Ch9

Why do firms acquire other firms?

- To gain access to new markets and distribution channels - To gain access to a new capability or competency - To preempt rivals

Partner selection and alliance formation

1st phase of Alliance Management Capability The expected benefits for the alliance must exceed its costs. When one or more of the five reasons for alliance formation are present (strengthen competitive position, enter new markets, hedge against uncertainty, access critical complementary resource, learn new capabilities) The firm must select the best possible alliance partner Necessary conditions: Partner compatibility Partner commitment

Alliance design and governance

2nd Phase of Alliance Management Capability Once two or more firms agree to pursue an alliance managers must then design the alliance and choose an appropriate governance mechanism from among the three options (non equity contractual agreement, equity alliances, or joint venture) Effective governance comes from skillfully combining formal and informal mechanism.

Post formation alliance management

3rd phase of Alliance Management Capability Concerns the ongoing management of the alliance. The partnership needs to create resource combinations that obey the VRIO criteria. Can me accomplished if: make relation specific investments establish knowledge sharing routines build interfirm trust Trust is critical in any alliance. Build capability through repeated experiences over time.

Alliance Management Capability

A firm's ability to effectively manage three alliance related tasks concurrently: 1) Partner selection and alliance formation 2) Alliance design and governance 3) Post formation alliance management

Interorganizational Trust

Alliance design and governance Critical dimension of alliance success. All contracts are necessarily incomplete, trust between the alliance partners plays an important role for effective post formation alliance management.

Why do firms enter Strategic alliances?

An alliance must promise a positive effect on the firm's economic value creation through increasing value and or lowering costs. - Strengthen competitive position - Enter new markets - Hedge against uncertainty - Access critical complementary assets - Learn new capabilities

Partner Compatibility

Captures the cultural fit between firms

Build-to-borrow-or-buy Framework

Conceptual model that aids firms in deciding whether to: - Pursue internal development (build) - Enter a contractual arrangement or strategic alliance (borrow) - Acquire new resources, capabilities, and competencies (buy) Firms that are able to learn how to select the right pathways to obtain new resources are more likely to gain and sustain a competitive advantage. resources = capabilities and competencies Starting point is the firm's identification of a strategic resource gap that will impede future growth. It is strategic because closing this gap is likely to lead to competitive advantage. Relevancy Tradability Closeness Integration

Partner Commitment

Concerns the willingness to make available necessary resources and to accept short-term sacrifices to ensure long-term rewards.

Interfirm Trust

Entails the expectation that each alliance partner will behave in good faith and develop norms of reciprocity and fairness. Helps ensures the relationship survives and thereby increases the possibility of meeting the intended goals of the alliance. Important for fast decision making.

Corporate Venture Capital (CVC)

Equity Alliances Equity investments by established firms in entrepreneurial ventures; CVC falls under the broader rubric of equity alliances. Estimated to be in the double digit billion dollar range each year Creates real options in terms of gaining access to new and potentially disruptive technologies.

Tactic Knowledge

Equity Alliances Knowledge that cannot be codified; concerns knowing how to do a certain task and can be acquired only through active participation in that task. Only acquired through actively participating in the process.

Strengthen Competitive Position

Firms can use strategic alliances to change the industry structure in their favor. Firms frequently use strategic alliances when competing in so called battles for industry standards.

Learn New Capabilities

Firms enter strategic alliances because they are motivated by the desire to learn new capabilities from their partners. Alliance formation is frequently motivated by leveraging economies of scale, scope, specialization, and learning Co-opetition Learning Races

Enter New Markets

Firms may use strategic alliances to enter new markets, either in terms of products and services or geography. Some governments may require that foreign firms have a local joint venture before doing business in their countries. Cross boarder strategic alliances have both benefits and risks

Equity Alliances

Governing Strategic Alliances At least one partner takes partial ownership in the other. They are less common because they often require larger investments. Based on partial ownership rather than contracts, used to signal stronger commitments Tactic Knowledge Corporate Venture Capital (CVC) Partners frequently exchange personnel to make the acquisition of tactic knowledge possible. Downside: 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.

Non Equity Alliances

Governing Strategic Alliances Partnership based on contracts between firms, most common. Firms tend to share Explicit Knowledge Vertical strategic alliances: Supply agreements Distribution agreements Licensing agreements Contractural nature, temporary flexible easy to initiate and terminate. sometimes produce weak ties between the alliance partners which can result in a lack of trust and commitment.

Joint Ventures

Governing Strategic Alliances Standalone organization created and jointly owned by two or more parent companies. Contribute equity, they are making a long term commitment. Exchange of both explicit and tacit knowledge through interaction of personnel is typical. Strong ties, trust and commitment Can entail long negotiations and significant investments. If it doesn't work out as expected, it can be costly. Knowledge shared with the new partner could be misappropriated by opportunistic behavior. any rewards must be shared between partners. A country may require to form a joint venture and provide knowledge and advanced technology in exchange for access to the market

Managerial advantages of building a firm into a large organization

Greater Prestige More job security Increased power

Real options perspective

Hedge against uncertainty Approach to strategic decision making that breaks down a larger investment decision into a set of smaller decisions that are staged sequentially over time. (Whether to enter biotechnology or not, nanotechnology, semiconductors) At each stage, after new info is revealed, the firm evaluates whether or not to make future investments. A real option which is the right but not the obligation, to continue making investments allows the firm to buy time until sufficient information for a go versus no-go decision is revealed.

