BUS 498 Chapter 9

Example of post integration failure

1. AOL and Time warner 2. Bank of America and Merrill Lynch

equity alliances

1. At east one partner takes partial ownership in the other partner 2. less common then non equity 3. require stronger commitments due to larger investments and ownership nature 4. sharing tactic knowledge

Do M&A create competitive advantage?

1. Benefits of M&As are hard to obtain. They may destroy shareholder value because anticipated synergies don't materialize. 2. If synergies do mix and value is created, usually only the firm that was acquired reaps the benefits and only those shareholders feel the benefit. This is because acquirers usually pay a premium when buying the target company

Example of enter new markets benefit

1. HP and DreamWorks created Halo Collaboration Studio which allowed consumers to make virtual phone calls around the globe. It gave consumers the impression that they were sitting in the room together. 2. Neither HP or DreamWorks could have created this technology alone, but together both partners were able to pursue diversification

Example of learning new capabilities: How NUMMI ended

1. NUMMI went from being GMs worst performer to the highest quality plant. 2. Toyota was able to create greenfield plants throughout the US 3. Toyota was able to learn how to manage US workers bc of its limited scope 4. GM learned a completely new production system and had a hard time implementing the manufacturing into existing plants

non equity alliance

1. Partnerships based on contracts between firms 2. Most common types: supply agreements, licensing agreements, and distribution agreements 3. Firms tend to share explicit knowledge 4. Most common type of strategic alliance

BBB Framework: Relevancy

1. Question 1 2. How relevant are the existing internal resources to solving the resource gap? 3. Evaluate the resources by determining if they are similar to those the firm needs to develop and superior (VRIO) to those of competitors in the target area

BBB Framework: Tradability

1. Question 2 2. how tradable are the target resources that may be available externally

BBB Framework: Closeness

1. Question 3 2. how close do you need to be to your external resource partner? 3. if a firm is able to obtain the required resources to fill the strategic gap through more integrated strategic alliances such as equity alliances or joint venture rather than going into an acquisition

BBB framework: integrate

1. Question 4 2. how well can you integrate the target firm? 3. Integration sometimes fails due to cultural differences

Advantages of Strategic Alliances: hedge against uncertainty

1. Strategic alliances allows firms to limit their exposure to uncertainty in the market. 2. Real options perspective explains one side of this benefit

Advantages of Strategic Alliances: strengthen competitive position

1. Strategic alliances may enable a firm to change the industry structure in their favor. 2. Beneficial when the firm competes in an industry where there is a battle for industry standards Ex: Apple and IBM entered a strategic alliance to create simple to use productivity apps and to sell iPhones/iPads to IBMs corporate clients. This allowed IBM and apple to strengthen their competitive position and increase competitive pressure on rivals.

Why do firms acquire other firms?

1. access new markets and distribution channels: may prevent entry barriers when entering new markets and provide access to distribution channels ex. Kraft acquired Cadbury and was able to enter new markets/distribution channels in the US and overseas 2. access new capabilities or competencies Ex. Intel acquired Altera in order to gain access to the capability of designing mole chips for the internet of things (cell phones, appliances, cars, etc) 3. to preempt rivals: may prevent rivals from gaining new capabilities or competencies Ex. Facebook acquired Instagram

Strategic alliances allow a firm to

1. achieve their goals faster 2. lower cost 3. have fewer legal repercussions

Risks of merging

1. integration failure 2. reduced flexibility 3. increased potential for legal repercussions

Types of strategic alliances:

1. non equity alliance 2. equity alliances 3. joint ventures

Given the disadvantages to M&As, why do firms still use them?

1. principal agent problems: managers may chose to merge for their own benefits and not that of the shareholders 2. the desire to overcome competitive disadvantage Ex: adidas acquired Reebok to compete successfully with Nike. Hope was to overcome adidas comp. disadvantage and benefit from economies of scale 3. superior acquisition and integration capability: since superior acquisition and integration capability is valuable, costly, and hard to imitate, it has the potential to lead to competitive advantage

Why do firms merge?

