Chapter 9 MAN4720

Only if the three prior conditions _______________, __________________, _________________ shown in the decision tree in Exhibit 9.1 are met, should the firm consider M&A:

(low relevancy, low tradability, and high need for closeness)

Risks of horizontal integration

- Integration failure - Reduced flexibility - Increased risk of FTC influence

Enter New MArkets

- Product markets - Service markets - Geographical markets > Governments such as Saudi Arabia or China may require that foreign firms have a local joint venture partner before doing business in their countries

Why do firms enter strategic alliances?

- Strengthen competitive position - enter new markets - Hedge against uncertainty - Access critical complementary assets > Learn new capabilities > GM & Toyota (NUMMI) - formed in 1984

The three options to close the resource gap that leads to a competitive advantage are what?

1. Build. 2. Borrow. 3. Buy.

In this approach executives must determine the degree to which certain conditions apply, either high or low, by responding to up to four questions sequentially before finding the best course.

1. Relevancy. How relevant are the firm's existing internal resources to solving the resource gap? 2. Tradability. How tradable are the targeted resources that may be available externally? 3. Closeness. How close do you need to be to your external resource partner? 4. Integration. How well can you integrate the targeted firm, should you determine you need to acquire the resource partner?

Joint Ventures

> A standalone organization created and jointly owned by two or more parent companies > Long-term commitment > Exchange both tacit and explicit knowledge > "Try before you buy" concept > Used to enter foreign markets > Least common of the 3 types of alliances

Explicit Knowledge

> Data, information > Documents - patents > Records > Files Only accounts for 5% of overall knowledge

Tacit Knowledge

> Experience > Thinking > Competence > Commitment > Deed Accounts for 95% of overall knowledge

Equity Alliances

> One partner takes partial ownership in the other > Allow the sharing of tacit knowledge > Tacit knowledge concerns the "know how" > less common than contractual, non-equity alliances because they often require larger investments.

Non-equity alliances

> Partnerships based on contracts > Examples: supply agreements, distribution agreements, and licensing agreements

Partner selection and alliance formation

> The benefits must exceed the costs > Partner compatibility & commitment are necessary

Relational view of competitive advantage

> competitive advantage can be generated from inter-organizational relationships with external partners > VRI resources are embedded in alliances 80% of Fortune 100 CEO's indicated that 25% of their firms revenue derived from strategic alliances

The advantages/disadvantages of joint ventures

Advantages: > ties, trust, and commitment that can result between the partners. Disadvantages: > However, they can entail long negotiations and significant investments. > If the alliance doesn't work out as expected, undoing the JV can take some time and involve considerable cost. > A further risk is that knowledge shared with the new partner could be misappropriated by opportunistic behavior. >Finally, any rewards from the collaboration must be shared between the partners.

Mergers and Acquisitions Competitive Advantage

Benefits of mergers and acquisitions are often hard to achieve > Anticipated synergies don't easily materialize Other reasons to merge: - The desire to overcome competitive disadvantage > revenue chasing - Superior acquisition and integration capability > Principal - agent problems

Access Critical Complementary Assets

Complementary assets such as: client has exceptional> > Marketing > Manufacturing > After-sale service > Quicksilver Helps complete the value chain: > From upstream innovation to downstream commercialization

Governing Strategic Alliances

Equity Alliances Non-Equity Alliances Joint Ventures

Corporate Venture capital

Equity investments by established firms in entrepreneurial ventures; CVC falls under the broader rubric of equity alliances. CVC investments create real options in terms of gaining access to new, and potentially disruptive, technologies. Strategy scholars find that CVC investments have a positive impact on value creation for the investing firm, especially in high-tech industries such as semiconductors, computing, and the medical-device sector.

Principal - agent problems

Managers may have incentives to acquire - Not for anticipated shareholder value appreciation - to build a larger empire - to receive more prestige, power, and pay Managerial hubris: - A form of self-delusion Managers convince themselves of their superior skills - Happens even if there's clear evidence to the contrary

Alliance design and governance

Possible governance mechanisms: > Non-equity contractual agreement > Equity alliances > Joint venture *Inter-organization trust is critical*

That is, corporate-level managers should not only coordinate the firm's portfolio of alliances, but also leverage their relationships to successfully engage in mergers and acquisitions.

Rather than focusing on developing an alliance manage- ment capability in isolation, firms should develop a relational capability that allows for the successful management of both strategic alliances and mergers and acquisitions. In sum, to ensure a positive effect on competitive advantage, the management of strategic alliances and M&A needs to be *placed at the corporate level.*

Hedge Against Uncertainty

Real-options perspective: > Approach to strategic decision making > Breaks down a larger investment decision into a set of smaller decisions > Staged sequentially over time > Allows firms to obtain information in stages

Strengthen Competitive Position

Strategic alliances can help: - Change industry structure to the firm's favor - Influence industry standards IBM & Apple > Entered a strategic alliance > Desired to strengthen their competitive position > In mobile computing and business productivity apps > Put competitive pressure on rivals such as Microsoft

Alliance Management Capability

The three phases of Alliance Management: 1. Partner selection and alliance formation 2. Alliance design and governance 3. Post-formation alliance management

Advantages/Disadvantages of Equity alliances

They also offer a window into new technology that, like a real option, can be exercised if successful or abandoned if not promising. Equity alliances are frequently stepping-stones toward full integration of the partner firms either through a merger or an acquisition. Essentially, they are often used as a "try before you buy" strategic option. The downside of equity alliances is the amount of investment that can be involved, as well as a possible lack of flexibility and speed in putting together and reaping benefits from the partnership.

