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Chapter 9

Corporate Strategy: Strategic Alliances, Mergers and Acquisitions

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The AFI Strategy Framework

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Learning Objectives

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

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

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

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

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

Explain why firms engage in acquisitions.

Evaluate whether mergers and acquisitions lead to competitive advantage.

How was built

What you had was a combination of Mergers and Acquisitions, as well as Joint Ventures to build this Fortune 50 company.

How Firms Achieve Growth

A strategist has three options to drive firm growth:

Organic growth through internal development

External growth through alliances

External growth through acquisition

The build-borrow-or-buy framework:

Aids strategists in deciding whether to pursue internal development (build)

Enter a contract arrangement or strategic alliance (borrow)

Acquire new resources, capabilities, and competencies (buy)

When acquiring a firm, you buy an entire “resource bundle,” not just a specific resource. This resource bundle, if obeying VRIO principles and successfully integrated, can then form the basis of competitive advantage.

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

Main Issues in the Build-Borrow-Buy Framework

Relevancy:

Can the firm’s existing internal resources solve 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 into your firm?

As shown in Exhibit 9.1, the answers to these questions lead to a recommended action or the next question.

Relevance/Tradability

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

Tradability…The firm creates a contract to:

Transfer ownership

Allow use of the resource

Contracts support borrowing resources

Ex. Licensing and franchising

If a resource is highly tradable, then the resource should be borrowed via a licensing agreement or other contractual agreement. If the resource in question is not easily tradable, then the firm needs to consider either a deeper strategic alliance through an equity alliance or a joint venture, or an outright acquisition

Closeness/Integration

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

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

Mergers and acquisitions are the most costly, complex, and difficult to reverse strategic option. This implies that only if extreme closeness to the resource partner is necessary to understand and obtain its underlying knowledge should M&A be considered the buy option. Regardless, the firm should always first consider borrowing the necessary resources through integrated strategic alliances before looking at M&A.

Multibillion-dollar failures include the Daimler-Chrysler integration, AOL and Time Warner, HP and Autonomy, and Bank of America and Merrill Lynch. More than cultural differences were involved in Microsoft’s 2015 decision to write down $7.6 billion in losses (or more than 80 percent) on its $9.4 billion acquisition of Nokia some 15 months earlier.

Strategic Alliances

9-‹#›

A strategic alliance has the potential to help a firm gain and sustain a competitive advantage when it joins together resources and knowledge in a combination that obeys the VRIO principles.

Next slide explains why SA’s are attractive.

STRATEGIC ALLIANCE

STRATEGIC CRITERIA

RATIONAL VIEW OF COMPETITIVE ADVANTAGE

A voluntary arrangement between firms that involves the sharing of knowledge, resources, and capabilities with the intent of developing processes, products, or services

An alliance qualifies as strategic only if it has the potential to affect a firm’s competitive advantage.

Framework where critical resources and capabilities are embedded in strategic alliances that span firm boundaries

Why Do Firms Enter Strategic Alliances?

1. Strengthen competitive position

Change industry structure, influence standards

2. Enter new markets

Product, service, or geographic markets

3. Hedge against uncertainty

Real options perspective

Breaks down investment into smaller decisions

Staged sequentially over time

4. Access critical complementary assets

Marketing, manufacturing, after-sale service

Helps complete the value chain

5. Learn new capabilities

Co-opetition: cooperation among competitors

Learning curve races: getting up to speed as fast as possible to exit the alliance quickly

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

Valuable

Rare

Difficult to imitate

Organized to capture the value

In support of this perspective, over 80 percent of Fortune 1000 CEOs indicated in a survey that more than one-quarter of their firm’s revenues were derived from strategic alliances.

Strategic Alliances with

Tesla alliance with Panasonic was to gain access to critical complementary assets…batteries

Tesla alliance with Daimler was to strengthen competitive position thru cash and engineering expertise. Daimler wanted to hedge against uncertainty of all-electric cars.

Tesla alliance with Toyota provided a manufacturing plant and expertise thru NUMMI site.

Strategic Alliances Can Be Governed By:

Non-Equity Alliances:

Partnerships based on contracts.

IBM/Microsoft licensing agreement

Equity Alliances:

One partner takes partial ownership in the other.

GM invested $500M in Lyft

Joint Ventures:

A standalone organization which is jointly owned by two or more companies.

Hulu is jointly owned by Comcast and Disney

Exhibit 9.2 provides an overview of the key characteristics of the three alliance types, including their advantages and disadvantages.

Examples of non-equity alliances: supply agreements, distribution agreements, and licensing agreements

Alliance Management Capability

Exhibit 9.3

Partner Selection and Alliance Formation

Expected benefits must exceed the costs.

