Exam II Review: Transaction Costs, Vertical Integration, Diversification

Forward Integration

Owning activities closer to the end customer

Backward 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 involving asset rationalization, activity integration, and acculturation to ensure successful mergers and acquisitions

Managing Alliances

Principles including value creation, governance, value sharing, incentives, defining roles, trust-building, and resource investment

How to do M&A right?

Recommendations include critical self-assessment, willingness to walk away, rigorous post-acquisition reviews, and caution with investment bankers' advice

Restructuring

Reorganizing and divesting to refocus a company's core competencies

M&A and Competitive Advantage

Research shows most M&As do not create competitive advantage, realize expected synergies, or add shareholder value

Desired Closeness to Resource Provider

Achieved through equity alliances or joint ventures, impacting the level of partnership and integration

Core Competence-Market Matrix

Assessing core competencies for new market leverage

Why so many M&As?

Driven by miscalculations, irrational exuberance, enthusiasm, commitment escalation, principal-agent problems, and desire to 'win'

Tradability

Ease of obtaining resources from another firm, influencing decisions on long-term contracts or acquisitions

Diversification

Entering new businesses not in the existing industry value chain

Acquisition Price

Factors like intrinsic value, market value, purchase price, and synergy value influence how much to pay for an acquisition

Vertical Integration

Firm's ownership of production inputs or distribution channels

Vertically Disintegrated

Focusing on the core stage, outsourcing other functions

Relevance

Internal resources are relevant if similar to needed resources and superior to competitors', guiding internal development or external acquisition decisions

Types of Alliances

Long-term contracts, equity alliances, joint ventures, each involving different levels of partnership and ownership

Financial Engineering

Manipulating financial structures for benefits, not a sufficient reason for mergers and acquisitions

Product-Resource Matrix

Matching resources with potential new markets using VRIO framework

Mergers and Acquisitions

Merger joins two companies forming a new entity, acquisition involves one company purchasing another, both with benefits and costs

Diversification Mode

Methods firms use to diversify, including internal development, alliances, non-equity, equity, joint venture, and M&A

Build-Borrow-or-Buy Framework

Model considering internal resources relevance, tradability, desired closeness to resource partner, and integration for growth strategies

External Transaction Costs

Costs between a firm and other entities, e.g., negotiating with suppliers

Internal Transaction Costs

Costs within a firm, e.g., monitoring employee performance

Synergy

Value creation from cost savings (C) and revenue enhancements (R) in acquisitions, challenging to estimate and often underestimated

Taper Integration

Vertical integration with reliance on outside firms for supplies

Strategic Alliances

Voluntary arrangements between firms for sharing knowledge, resources, and capabilities to develop processes, products, services

Miscalculations in M&As

Common overestimations of synergy and integration abilities, underestimations of post-merger challenges and resources needed

Make, Borrow, or Buy Continuum

Concept of how firms achieve growth through building (organic growth), buying (acquisitions), or borrowing (partnerships)

Integration

Conditions for integrating a resource provider based on relevancy, tradability, need for closeness, and integration ability

Alliance vs. Acquisition: The Four I's Framework

Considerations like infeasibility, information asymmetry, indigestibility, and inflexibility when choosing between alliances and acquisitions

Transaction Costs

Costs associated with economic exchanges, like buying lunch or recruiting

BCG Growth-Share Matrix

Tool to guide restructuring decisions by Boston Consulting Group