How do they achieve this?

They may complement a firm's value chain They may focus on similar value chain activities > Firm's to achieve their goals faster > Lower cost > Fewer legal repercussions

Post-formation alliance management

To create VRIO resource combinations: > Make relation-specific investments > Establish knowledge-sharing routines > Build interfirm trust Build capability through repeated experiences over time > Repeated alliance exposure improves learning

Strategic Alliances (Causes & Consequences of Partnering)

Voluntary arrangements between firms - Sharing knowledge, resources, and capabilities - Capabilities with the intent of developing: > Processes > Products > Services - Leading to gaining & sustaining competitive advantage

M&A and Competitive Advantage, continued

When there is value, it often goes to the acquirers - Acquirers tend to pay a premium

Short-term as well as long-term contracts, such as licensing or franchising,

are a way to *borrow* resources from another company

Licensing Agreements

are contractual alliances in which the participants regularly exchange codified knowledge. This type of vertical arrangement is often described as a "hand-off" from the upstream partner to the downstream partner and is possible because the underlying knowledge is largely explicit and can be easily codified. W

Non-equity alliances are flexible and easy to initiate and terminate because of their contractual nature, but

because they can be temporary in nature, they also sometimes product weak ties between the alliance partners, which can result in a lack of trust and commitment.

If the firm's internal resources are highly relevant to closing the identified gap, the firm should itself

build the new resources needed through internal development.

Merger

combining two companies - the joining of two independent companies - generally similar in size - forms a combined entity always friendly

On average mergers and acquisitions ___________ shareholder value

destroy

As a rule of thumb for going with horizontal integration...

go if the target firm is more valuable inside the acquiring firm than as a continued standalone company.

Is the whole greater than the sum of its parts?

it is relative

If the resource in question is not easily tradable, then the firm

needs to consider either a deeper strategic alliance through an equity alliance or a joint venture, or an outright acquisition.

Mergers and acquisitions are the most costly, complex, and difficult to reverse strategic option. This implies that ...

only if extreme closeness to the resource partner is necessary in order to understand and obtain its under- lying knowledge should M&A be considered the buy option. Regardless, the firm should always first consider borrowing the necessary resources through integrated strategic alliances before looking at M&A.

Horizontal Integration

process of merging and acquiring competitors - occurs in the SAME industry - HP buys Compaq in 2002 - Pfizer buys Wyeth in 2009 - Live Nation buys Ticketmaster in 2010

Build-borrow=or-buy framework

provides a conceptual model that aids firms in deciding whether to pursue internal development (build), enter a contractual arrangement or strategic alliance (borrow), or acquire new resources, capabilities, and competencies (buy).

Acquisition

purchase or takeover a company - purchase of one company by another - can be friendly... or unfriendly Hostile takeover - the target company does not wish to be acquired

Ideally, the tools to execute corporate strategy—strategic alliances and acquisitions—

should be centralized and managed at the corporate level, rather than at the level of the strategic business unit. This allows the company to not only assess their effect on the overall company performance, but also to harness spillovers between the different corporate development activities.

Horizontal integration can favorably affect several of Porter's five forces for the surviving firms:

strengthening bargaining power vis-a`-vis suppliers and buyers, reducing the threat of entry, and reducing rivalry among existing firms.

The most frequent forms of non-equity alliances are

supply agreements, distribution agreements, and licensing agreements. As suggested by their names, these contractual agreements are vertical strategic alliances, connecting different parts of the industry value chain and sharing explicit knowledge.

The term tradable means?

that the firm is able to source the resource externally through a contract that allows for the transfer of ownership or use of the resource.

If the firm's internal resources are insufficient to build, and the resource needed to fill the strategic gap cannot be borrowed through a strategic alliance, and closeness to the resource partner is needed

then the final question to consider is whether the integration of the two firms using a merger or acquisition will be successful.

If a resource is highly tradable....

then the resource should be borrowed via a licensing agreement or other contractual agreement.

Firms evaluate the relevance of internal resources in two ways:

they test whether resources are (1) similar to those the firm needs to develop and (2) superior to those of competitors in the targeted area.3 If both conditions are met, then the firm's internal resources are relevant and the firm should pursue internal development.

Why do firms engage in horizontal integration? (Benefits)

to level the playing field - reduce costs - reduce competitive industry - boost differentiation - access to new markets and distribution channels > Kraft purchased Cadbury- hostile takeover -