Equity investment

Less common than non-equity alliances, but more common than joint ventures

Explicit; exchange of tacit knowledge possible

• Stronger tie • Trust and

commitment can emerge

• Window into new technology (option value)

• Less flexible • Slower • Can entail

significant investments

• Renault–Nissan alliance based on cross equity holdings, with Renault owning 44.4% in Nissan; and Nissan owning 15% in Renault

• Rocheʼs equity investment in Genentech (prior to full integration)

Joint venture (JV)

Creation of new entity by two or more parent firms

Least common

Both tacit and explicit knowledge exchanged

• Strongest tie • Trust and

commitment likely to emerge

• May be required by institutional setting

• Can entail long negotiations and significant investments

• Long-term solution

• JV managers have double reporting lines (2 bosses)

• Hulu, owned by NBC, Fox, and Disney-ABC

• Dow Corning, owned by Dow Chemical and Corning

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Three Alliance‐Related Tasks Must Be Managed Concurrently

Exhibit 9.3 Jump to Appendix 3 for long description

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Partner Selection and Alliance Formation

Benefits must exceed the costs.

Five reasons for alliance formation:

1. Strengthen competitive position

2. Enter new markets

3. Hedge against uncertainty

4. Access critical complementary resources

5. Learn new capabilities

Partners must be compatible and committed.

• Partner compatibility captures aspects of cultural fit between different firms.

• Partner commitment concerns the willingness to make available necessary resources and to accept short‐term sacrifices to ensure long‐term rewards.

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Alliance Design and Governance

Governance mechanisms:

• Contractual agreement

• Equity alliances

• Joint venture

Inter‐organizational trust is critical.

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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

How to Make Alliances Work

Exhibit 9.4

Source: Adapted from J.H. Dyer and H. Singh (1998), “The relational view: Cooperative strategy and the sources of intraorganizational advantage,” Academy of Management Review 23: 660–679.

Jump to Appendix 4 long image description

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§9.3 Mergers and Acquisitions

Merger:

• The joining of two independent companies

• Forms a combined entity

Acquisition:

• Purchase of one company by another

• Can be hostile

• When the target firm does not wish to be acquired

Why Do Firms Merge?

Horizontal integration:

• Merging/acquiring a competitor

• At the same stage of the value chain

Three main benefits:

1. Reduction in competitive intensity

2. Lower costs

3. Increased differentiation

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Sources of Value Creation and Costs in Horizontal Integration

Corporate Strategy Sources of Value Creation (V)

Sources of Costs (C)

• Horizontal integration through M&A

• Reduction in competitive intensity

• Lower costs • Increased differentiation

• Integration failure • Reduced flexibility • Increased potential for

legal repercussions

Exhibit 9.5

Why Do Firms Merge/Acquire Other Firms?

To access new markets & distribution channels

• To overcome entry barriers

• To access new capabilities or competencies

To preempt rivals

• Facebook and Google are famous for this

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M&A and Competitive Advantage

In most cases mergers and acquisitions:

• Do not create competitive advantage

• Do not realize anticipated synergies

Why mergers take place:

• Principal‐agent problems

• The desire to overcome competitive disadvantage

• Superior acquisition and integration capability

Principal – Agent Problems

Managers incentives to acquire:

• To build a larger empire

• To receive prestige, power, and pay

Managerial hubris:

• A form of self‐delusion

• Managers convince themselves of their superior skills

• They see themselves as exceptions to the rule