CHAPTER Corporate Strategy: Acquisitions, Alliances, and Networks McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc.
Download ReportTranscript CHAPTER Corporate Strategy: Acquisitions, Alliances, and Networks McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc.
McGraw-Hill/Irwin
CHAPTER
9
Corporate Strategy: Acquisitions, Alliances, and Networks
Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.
Part 2 Strategy Formulation
LO 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
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
Chapter Case 9
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
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 9.2
Source 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
STRATEGY 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
1 –12
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 9-1
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
Mergers and Acquisitions
•
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
•
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 9-1
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
.
STRATEGY HIGHLIGHT 9.2
Strategic Alliances Challenge Amazon to
•
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
1 –22
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
STRATEGY 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
1 –24
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 9-1 LO 9-2 LO 9-3 LO 9-4 LO 9-5 LO 9-6 LO 9-7
Differentiate between mergers and acquisitions, and explain why firms would use either as a vehicle for corporate strategy.
Define horizontal integration and evaluate the advantages and disadvantages of this corporate level strategy.
Evaluate whether mergers and acquisitions lead to competitive advantage.
Define strategic alliances, and explain why they are important corporate strategy vehicles and why firms enter into them.
Describe three alliance governance mechanisms and evaluate their pros and cons.
Describe the three phases of alliance management, and explain how an alliance management capability can lead to a competitive advantage.
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 9-1 LO 9-2 LO 9-3 LO 9-4 LO 9-5 LO 9-6 LO 9-7
Differentiate between mergers and acquisitions, and explain why firms would use either as a vehicle for corporate strategy.
Define horizontal integration and evaluate the advantages and disadvantages of this corporate level strategy.
Evaluate whether mergers and acquisitions lead to competitive advantage.
Define strategic alliances, and explain why they are important corporate strategy vehicles and why firms enter into them.
Describe three alliance governance mechanisms and evaluate their pros and cons.
Describe the three phases of alliance management, and explain how an alliance management capability can lead to a competitive advantage.
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
1 st 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
STRATEGY 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
1 –40
Take-Away Concepts
LO 9-1 LO 9-2 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.
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.
LO 9-3
Take-Away Concepts
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.