9CHAPTER

McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

Corporate Strategy: Acquisitions, Alliances,

and Networks

Part 2 Strategy Formulation

LO 9-1LO 9-1 Differentiate between mergers and acquisitions, and explain why firms would use either as a vehicle for corporate strategy.

LO 9-2 Define 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.

Chapter Case 9 Chapter Case 9 Facebook: From Dorm Room to

Dominant Social Network

• 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

Facebook: From Dorm Room to Dominant Social Network

• Facebook: business model Drive volume (& not profits) Attract top software developers for apps

• What are the key issues in the opening case?

• New strategic intent: Maximize the benefits from network effects

Online marketing

Winner takes all

Implications for alliances and networks

Chapter Case 9 Chapter Case 9

EXHIBIT 9.1 Global Users of Facebook and MySpace

Facebook passes MySpace on number of users in 2008 and continues exponential growth

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

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

EXHIBIT 9.2Source of Value Creation and Costs in Horizontal Integration

Benefits Drawbacks

Reduction in Competitive Intensity

• Changes underlying industry structure Taking out excessive capacity from rivals Increased industry consolidation

Example: U.S. airlines in recent years

• Increasing bargaining power vis-à-vis suppliers and buyers

• Stable industry and more profits

• Usually need government’s approval Example: FTC rejected Office Depot & Staples merger

Horizontal Integration: Lower Costs

• How? Through economies of scale Enhancing economic value creation

• Crucial to the industries with high fixed costs Example: pharmaceutical industry Large sales force = fixed cost

Need $1billion in drug revenues to cover these costs

1–12

STRATEGY HIGHLIGHT 9.1STRATEGY HIGHLIGHT 9.1 Food Fight: Kraft Hostile Takeover 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

Horizontal Integration

• Increased differentiation Strengthen competitive positions

Differentiation of products and services– Example: Oracle buys PeopleSoft ($10B in 2005)

• Joined enterprise software with HR management software

• Access to new markets and distribution channel Enter new markets by M&A

– Ex: Kraft buys Cadbury• New distribution in emerging markets & domestically

LO 9-1LO 9-1 Differentiate between mergers and acquisitions, and explain why firms would use either as a vehicle for corporate strategy.

LO 9-2 Define 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.

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?

1. Overcome competitive disadvantage

2. Superior acquisition and integration capability

3. Principal–agent problems

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

• Desire to Overcome Competitive Disadvantage Adidas acquired Reebok in 2006

Benefits from economies of scale and scope Compete more effectively with #1 Nike

• Superior Acquisition and Integration Capability

• Some firms have superior M&A abilities They identify, acquire, and integrate target companies

Example: Cisco Systems • Sought complementary assets

• Bought over 130 firms since 2001, including large firms: Linksys, Scientific Atlanta, & WebEx

Mergers and Acquisitions

Mergers and Acquisitions

• Principal–agent problems Managers have incentives to diversify through M&As

to receive more prestige, power, and pay. Not for shareholder value appreciation This is principal—agent problem

• Managerial hubris Self-delusion

Beliefs in their own capability despite evidence to the contrary

“Exception to the rule” Example Quaker Oats purchase of Snapple Sony purchase of Columbia Pictures

LO 9-1LO 9-1 Differentiate between mergers and acquisitions, and explain why firms would use either as a vehicle for corporate strategy.

LO 9-2 Define 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.

Strategic Alliances: Causes and Consequences of

Partnering• Strategic alliances: voluntary arrangements between firms Sharing knowledge, resources, and capabilities Leading to gaining and sustaining competitive

advantage

• Relational view of competitive advantage VRI resources are embedded in alliances

(VRIO framework from Chapter 4)

• HP’s alliance with DreamWorks SKG Resulted in Halo Collaboration conferencing

EXHIBIT 9.4 Number of R&D Alliances

Explosive growth since the 1980s yields faster products at lower costs and aids globalization.

1–22

STRATEGY HIGHLIGHT 9.2STRATEGY HIGHLIGHT 9.2 Strategic Alliances to Challenge Amazon

• 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

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

1–24

STRATEGY HIGHLIGHT 9.3STRATEGY HIGHLIGHT 9.3 Pixar and Disney: From Alliance to

Acquisition• Pixar and Disney

• Early strategic alliance

• Successful products: Toy Story, Monsters, Inc., Finding Nemo, etc.

• In 2005, Disney acquired Pixar for $7.4 billion

• Steve Jobs became the largest shareholder of Disney

• Early alliance serves as a vehicle to match two parties’ complementary assets and eventually led to the acquisition

• Disney later acquired Marvel Entertainment, which made Spiderman, Iron Man, The Incredible Hulk…etc. Pixar Video

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 Stand-alone organization owned by 2 or more firms

Non-Equity Alliances

• Most common forms of contracts Supply agreements Distribution agreements Licensing agreements

• Vertical strategic alliances Firms tend to share explicit knowledge that are codified Licensing agreements, partners exchange codified

knowledge regularly Ex: Genentech & Eli Lilly

• Genentech R&D focused

• Eli Lilly manufacturing & FDA approvals

Equity Alliances

• At least one partner takes partial ownership position Stronger commitment toward the relationship

• Allow the sharing of tacit knowledge Tacit knowledge concerns the “know how”

• Partners exchange personnel to acquire tacit knowledge 1984 Toyota + GM = NUMMI

(New United Motor Manufacturing Inc.)