1. reduction in competitive intensity: horizontal integration changes the industry structure in favor of the surviving firms. Excess capacity decreases from the market and competition also decreases Ex. the horizontal integration in the airline industry (delta and northwest airlines) has decreased competitive intensity 2. Lower costs: Lower cost through economies of scale and may enhance value creation which will in turn increase their performance (important for industries with a high fixed cost) 3. increased differentiation: will strengthen their competitive position Ex. Disney acquired Marvel which allowed them to differentiate their offerings by adding more superheroes to their mix of characters.

The questions of the build borrow buy framework cover 4 key issues:

1. relevancy 2. tradability 3. closeness 4. integration

Joint ventures

1. standalone organization created and jointly owned by two or more parent companies (Hulu is owned by NBC, Disney/ABC, and Fox) 2. least common strategic alliance 3. both tactic and explicit knowledge

Why do firms enter strategic alliances?

1. strengthen competitive position 2. enter new markets 3. hedge against uncertainty 4. access critical complementary assets 5. learn new capabilities

Corporate venture capitalism

1. type of equity alliance 2. equity investments by established firms in entrepreneurial ventures 3. allow firms to create real options and gain access to new disruptive technology.

Alliance management capability

A firms ability to effectively manage three alliance related tasks concurrently Has three phases: 1. partner selection and alliance formulation 2. alliance design and governance 3. post formation alliance management

Relevancy "similar" example

A newspaper publisher might think that the researching, reporting, writing, and editing activities done for a printed newspaper are similar to that of an online one. The activities may be similar but the technology and business model are different. Managing online media and interactions is different from managing print.

Partner selection and alliance formulation

Alliances are formed because of at least one of the five advantages to strategic alliances. The benefits of selecting a partner must excess costs. Partner selection consist of two sections: 1. Partner capability: cultural fit between different firms 2. Partner commitment: willingness to make available necessary resources and accept ST sacrifices to ensure LT rewards

Example of tradability

Biotech pharma industry (like Eli Lilly) 1. some producers use licensing agreements to transfer knowledge and technology from a licensor's R&D to the licensee's manufacturing

Incentives for the principal agent problem

Build a larger empire and in return gain more power and pay

Post formation alliance management

Concerns the ongoing management of the alliance. In order to gain/sustain competitive advantage with the alliance, partners must create resource combinations that comply with the VRIO framework. This may be accomplished with: 1. relation specific investments 2. establish knowledge sharing routines 3. build interfirm trust Firms should also build capabilities through repeated experiences over time

Alliance design and governance

During this step the partners decide on which governance mechanism to implement. 1. non equity agreement 2. equity alliance 3. joint venture Interorganizational trust is important to alliance success. Obtaining complementary value chain assets with your partner may decrease the possibility of your alliance being governed as a hierarchy and may increase international trust.

Advantages of Strategic Alliances: learn new capabilities

Firms enter strategic alliances because they are motivated by the desire to learn new capabilities from their partners 1. with co-opetition 2. may lead to learning races

Learning races

Firms may learn more quickly than others 1. the firm that learns more quickly is motivated to exit the alliance or reduce knowledge sharing

Example of non equity alliance

Genetech licensed humulin to Eli Lily for manufacturing and distributing. This is an example of a vertical strategic alliance as one company focused on the upstream activities while the other focused on the downstream activities.

If relevancy is high or low

High: build own resources (internal development) Low: go to next question

If tradability is high/low

High: enter a contractual strategic alliance and use ST and LT contracts to borrow resources 1. licensing 2. contracts

If closeness is high/low

High: next question (mergers and acquisitions) Low: enter a strategic alliance (equity or joint)

Example of learning new capabilities

NUMMI (joint venture between GM and toyota) was meant to help each partner learn new capabilities. GM wanted to learn the manufacturing system that toyota had in order to produce high quality, fuel efficient cars. While Toyota wanted to learn how to implement its manufacturing program with an American workforce.

real options perspective example

Pfizer entered into hundreds of strategic alliances with biotech startups. The firm made small investments in the startups that were expected to disrupt the existing market. Once the new biotech drugs of the startups were known and the uncertainty was removed, the firm could react accordingly.

