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Chapter 9 Corporate Strategy: Strategic Alliances, Mergers and Acquisitions

Learning Objectives 1. Apply the build-borrow-or-buy framework to guide corporate strategy.

2. Define strategic alliances, and explain why they are important to implement corporate strategy and why firms enter into them.

3. Describe three alliance governance mechanisms and evaluate their pros and cons.

4. Describe the three phases of alliance management and explain how an alliance management capability can lead to a competitive advantage.

5. Differentiate between mergers and acquisitions, and explain why firms would use either to execute corporate strategy.

6. Define horizontal integration and evaluate the advantages and disadvantages of this option to execute corporate-level strategy.

7. Explain why firms engage in acquisitions.

8. Evaluate whether mergers and acquisitions lead to competitive advantage.

How Firms Achieve Growth

Build:

• Internal organic growth through development.

Borrow:

• External growth through a contract / strategic alliance.

Buy:

• External growth through acquiring new resources,

capabilities, and competencies.

Guiding Corporate Strategy: The Build-Borrow- or-Buy Framework

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

Access the text alternate for slide image.

Main Issues in the Build-Borrow-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 to acquire?

Relevance

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.

Are the firm’s internal resources highly relevant?

• If so, the firm should develop internally.

Tradability

The firm creates a contract to:

• Transfer ownership.

• Allow use of the resource.

Contracts support borrowing resources:

• Ex. Licensing and franchising, or contracts.

Closeness

Closeness can be achieved through alliances

• Equity alliances

• Joint ventures

• This enables resource borrowing

M&As are complex and costly

• Used only when extreme closeness is needed

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.

What are Strategic Alliances?

A voluntary arrangement between firms

Involves the sharing of:

• Knowledge.

• Resources.

• Capabilities.

To develop:

• Processes, products, services.

Why Do Firms Enter Strategic Alliances?

Strengthen competitive position.

Enter new markets.

Hedge against uncertainty.

Access critical complementary assets.

Learn new capabilities.

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.

Alliance Management Capability

Exhibit 9.3

Partner Selection and Alliance Formation

Expected 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.

Alliance Design and Governance

Governance mechanisms:

• Contractual agreement.

• Equity alliances.

• Joint venture.

Inter-organizational trust is a critical dimension of alliance success.

Post Formation Alliance Management

To be a source of competitive advantage, the

partnership has 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. Access the text alternate for slide image.

Mergers and Acquisitions

Merger:

• The joining of two independent companies.

• Forms a combined entity.

• Tends to be friendly.

Acquisition:

• Purchase of one company by another.

• Can be friendly or unfriendly.

• Considered a hostile takeover when the target firm does not wish to be acquired.

Why Do Firms Merge?

Horizontal integration:

• The process of merging with a competitor.

• Occurs at the same stage of the value chain.

Three main benefits:

1. Reduction in competitive intensity.

2. Lower costs.

3. Increased differentiation.

Why Do Firms Acquire Other Firms?

To access new markets & distribution channels.

• To overcome entry barriers.

• To access new capabilities or competencies.

Access to a new capability or competency.

To preempt rivals.

• Facebook and Google are famous for this.

M&A and Competitive Advantage

In most cases mergers and acquisitions:

• Do not create competitive advantage.

• Do not realize anticipated synergies.

• Result in destroyed shareholder value.

Why mergers take place:

• Principal-agent problems.

• The desire to overcome competitive disadvantage.

• Superior acquisition and integration capability.

Principal-Agent Problems with M&A

Managers may have personal incentives to acquire:

• To build a larger empire.

• To receive prestige, power, and higher pay.

Managerial hubris:

• A form of self-delusion.

• May lead to ill-fated business deals.

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