Exam II Review: Transaction Costs, Vertical Integration, Diversification, Alliances, M&A
M&A and Competitive Advantage
Most M&As do not create competitive advantage, realize synergies, or add shareholder value
Forward Vertical Integration
Owning activities in industries closer to the end customer
Backward Vertical Integration
Owning activities in industries further from the end customer
Fully Vertically Integrated
Participating in every stage of the industry value chain
Acquisition Integration
Post-deal work includes asset rationalization, activity integration, and acculturation for success
Tradability
Refers to ease of obtaining and using resources from another firm, influencing alliance type
Restructuring
Reorganizing and divesting to refocus a company's core competencies
Integration
Resource provider integration conditions: low relevancy, tradability, high need for closeness, and integration ability
Desired Closeness to Resource Provider
Achieved through equity alliances or joint ventures, impacting resource integration
BCG Growth-Share Matrix
An old-school technique for guiding restructuring decisions
Core Competence-Market Matrix
Assessing how core competencies can be leveraged into new markets
How to do M&A right?
Critical self-assessment, willingness to walk away, rigorous post-acquisition reviews, independence from bankers' advice
Synergy Value
Difference between expected benefits and acquisition price; includes cost savings and revenue enhancements
Why so many M&As?
Driven by miscalculations, irrational exuberance, commitment escalation, principal-agent problems
Diversification
Entering new businesses not in the existing business's industry value chain
Product-Resource Matrix
Evaluating resource-market match using the VRIO framework
Build-Borrow-or-Buy Framework
Factors considered: internal resource relevance, tradability, closeness to resource partner, integration ability
Acquisitions: Benefits and Costs
Fast access to resources, competitor removal are benefits; premium, integration challenges are costs
Vertical Integration
Firm's ownership of production inputs or distribution channels in value chain
Make, Borrow, or Buy Continuum
Firms achieve growth through Build (organic), Buy (acquisitions), Borrow (partnerships)
Vertically Disintegrated
Focusing only on the core stage of the value chain, outsourcing the rest
Relevance
Internal resources are relevant if similar or superior to competitors; determines internal development or external growth
Managing Alliances
Involves creating value, governance, and sharing value; requires trust, defined roles, and resource investment
Types of Alliances
Long-term contracts, Equity Alliances, Joint Ventures differ in ownership and structure
Mergers and Acquisitions
Merger joins two firms forming a new entity; Acquisition involves purchasing another firm, can be friendly or hostile
Diversification Mode
Modes firms use to diversify: Internal Development, Alliances, Non-Equity, Equity, Joint Venture, M&A
External Transaction Costs
Costs between a firm and other entities, like negotiating contracts
Internal Transaction Costs
Costs within a firm, like monitoring employee performance
Taper Integration
Vertical integration with reliance on outside firms for supplies or distribution
Strategic Alliances
Voluntary arrangements sharing knowledge, resources, capabilities to develop processes, products, services
Miscalculations in M&As
Common overestimations of synergy, integration ability, and underestimations of post-merger challenges
Alliance vs. Acquisition: The Four I's Framework
Compares investment in alliances vs. acquisitions based on feasibility, information asymmetry, indigestibility, and inflexibility
Transaction Costs
Costs associated with economic exchanges, like recruitment or acquisitions