Lower Costs

Horizontal Integration Firms use horizontal integration to lower costs through economies of scale and to enhance their economic value through creation and in turn their performance. Industries with high fixed costs, achieving economies of scale through large output is critical in lowering costs.

Increased Differentiation

Horizontal Integration Help firms strengthen their competitive positions by increasing the differentiation of their product and service offerings

Reduction in competitive intensity

Horizontal Integration Horizontal integration changes the underlying industry structure in favor of the surviving firms. Excess capacity is taken out of the market, and competition tends to decrease with a consequence of horizontal integration, assuming no new entrants. The industry structure becomes more consolidated and potentially more profitable. Favorable affect several five forces: Strengthening bargaining power vis a vis suppliers and buyers, reducing the threat of entry, and reducing rivalry among firms.

Closeness

How close do you need to be to our external resource partner? Firms are able to obtain the required resources to fill the strategic gap through more integrated strategic alliances such as equity alliances or joint ventures rather than through outright acquisition. Mergers and acquisitions are most costly, complex, and difficult to reverse strategic option. The firm should always first consider borrowing the necessary resources through strategic alliances before looking at M&A

Relevancy

How relevant are the rim's existing internal resources to solving the resource gap? If the firm's internal resources are highly relevant to closing the identified gap, the firm should build itself the new resources through internal development Firms evaluate relevancy by testing whether resources are: 1) Similar to those the firm needs to develop 2) Superior to those of competitors in the targeted area. If both conditions are met, then the firm's internal resources are relevant and the firm should pursue internal development.

Tradability

How tradable are the targeted resources that may be available externally? Implies 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. Short term and long term contracts (licensing or franchising) are a way to borrow resources from another company If a resource is highly tradable, it should be borrowed via licensing agreement or other contractual agreements. If 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.

Integration

How well can you integrate the targeted firm, should you determine you need to acquire the resource partner?

Hedge Against Uncertainty

In dynamic markets, strategic alliances allow firms to limit their exposure to uncertainty in the market. Real options perspective

Explicit Knowledge

Knowledge that can be codified; concerns knowing about a process or product. Patents user manuals fact sheets scientific publications Concerns the notion of knowing about a certain process or product

Superior acquisition and integration capability

M&A and Competitive Advantage Acquisition and integration capabilities are not equally distributed across firms. On average, destroy rather than create shareholder value, it does not exclude the possibility that some firms are consistently able to identify, acquire, and integrate target companies to strengthen their competitive postions.

Desire to overcome competitive disadvantage

M&A and Competitive Advantage Managers are motived not by competitive advantage in some instances. Benefit from economies of scale

Principal agent problems

M&A and Competitive Advantage Managers, as agents, are supposed to act in the best interest of the principals, the shareholders. Managers may have incentives to grow their firms through acquisitions - not for anticipated shareholder value appreciation. Higher compensation, job security Managerial Hubris

Mergers vs acquisitions

Merger joining of two independent companies Acquisition - the purchase or takeover of a firm

Mergers&Acquisitions and Competitive Advantage

Most cases, mergers and acquistiioners do not create competitive advantage. Many mergers destroy shareholder value because the anticipated synergies never materialize. If value is created it generally accrues to the shareholders of the firm that was taken over (acquiree), acquirers often pay a premium when buying the target company. Why do we see so many mergers: - Principal agent problems - Desire to overcome competitive disadvantage - Superior acquisition and integration capability

Licensing agreements

Non Equity Alliances Contractual alliances in which the participants regularly exchange codified knowledge.

Three Governing Strategic Alliances

Non Equity Alliances Equity Alliances Joint Ventures (These 3 lie in the middle of the make or buy continuum)

Resources are superior to those of competitors in the targeted area.

One requirement of Relevancy Assessed by applying the VRIO framework.

Resources are similar to those the firm needs to develop

One requirement of Relevancy Mangers are often misled because things that might appear similar at the surface are actually quite different deep down. Managers focus on the known (similarities) rather than unknown (differences) Often don't know how the resources needed for the existing and new business opportunity differ.

Co-opetition

Portmanteau describing cooperation by competitors, achieve a strategic objective by cooperating with competitors. They may cooperate to create a larger pie but then might compete about how the pie should be divided. Leads to learning races

Alliance Manager

Positioned with Office of Alliance management serves as an alliance process resource and business integrator between the two alliance partners and provides alliance training and development as well as diagnostic tools

Managerial Hubris

Principal agent problems Form of self-delusion in which managers convince themselves of their superior skills in the face of clear evidence to the contrary. 1) Managers of the acquiring company convince themselves that they are able to manage the business of the target company more effectively and therefore create additional shareholder value. Unrelated diversification strategy 2) They see themselves as the exceptional rule. led to many ill fated deals, destroying billions of dollars.

