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

9–2

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

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

EXHIBIT 9.1 Global Users of Facebook and MySpace

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

9–5

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

9–7

EXHIBIT 9.2Source of Value Creation and Costs

in Horizontal Integration

Benefits Drawbacks

9–8

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

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

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

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.

9–13

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

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

• 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.

9–18

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.

9-20

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

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

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

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

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

9–26

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

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.

9–29

EXHIBIT 9.6 Alliance Management Capability

9–30

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

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

EXHIBIT 9.7 How to Make Alliances Work

9–33

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

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

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

EXHIBIT 9.8 Firms Embedded in Strategic Networks

A hypothetical strategic network. Firm B is in a key position - knowledge broker 9–37

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