Corporate Strategy: Acquisitions, Alliances, and Networks
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Transcript of Corporate Strategy: Acquisitions, Alliances, and Networks
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9CHAPTER
McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.
Corporate Strategy: Acquisitions, Alliances,
and Networks
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Part 2 Strategy Formulation
9–2
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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.
9–3
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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
• Implications for alliances and networks
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EXHIBIT 9.1 Global Users of Facebook and MySpace
Facebook passes MySpace on number of users in 2008 and continues exponential growth
9–5
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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
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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
9–7
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EXHIBIT 9.2Source of Value Creation and Costs
in Horizontal Integration
Benefits Drawbacks
9–8
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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
9–9
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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
9–10
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1–11
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
9–11
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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
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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.
9–13
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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
9–14
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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 9–15
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• 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
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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
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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.
9–18
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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
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EXHIBIT 9.4 Number of R&D Alliances
Explosive growth since the 1980s yields faster products at lower costs and aids globalization.
9-20
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1–21
STRATEGY HIGHLIGHT 9.2STRATEGY HIGHLIGHT 9.2Strategic 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
9–21
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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
9–22
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1–23
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
9–23
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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
9–24
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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
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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
9–26
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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 9–27
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EXHIBIT 9.5 Key Characteristics of Different Alliance Types
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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.
9–29
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EXHIBIT 9.6 Alliance Management Capability
9–30
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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 critical9–31
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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
9–32
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EXHIBIT 9.7 How to Make Alliances Work
9–33
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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.
9–34
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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
9–35
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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
9–36
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EXHIBIT 9.8 Firms Embedded in Strategic Networks
A hypothetical strategic network. Firm B is in a key position - knowledge broker 9–37
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1–38
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
9–38