Horizontal Integration

Process of merging with a competitor at the same stage of the industry value chain. Type of corporate strategy that can improve a firm's strategic position in a single industry. Firms should go ahead with horizontal integration if the target is more valuable inside the acquiring firm than as continued standalone company. Tends to lead to consolidation. (airlines, banking, telecommunications, pharmaceuticals, health insurance) 3 Main benefits: (sources of value creation) Reduction in competitive intensity Lower Costs Increased differentiation

Dedicated alliance function

Should be given the tasks of coordinating all alliance related activity in the entire organization, taking a corporate level perspective. It should serve as a repository of prior experience and be responsible for creating processes and structures to teach and leverage that experience and related knowledge throughout the rest of the organization across all levels.

Learning Races

Situations in which both partners in a strategic alliance are motivated to form an alliance for learning but the rate at which the firms learn may vary. The firm that learns faster and accomplishes its goal more quickly has an incentive to exit the alliance or, at a minimum, reduce its knowledge sharing. Can have a positive effect on the winning firm

Strategic Alliance vs. M&A (Mergers and Acquisitions)

Strategic alliances allow firms to circumvent potential legal repercussions including potential lawsuits filed by US federal agencies.

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. Applying the VRIO framework we know that the basis for competitive advantage is formed when a strategic alliance creates resource combinations that are valuable, rare, and difficult to imitate, and the alliance is organized appropriately to allow for value capture.

Access Critical Complementary Assets

Successful commercialization of a new product or service often requires complementary assets such as marketing, manufacturing, and after-sale service. New firms are in need of complementary assets to complete the value chain from upstream innovation to downstream commercialization. Downstream complementary assets (marketing and regulatory expertise or a sales force) often prohibitively expensive and time consuming and not an option for new ventures. Strategic alliance allow firms to match complementary skills and resources to complete the value chain. Licensing agreements allow the partners to benefit from a division of labor, allowing each to efficiently focus on its core competency.

Alliance Leader

Technical expertise and knowledge needed for specific technical area and is responsible for the day to day management of the alliance

Merger

The joining of two independent companies to form a combined entity. Mergers tend to be friendly. Two firms agree to join in order to create a combined entity. hundreds of mergers each year, cumulative value in trillions of dollars

Acquisition

The purchase of takeover of one company by another. Can be friendly or unfriendly.

How do firms achieve growth?

Three options to drive firm growth: Organic growth through internal development External growth through alliances External growth through acquisitions.

Strategic Alliances

Voluntary arrangements between firms that involve the sharing of knowledge, resources, and capabilities with the intent of developing processes, products, or services. The use of strategic alliances to implement corporate strategy has exploded in the past few decades with thousands forming each year. Globalization has also contributed to an increase in cross-border strategic alliances. May join complementary parts of a firm's value chain (R&D or marketing) on joining the same value chain activities. Attractive because they enable firms to achieve goals faster and at lower costs than going it alone. Different motivations for forming alliances are not necessarily independent and can't be intertwined. Alliance formation is frequently motivated by leveraging economies of scale, scope, specialization, and learning.

Hostile takeover

When a target firm does not want to be acquired.

To gain access to a new capability or competency

Why do firms acquire other firms? Firms resort to obtain new capabilities or competencies

To gain access to new markets and distribution channels

Why do firms acquire other firms? Resort to acquisitions when they need to overcome entry barriers into markets they are currently not competing in or to access new distribution channels.

To preempt rivals

Why do firms acquire other firms? Sometimes firms may acquire promising startups not only to gain access to a new capability or competency but also to preempt rivals from doing so.

Strategists cant grow their firms by growing organically through internal development or externally through alliances and

acquisitions

Alliance between disney and pixar was successful because

complementary assets matched

When two competitors merge, leading to industry consolidation, they are engaging in

horizontal integration

Relational view of competitive advantage

important resources and capabilities are commonly embedded in strategic alliances that cross firm boundaries.

Gaining new capabilities or competencies is one of the three main reasons why companies

make acquisitions

Advantages of strategic alliances

might give companies a competitive advantage firms achieve goals faster than they would alone

a firm with alliance management capability is able to effectively manage which of the following tasks? Phases of alliance management

post formation alliance management alliance design and governance partner selection and alliance formation

The main reasons to pursue mergers include the desire to overcome competitive disadvantage, superior acquisition and integration capability and

principal agent problems

Alliance Champion

senior corporate level executive responsible for high level support and oversight. Responsible for making sure that the alliance fits within the firm's existing alliance portfolio and corporate level strategy

Learning by doing

value for small ventures in which a few key people coordinate most of the firms' activities. Clear limitations by larger companies. Alliance are best managed at the corporate level.