University of The Cumberlands Chapter 9 Corporate Strategy and Strategic Alliances Paper

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Assigned Readings:

Chapter 9. Corporate Strategy: Strategic Alliances, Mergers, and Acquisitions

Initial Postings: Read and reflect on the assigned readings for the week. Then post what you thought was the most important concept(s), method(s), term(s), and/or any other thing that you felt was worthy of your understanding in each assigned textbook chapter.Your initial post should be based upon the assigned reading for the week, so the textbook should be a source listed in your reference section and cited within the body of the text. Other sources are not required but feel free to use them if they aid in your discussion.

Also, provide a graduate-level response to each of the following questions:

In the fall of 2016 Yahoo disclosed several major security breaches involving more than 1.5 billion user accounts. The results of these disclosures delayed the purchase by Verizon and reduced the Yahoo purchase price by at least $300 million. In June 2017 Yahoo shareholders agreed to the final sale to Verizon, nearly a year after the purchase was announced. What responsibility do firms have for the protection of customer data provided in the operation of their firm? Should Verizon have backed out of the deal with Yahoo given the scale and duration of the security issues brought to light in the fall of 2016? (see related article and video, “Why Verizon Decided to Stick With Yahoo Deal after Big Data Breaches,” WSJ).

[Your post must be substantive and demonstrate insight gained from the course material. Postings must be in the student's own words - do not provide quotes!]

[Your initial post should be at least 450+ words and in APA format (including Times New Roman with font size 12 and double spaced). Post the actual body of your paper in the discussion thread then attach a Word version of the paper for APA review]

Part 2

1. Given the poor track record of M&As, what explains the continuing trend for mergers and acquisitions in many industries? What steps can a firm take to improve the chances of successful M&As?

  1. The assignment is to answer the question provided above in essay form. This is to be in narrative form. Bullet points should not to be used. The paper should be at least 1.5 - 2 pages in length, Times New Roman 12-pt font, double-spaced, 1 inch margins and utilizing at least one outside scholarly or professional source related to organizational behavior. This does not mean blogs or websites. This source should be a published article in a scholarly journal. This source should provide substance and not just be mentioned briefly to fulfill this criteria. The textbook should also be utilized. Do not use quotes. Do not insert excess line spacing. APA formatting and citation should be used.

Use only book as reference

Rothaermal, F. T. (2021). Strategic Management (5 ed.). New York: Mc Graw Hill.

