12 Apr Business Article Analysis Assignments ?? To encourage you to read the popular business press and apply the concepts of the course
Business Article Analysis Assignments – To encourage you to read the popular business press and apply the concepts of the course, you will be responsible for two article analyses write-ups. In each of these write-ups you will complete an analysis, using a specified tool from one of the chapters, from information contained in the business press article about a specific company. Publications such as The Wall Street Journal, The Economist, Fortune, Forbes, Fast Company, Business Week, New York Times, etc. are excellent sources. If you use an article found on the Internet, print it out before you begin work on the assignment. Each write-up is to be submitted as a word document via email and must not exceed three pages in length. The assignment requires a VRIO analysis. Choose an article about a company or industry (depending on the tool), other than one that we have analyzed for cases or that you have chosen for your group project. In your write-up, use the specified tool to analyze the company, its resources, or its environment. Explain the purpose of the tool and offer a conclusion based on your analysis. What strategic recommendations would you offer to executives at that company? You may use other strategic tools as necessary. You must attach a copy of the article with your write-up (not a link to the article). Cutting and pasting the text at the end of the document is fine.
Chapter 9
Corporate Strategy: Strategic Alliances, Mergers and Acquisitions
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No reproduction or further distribution permitted without the prior written consent of McGraw Hill.
Because learning changes everything.®
The AFI Strategy Framework
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Chapter Outline
Mergers and Acquisitions
Merging with Competitors
Why Do Firms Make Acquisitions?
M&A and Competitive Advantage
Strategic Alliances
Why Do Firms Enter Strategic Alliances?
Governing Strategic Alliances
Alliance Management Capability
Implications for the Strategist
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Mergers and Acquisitions
Merger: combining two companies usually similar in size
Friendly approach
Acquisition: purchase or takeover of a company
Can be friendly
Can be a hostile takeover
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Merging with Competitors
Horizontal integration: process of merging and acquiring competitors
HP buys Compaq in 2002.
Pfizer buys Wyeth in 2009.
Live Nation buys Ticketmaster in 2010.
Benefits:
Reduce competitive intensity
Lower costs
Increased differentiation
Access to new markets and distribution channels
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Mergers, Acquisitions, and Competitive Advantage
Many M&As actually destroy shareholder value!
When there is value, it often goes to the acquiree.
Acquirers tend to pay a premium.
Why still desire M&As?
Principal–agent problems
Overcome competitive disadvantage
Superior acquisition and integration capability
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When acquiring a firm, you buy an entire “resource bundle,” not just a specific resource. This resource bundle, if obeying VRIO principles and successfully integrated, can then form the basis of competitive advantage.
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Why Do Firms Acquire Other Firms?
To access new markets & distribution channels
To overcome entry barriers
To access new capabilities or competencies
To preempt rivals
Facebook and Google are famous for this
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Example: Facebook acquired: Instagram (photo & video sharing), WhatsApp (text messaging service), Oculus (virtual reality headsets).
Example: Google acquired: YouTube (video sharing), Motorola (mobile technology), Waze (interactive mobile maps).
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M&A Problems
Managers incentives to acquire:
To build a larger empire
To receive prestige, power, and pay
Managerial hubris:
A form of self-delusion
Managers convince themselves of their superior skills
They see themselves as exceptions to the rule
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Managerial hubris has led to many ill-fated deals, destroying billions of dollars. For example, Quaker Oats Co. acquired Snapple because its managers thought Snapple was another Gatorade, which was a successful previous acquisition.6 The difference was that Gatorade had been a standalone company and was easily integrated, but Snapple relied on a decentralized network of independent distributors and retailers who did not want Snapple to be taken over and who made it difficult and costly for Quaker Oats to integrate Snapple. The acquisition failed—and Quaker Oats itself was taken over by PepsiCo. Snapple was spun out and eventually ended up being part of the Dr Pepper Snapple Group.
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Why Enter Strategic Alliances?
Strengthen competitive position
Enter new markets
Hedge against uncertainty
Access critical complementary assets
Learn new capabilities
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Why Strategic Alliances Are Attractive
Firm goals can be achieved faster and at lower costs.
Complement or augment the value chain
Less complex legally
Can help a firm gain and sustain a competitive advantage
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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. In support of this perspective, over 80 percent of Fortune 1000 CEOs indicated in a survey that more than one-quarter of their firm’s revenues were derived from strategic alliances.
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Governing Strategic Alliances
Governing mechanisms:
Non-equity alliances
Based on contracts
Equity alliances
One firm takes partial ownership in the other
Joint ventures
Standalone organization owned by 2 or more firms
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Non-Equity Alliances
Most common forms of alliance
Supply agreements
Distribution agreements
Licensing agreements
Vertical strategic alliances
Firms share explicit knowledge
Knowledge that can be codified
Patents
User manuals and fact sheets,
Scientific publications
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Equity Alliances
At least one partner takes partial ownership position
Stronger commitment toward the relationship
Allow the sharing of tacit knowledge
Tacit knowledge concerns the “know-how”
Partial ownership, thus equity alliances signal stronger commitments
Moreover, equity alliances allow for the sharing of tacit knowledge that can not be codified.
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Joint Ventures
Joint ventures (JVs) are the strong ties, trust, and commitment that can result.