2010 Toyota + Tesla to use the NUMMI plant

• Corporate venture capital is another equity source Established firms invest in new startups

• Tends to produce stronger ties and greater trust

Joint Ventures

• Created and owned by two or more companies Hulu owned by NBC, ABC, and Fox

• Long-term commitment Exchange both tacit and explicit knowledge Frequent interaction of personnel

• Stepping stone toward full integration of the partnership

• “Try before you buy” concept

• Used to enter foreign markets

• Least common of the 3 types of alliances

EXHIBIT 9.5 Key Characteristics of Different Alliance Types

LO 9-1LO 9-1 Differentiate between mergers and acquisitions, and explain why firms would use either as a vehicle for corporate strategy.

LO 9-2 Define 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.

Alliance Management Capability

• A firm’s ability to effectively manage three alliance related tasks concurrently.

30 to 70% of all alliances yield disappointing results

1. Partner selection and alliance formation

2. Alliance design and governance

3. Post-formation alliance management

Alliance Management Capability

• Partner selection and alliance formation Ascertain that expected benefits exceeds costs Must select the best possible alliance partner

Partner compatibility Partner commitment

– Willingness to share resources & long-term view

• Alliance design and governance Choose and agree upon governance structure

Non-equity contractual agreement Equity alliances Joint venture

Inter-organizational trust is critical

EXHIBIT 9.6 Alliance Management Capability

Alliance Management Capability

• Post-formation alliance management

• To effectively manage the ongoing relationship Tips:

Make relationship-specific investments Establish knowledge-sharing routines Build interfirm trust

Example: HP’s dense network of alliances vs. DEC

• Dedicated alliance function Coordinate alliance-related tasks – at corporate level Knowledge base about how to manage alliance

Ex: Eli Lilly is a clear leader in alliance management

Best to develop a relational capability

EXHIBIT 9.7 How to Make Alliances Work

LO 9-1LO 9-1 Differentiate between mergers and acquisitions, and explain why firms would use either as a vehicle for corporate strategy.

LO 9-2 Define 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.

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

Analyzing Strategic Networks

• Enable us to understand the benefits and costs of a network Quality of the tie: strong or weak?

• Firm’s position in a network Network centrality Knowledge broker

Ex: IDEO design consultancy

Structural holes

• Small-world phenomenon Network in local cluster High degree of centrality of each firm

EXHIBIT 9.8 Firms Embedded in Strategic Networks

A hypothetical strategic network. Firm B is in a key position - knowledge broker

1–40

STRATEGY HIGHLIGHT 9.4STRATEGY HIGHLIGHT 9.4 When Strategic Networks Become Dysfunctional

• Deregulation of EU telecoms, competitive intensity rises

Swedish Telia and Dutch KPN form a JV called Unisource

• Unisource became a global strategic network

25 telecom companies in 11 countries

• The flexibility and autonomy of smaller firms in the network has been severely restricted by large partners

Large firms such as AT&T could dominate the network

• Members exited the network and it collapsed

Take-Away Concepts

LO 9-1 Differentiate between mergers and acquisitions and explain why firms would use either as a vehicle for corporate strategy

A merger describes the joining of two independent companies to form a combined entity.

An acquisition describes the purchase or (hostile) takeover of one company by another.

The distinction between mergers and acquisitions (M&A) can be blurry. Many observers simply use the umbrella term M&A to describe horizontal integration.

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.

LO 9-2 Define horizontal integration and evaluate the advantages and disadvantages of this corporate-level strategy.

Horizontal integration is the process of acquiring and merging with competitors, leading to industry consolidation.

As a corporate strategy, firms use horizontal integration to (1) reduce competitive intensity, (2) lower costs, (3) increase differentiation, and (4) access new markets and distribution channels.

Take-Away Concepts

LO 9-3 Evaluate whether mergers and acquisitions lead to competitive advantage.

Most mergers and acquisitions destroy shareholder value because anticipated synergies never materialize.

If there is any value creation in M&As, it generally accrues to the shareholders of the firm that is taken over (the acquiree), because acquirers often pay a premium when buying the target company.

M&A are a popular corporate-level strategy for three reasons: (1) the desire to overcome competitive disadvantage, (2) the quest for superior acquisition and integration capability, and (3) because of principal–agent problems.

LO 9-4 Define strategic alliances and explain why they are important corporate strategy vehicles, and why firms enter into them.

Strategic alliances have the goal of sharing knowledge, resources, and capabilities in order 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 a new market, (3) hedge against uncertainty, (4) access critical complementary resources, and (5) learn new capabilities.

Take-Away Concepts

LO 9-5 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.

Exhibit 9.5 presents the pros and cons of each alliance governance mechanism.

LO 9-6 Describe the three phases of alliance management, and explain how an alliance management capability can lead to a competitive advantage.

Alliance management capability can be a source of competitive advantage.

Alliance management capability consists of a firm’s ability to effectively manage three alliance-related tasks concurrently: (1) partner selection and alliance formation, (2) alliance design and governance, and (3) post-formation alliance management.

Firms build a superior alliance management capability through “learning-by-doing” and by establishing a dedicated alliance function.

Take-Away Concepts

LO 9-7 Define strategic networks and evaluate the advantages and disadvantages of different network positions.

A strategic network is an alliance of several firms to pursue a common purpose. It is a social structure of multiple organizations (network nodes) and the links among the nodes (network ties).

A firm with a high degree of centrality in a strategic network is connected to many other firms, provides social capital to the central firm, and is trusted in the closely connected network cluster (Firm A in Exhibit 9.8).

A network broker firm connects different network clusters (Firm B in Exhibit 9.8). The broker often spans structural holes, which strengthens its position, especially in a small-world network.

A firm not connected to any other firm in a network is an isolate (Firm E in Exhibit 9.8). Given its lack of connections, an isolate frequently is at a competitive disadvantage.