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CHAPTER 9 Corporate Strategy: Strategic Alliances, Mergers and Acquisitions Chapter Outline 9.1 9.2 9.3 9.4 How Firms Achieve Growth The Build-Borrow-Buy Framework Strategic Alliances Why Do Firms Enter Strategic Alliances? Governing Strategic Alliances Alliance Management Capability Mergers and Acquisitions Why Do Firms Merge with Competitors? Why Do Firms Acquire Other Firms? M&A and Competitive Advantage Implications for Strategic Leaders Learning Objectives LO 9-1 Apply the build-borrow-or-buy framework to guide corporate strategy. LO 9-2 Define strategic alliances, and explain why they are important to implement corporate strategy and why firms enter into them. LO 9-3 Describe three alliance governance mechanisms and evaluate their pros and cons. LO 9-4 Describe the three phases of alliance management and explain how an alliance management capability can lead to a competitive advantage. LO 9-5 Differentiate between mergers and acquisitions, and explain why firms would use either to execute corporate strategy. LO 9-6 Define horizontal integration and evaluate the advantages and disadvantages of this option to execute corporate-level strategy. LO 9-7 Explain why firms engage in acquisitions. LO 9-8 Evaluate whether mergers and acquisitions lead to competitive advantage. 308 CHAPTERCASE 9 Little Lyft Gets Big Alliance Partners WITH A VALUATION of close to $70 billion in 2017, Uber is the most valuable privately held company ever. Serving some 600 cities in over 60 countries worldwide, Uber dominates the global car-hailing app market. The numbertwo competitor to Uber in the United States is Lyft, which is also a privately held startup but only worth about onetenth of Uber (some $7.5 billion). What should little Lyft do to compete against the giant Uber? Lyft is clearly the underdog in the fiercely competitive ride-hailing app market. Similarly to dealing with a schoolyard bully, it helps to have strong friends. Lyft found itself powerful alliance partners for a number of strategic reasons. Strengthen Competitive Position. Strategic alliances with powerful partners enable Lyft to strengthen its competitive position against Uber. In particular, Lyft entered two important alliances. In 2016, Lyft formed an equity alliance with GM, which invested $500 million in the startup. A year later, Lyft announced an alliance with Waymo, an autonomous car technology venture and a subsidiary of Alphabet, which is also Google’s parent company. Waymo is also a fierce rival of Uber © in the development of self-driving car technology. When Lyft announced its alliance with Waymo in 2017, Alphabet and Uber were entangled in a lawsuit. In particular, Alphabet alleged that Uber stole proprietary technology when acquiring Otto, a self-driving technology company mainly for trucks, which was founded by a former Waymo executive who headed its self-driving car efforts. Thus, the alliance with Waymo allows Lyft to strengthen its competitive position vis-à-vis Uber. Having autonomous vehicle technology succeed is critical for both Uber and Lyft because human drivers are the biggest cost factor in offering rides. Moreover, autonomousdriving technology is also expected to be safer than human driving, resulting in fewer accidents. In addition, since smart traffic guidance can be employed much more easily with self-driving cars that can run 24/7, 365 days a year, traffic congestion and delays are expected to be much fewer, if any. Enter New Markets. The alliance with Lyft allows GM to tap into the second largest mobile transportation network globally. The goal is that GM’s cars will be deployed on Lyft’s network, ideally as self-driving vehicles. The equity alliance with Lyft affords GM an entry into the mobile transportation and logistics market. Hedge Against Uncertainty. The equity investment in Lyft also allows GM to hedge against uncertainty. With network effects supporting winner-take-all dynamics, it is likely that only one or a few at best mobile transportation companies survive in the long run. GM is betting on Lyft and wants to be in this new market because the age-old private car ownership model is likely to shift in favor of fleet ownership and management. Consumers will “rent” a car for a specific ride, rather than own the fixed asset. Noteworthy is that private cars in the United States are used only 5 percent of the time, and sit idle for most of the day. Car owners have the fixed costs of purchasing a car, buying insurance, and maintaining the car. All this goes away with the new business model that is likely to emerge. Learn New Capabilities. For instance, Lyft may need to learn how to manage large fleets of cars that it might eventually need to own, a capability held by GM as key supplier to many large car rental companies. In addition, 309 310 CHAPTER 9 Corporate Strategy: Strategic Alliances, Mergers and Acquisitions Lyft may want to learn some of the self-driving technology from Waymo. Conversely, the Alphabet subsidiary might be motivated to learn more about how to establish and maintain a large mobile logistics network that it can leverage into more precise target advertising for its Google partner division, or other new services it might want to offer one day.1 You will learn more about Lyft by reading this chapter; related questions appear in “ChapterCase 9 / Consider This . . . .” THE CHAPTERCASE highlights how Lyft uses strategic alliances with GM and Waymo in an attempt to close the gap with Uber. Lyft’s strategic leaders realize that it is difficult for the much smaller ride-hailing company to catch up with Uber on its own. Lyft thus is reaching out to powerful partners. Tapping into its partners’ resources and expertise allows