Five reasons for alliance formation:

Strengthen competitive position.

Enter new markets.

Hedge against uncertainty.

Access critical complementary resources.

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.

GM invested $500M into Lyft

GM and Waymo partnerships strengthen competitive position of Lyft compared to Uber for self driving cars

GM taps into the 2nd largest mobile transportation network globally

Lyft is number 2, so GM is hitching their wagon to them

Lyft may need to manage a fleet of cars that they may own, GM has that experience with rentals.

Alliance Design and Governance

Governance mechanisms:

Contractual agreement.

Equity alliances.

Joint venture.

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

In a study of over 640 alliances, researchers found that the joining of specialized complementary assets increases the likelihood that the alliance is governed hierarchically. This effect is stronger in the presence of uncertainties concerning the alliance partner as well as the envisioned tasks.

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.

That said, it is still very difficult and cultural differences remain the biggest hurdle.

Mergers and Acquisitions

Merger:

The joining of two independent companies.

Forms a combined entity.

Tends to be friendly. (Bell Atlantic/GTE, “merger of equals”)

Acquisition:

Purchase of one company by another.

Can be friendly…Disney buying Pixar

Can be unfriendly…RJ Reynolds buying Nabisco.

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

Ernst and Whinney merged with Arthur Young, GTE/Bell Atlantic Mergers of equals

RJReynolds tobacco buys Nabisco, Barbarians at the gate. LBO.

Why Do Firms Merge?

Horizontal integration is the process of merging with a competitor, (who’s at same stage of the value chain)

HP buys Compaq in 2002.

Pfizer buys Wyeth in 2009.

Live Nation buys Ticketmaster in 2010.

Sirius buys XM in 2007

Three main benefits:

Reduction in competitive intensity

Lower costs

Increased differentiation

In particular, competitors in the same industry such as airlines, banking, telecommunications, pharmaceuticals, or health insurance frequently merge to respond to changes in their external environment and to change the underlying industry structure in their favor.

Why Do Firms Acquire Other Firms?

To access new markets & distribution channels.

To overcome entry barriers which allows you access to a new customer set.

Kraft bought Cadbury for entry into European markets via their distribution network

Access to a new capability or competency

Intel bought Altera to gain access to mobile chipsets

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).

M&A and Competitive Advantage

Many M&As actually destroy shareholder value! (Due to anticipated synergies never materializing)

Value creation generally accrues to the shareholders of the firm that is taken over, (acquirers often pay a premium when buying the target company).

M&A’s are a popular vehicle for corporate-level strategy implementation for three reasons:

because of principal–agent problems

the desire to overcome competitive disadvantage

the quest for superior acquisition and integration capability.

Examples of mergers that destroyed significant shareholder value (as measured one year after the deal closed) include: Bayer - Monsanto (down 47 percent); Bank of America - Countrywide (down 45 percent); Alcatel - Lucent (down 39 percent); AOL - Time Warner (down 37 percent), and Sprint - Nextel (down 30 percent).

Motives for Mergers and Acquisitions

Managerial

C-level compensation based on size vs. profitability

C-level ego, (MA confers power and celebrity)

FOMO, imitation, everyone else is doing it

Financial

Stock market inefficiencies, undervalued or overvalued manipulation. (Berkshire Hathaway/Heinz)

Tax savings by moving HQ offshore (Burger King/Tim Hortons)

Strategic

Horizontal: EOS, competition and market power, (Sirius/XM)

Geographic: access to overseas market, (Kraft/Cadbury)

Vertical: acquire a supplier or customer, (Apple/Corning)

Diversification: enter a new area of business, (Kering/Puma)

BH saw that Heinz was undervalued and bought to help grow the business

BK moved HQ to Canada for better taxes than UK

Sirius bought out the only other competitor of Satellite based radio.

Kraft bought Cadbury Candies solely for European distribution channel

Apple needs Corning for Gorilla glass, (largest investor)

Kering owns various luxury goods brands, including Gucci, Yves Saint Laurent, Balenciaga, Alexander McQueen, Bottega Veneta, Boucheron and Brioni, as well as Puma and Volcom in its Sport & Lifestyle portfolio.

Principal-Agent Problems with M&A

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

Quaker Oats Co. acquired Snapple because its managers thought Snapple was another Gatorade, which was a successful previous acquisition. The difference was that Gatorade had been a standalone company and was easily integrated, but Snapple relied on a decentralized network of independent distributors and retailers who did not want Snapple to be taken over and who made it difficult and costly for Quaker Oats to integrate Snapple. The acquisition failed—and Quaker Oats itself was taken over by PepsiCo. Snapple was spun out and eventually ended up being part of the Dr. Pepper Snapple Group.

Small Group Exercise

End of Main Content

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