Pros/cons of non equity alliances

Pros: 1. Because of their contractual nature they are flexible, fast, easy to initiate and terminate Cons: 1. weak ties, lack of trust/commitment

Pros/cons of equity alliances

Pros: 1. Stronger ties, trust, and commitment due to ownership/larger investments 2. window into new technology cons: 1. less flexible, slower, and requires large investments

Joint ventures pros and cons

Pros: 1. strongest tie, trust, and commitment 2. may be required by the government Cons: 1. may entail long negotiations and large investments 2. More of a long term solution 3. Joint venture managers have double reporting lines (2 bosses to report to)

How do firms achieve growth?

Three options: 1. organic growth through internal development 2. external growth through alliances 3. external growth through acquisitions

example of equity alliance

Toyota and Tesla: 1. Toyota wanted to access a window into Tesla's technology and also to learn from Tesla. 2. Toyota made a $50 million equity investment in Tesla 3. Toyota hoped that Tesla would transfer tactic knowledge and Toyota's entrepreneurial spirit would enhance 4. Turned into a learning race and Toyota backed out in 2014

Managerial humbris

a form of self delusion in which managers convince themselves of their superior skills in the face of clear evidence to the contrary 1. managers convince themselves that they are able to manager the target firm and create shareholder value 2. Top level managers are aware of the dangers of the acquisition, but they see themselves as an exception

real options perspective

approach to strategic decision making that breaks down a larger investment decision into a set of smaller decisions that are staged sequentially over time 1. allows firms to obtain info in stages and then after each stage, the firm decides whether to make any future investments or not

What do strategic alliances add

complementary parts of a firms value chain or they may focus on joining current value chain activities

Types of non equity alliances

contracts 1. licensing 2. franchising

co-opetition

cooperation by competitors to achieve a strategic objective

Mergers and acquisitions are

costly, complex, and difficult to reverse and should only be used if extreme closeness is necessary always consider borrowing first

Resources in the build buy borrow framework should

follow the VRIO framework

Firms that are able to chose the right pathway in the build buy borrow framework to obtain new resources are more likely to

gain/sustain competitive advantage

What has contributed to the rise of strategic alliances?

globalization and advances in technology

Merger

joining of two independent companies to form a combined entity - Live nation and Ticket master merged

Explicit knowledge

knowledge that can be codified. May be captured with patents, user manuals, and fact sheets

tactic knowledge

knowledge that cannot be codified; concerns knowing how to do a certain task and be acquired only through active participation in the task

An alliance is strategic

only if it has the potential to affect a firms competitive advantage

horizontal integration

process of merging with competitors leading to industry consolidation Should only horizontally integrate if the target firm has more value inside the current firm than as a standalone

Build borrow buy framework

provides a conceptual model that aids firms in deciding whether to pursue internal development, enter a contractual agreement, strategic alliance, or acquire new resources, capabilities, and competencies.

Acqusition

purchase of one company by another - may be friendly or unfriendly - Disney acquired Pixar

Advantages of Strategic Alliances: Access critical complementary assets

strategic alliances allow firms to match complementary assets to complete their value chain 1. implies that the firm has core competencies in R&D. 2. Products/services need complementary assets to succeed. (marketing, manufacturing, and after-sale service) 3. This will complete the value chain from up to downstream

Advantages of Strategic Alliances: Enter new markets

strategic alliances can be used to enter new product, service, or geographical markets.

relational view of competitive advantage

strategic management framework that proposes that critical resources and capabilities frequently are embedded in strategic alliances that span firm boundaries Sustainable competitive advantage is achieved through relationships and networks

Tradable means that

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

Hostile takeover

the target company does not wish to be acquired Ex: Kraft bought Cadbury which was mainly focused on candy and gum. Kraft reconstructed in 2012 and separated grocery foods from snack foods

Firms use the BBB framework when

there is a strategic resource gap: 1. a difference between the resources needed and the resources on hand

Relevancy: resources are superior if

they pass the VRIO framework

Purpose of strategic alliances

to develop new processes, products, and services

strategic alliance

voluntary agreements between firms that involve the sharing of knowledge, resources, and capabilities.