Created and owned by two or more companies
Long-term commitment
Exchange both tacit and explicit knowledge
Frequent interaction of personnel
Used to enter foreign markets
Least common of the 3 types of alliances
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Three Alliance-Related Tasks Must Be Managed Concurrently
Exhibit 9.3
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Instructors:
The digital companion to this book McGraw-Hill Connect has a case exercise on this section of the textbook. It builds student confidence on the features of alliance management by looking at a brief case about Starbucks (LO 9-4).
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Partner Selection and Alliance Formation
Benefits must exceed the costs.
Five reasons for alliance formation:
Strengthen competitive position
Enter new markets
Hedge against uncertainty
Access critical complementary resources
Learn new capabilities
Partners must be compatible and committed.
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Partner compatibility captures aspects of cultural fit between different firms. Partner commitment concerns the willingness to make available necessary resources and to accept short-term sacrifices to ensure long-term rewards.
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Alliance Design and Governance
Governance mechanisms:
Contractual agreement
Equity alliances
Joint venture
Inter-organizational trust is critical.
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In a study of over 640 alliances, researchers found that the joining of specialized complementary assets increases the likelihood that the alliance is governed hierarchically. This effect is stronger in the presence of uncertainties concerning the alliance partner as well as the envisioned tasks.
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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
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How to Make Alliances Work
Exhibit 9.4
Source: Adapted from J.H. Dyer and H. Singh (1998), “The relational view: Cooperative strategy and the sources of intraorganizational advantage,” Academy of Management Review 23: 660–679.
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Pharmaceutical company Eli Lilly is an acknowledged leader in alliance management. Lilly’s Office of Alliance Management, led by a director and endowed with several full-time positions, manages its far-flung alliance activity across all hierarchical levels and around the globe. Lilly’s process prescribes that each alliance is managed by a three-person team: an alliance champion, alliance leader, and alliance manager.
The alliance champion is a senior, corporate-level executive responsible for high-level support and oversight. This senior manager is also responsible for making sure that the alliance fits within the firm’s existing alliance portfolio and corporate-level strategy.
The alliance leader has the technical expertise and knowledge needed for the specific technical area and is responsible for the day-to-day management of the alliance.
The alliance manager, positioned within the 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.
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Implications for the Strategist
A strategist has three options to drive firm growth:
Organic growth through internal development
External growth through alliances
External growth through acquisition
The build-borrow-or-buy framework:
Aids strategists in deciding whether to pursue internal development (build)
Enter a contract arrangement or strategic alliance (borrow)
Acquire new resources, capabilities, and competencies (buy)
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The Build-Borrow-or-Buy Framework
Source: Adapted from L. Capron and W. Mitchell (2012), Build, Borrow, or Buy: Solving the Growth Dilemma (Boston, MA: Harvard Business Review Press).
Exhibit 9.1
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Strategic leaders 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. The questions cover issues of relevancy, tradability, closeness, and integration.
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Questions?
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In particular, competitors in the same industry such as airlines, banking, telecommunications, pharmaceuticals, or health insurance frequently merge to respond to changes in their external environment and to change the underlying industry structure in their favor.
Instructors:
The digital companion to this book McGraw-Hill Connect has an application exercise on this section of the textbook. It builds student confidence on horizontal integration. (LO 9-6).
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Take-Away Concepts
Differentiate between mergers and acquisitions, and explain why firms would use either as a vehicle for corporate strategy.
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Merger
Acquisition
M&A Umbrella Term
An acquisition describes the purchase or takeover of one company by another. Can be friendly or hostile.
Although there is a distinction between mergers and acquisitions, many observers simply use the umbrella term “Mergers & Acquisitions,” or M&A.
A merger describes the joining of two independent companies to form a combined entity.
Take-Away Concepts
Define horizontal integration and evaluate the advantages and disadvantages of this corporate-level strategy.
©McGraw-Hill Education.
Horizontal Integration
Reasons
Horizontal integration is the process of merging with competitors, leading to industry consolidation.
As a corporate strategy, firms use horizontal integration to:
Reduce competitive intensity
Lower costs
Increase differentiation
Take-Away Concepts
Firms engage in acquisitions to (1) access new markets and distributions channels, (2) gain access to a new capability or competency, and (3) preempt rivals.
Explain why firms engage in acquisitions.
©McGraw-Hill Education.
Take-Away Concepts
Most mergers and acquisitions destroy shareholder value because anticipated synergies never materialize.
If there is any value creation in M&A, it generally accrues to the shareholders of the firm that is taken over (the acquiree), because acquirers often pay a premium when buying the target company.
Mergers and acquisitions are a popular vehicle for corporate-level strategy implementation for three reasons: (1) because of principal–agent problems, (2) the desire to overcome competitive disadvantage, and (3) the quest for superior acquisition and integration capability.
Evaluate whether mergers and acquisitions lead to competitive advantage.
©McGraw-Hill Education.
Take-Away Concepts
Define strategic alliances, and explain why they are important corporate strategy vehicles and why firms enter into them.
©McGraw-Hill Education.
Strategic Alliances
Competitive Advantage
Reasons for Alliances
An alliance qualifies as strategic if it has the potential to affect a firm’s competitive advantage by increasing value and/or lowering costs.
The most common reasons why firms enter alliances are to: (1) strengthen competitive position, (2) enter new markets, (3) hedge against uncertainty, (4) access critical complementary resources, and (5) learn new capabilities.
Strategic alliances have the goal of sharing knowledge, resources, and capabilities in order to develop processes, products, or services.
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