Lyft to become a much more potent rival to Uber than as a standalone company. This example shows how strategic alliances can help firms to grow and to possibly outperform much stronger rivals. In Chapter 8, we discussed why firms grow. In this chapter we discuss how firms grow. In addition to internal organic growth (achieved through reinvesting profits, see discussion of Exhibit 4.3 in Chapter 4), firms have two critical strategic options to execute corporate strategy: alliances and acquisitions. We devote this chapter to the study of these fundamental pathways through which firms implement corporate strategy. We begin this chapter by introducing the build-borrow-or-buy framework to guide corporate strategy in deciding whether and when to grow internally (build), use alliances (borrow), or make acquisitions (buy). We then take a closer look at strategic alliances before studying mergers and acquisitions. We discuss alliances before acquisitions because alliances are smaller strategic commitments and thus are much more frequent. Moreover, in some cases, alliances may lead to acquisitions later, offering “try before you buy.” For example, before Disney acquired Pixar (for $7.4 billion in 2006), the firms had a longstanding strategic alliance, where Pixar would develop computer-animated films that Disney would market and distribute. We conclude with Implications for Strategic Leaders, in which we discuss practical applications. LO 9-1 Apply the build-borrowor-buy framework to guide corporate strategy. build-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), or acquire new resources, capabilities, and competencies (buy). 310 9.1 How Firms Achieve Growth After discussing in Chapter 8 why firms need to grow, the next question that arises is: How do firms achieve growth? Corporate executives have three options at their disposal to drive firm growth: organic growth through internal development, external growth through alliances, or external growth through acquisitions. Laurence Capron and Will Mitchell developed an insightful step-by-step decision model to guide managers in selecting the most appropriate corporate strategy vehicle.2 Selecting the most suitable vehicle for corporate strategy in response to a specific strategic challenge also makes successful implementation more likely. THE BUILD-BORROW-BUY FRAMEWORK The 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). 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. Note that in the build-borrow-or-buy model, the term resources is defined broadly to include capabilities CHAPTER 9 Corporate Strategy: Strategic Alliances, Mergers and Acquisitions 311 and competencies (as in the VRIO model discussed in Chapter 4). Exhibit 9.1 shows the build-borrow-or-buy decision framework. The starting point is the firm’s identification of a strategic resource gap that will impede future growth. The resource gap is strategic because closing this gap is likely to lead to a competitive advantage. As discussed in Chapter 4, resources with the potential to lead to competitive advantage cannot be simply bought on the open market. Indeed, if any firm could readily buy this type of resource, its availability would negate its potential for competitive advantage. It would no longer be rare, a key condition for a resource to form the basis of competitive advantage. Moreover, resources that are valuable, rare, and difficult to imitate are often embedded deep within a firm, frequently making up a resource bundle that is hard to unplug whole or in part. The options to close the strategic resource gap are, therefore, to build, borrow, or buy. Build in the build-borrow-buy framework refers to internal development; borrow refers to the use of strategic alliances; and buy refers to acquiring a firm. 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. Exhibit 9.1 provides a schematic of the build-borrow-or-buy framework. In this approach 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: 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? EXHIBIT 9.1 / Guiding Corporate Strategy: The Build-Borrow-or-Buy Framework Strategic Resource Gap Key Question How relevant are internal resources? High Action Buy-Borrowor-Build? Low How tradable are the targeted resources? Low High Internal Development Build How close to your resource partner? Low High How well can you integrate the target firm? Low Revisit build-borrow-buy options or reformulate strategy High Strategic Alliance • Contract • Licensing Contractual Alliance • Equity Alliance • Joint Venture Borrow Alliance with Equity Acquisition Buy SOURCE: Adapted from L. Capron and W. Mitchell (2012), Build, Borrow, or Buy: Solving the Growth Dilemma (Boston, MA: Harvard Business Review Press). 312 CHAPTER 9 Corporate Strategy: Strategic Alliances, Mergers and Acquisitions 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? As shown in Exhibit 9.1, the answers to these questions lead to a recommended action or the next question. We’ll review each in more depth. 1. HOW RELEVANT ARE THE FIRM’S EXISTING INTERNAL RESOURCES TO SOLVING THE RESOURCE GAP? The firm’s strategic leaders start by asking whether the firm’s internal resources are high or low in relevance. 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. But how does a strategic leader know whether the firm’s resources are relevant in addressing a new challenge or opportunity? 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. Let’s look at both conditions. Strategic leaders are often misled by the first test because things that might appear similar at the surface are actually quite different deep down.4 Moreover, they tend to focus on the (known) similarities rather than on (unknown) differences. Strategic leaders often don’t know how the resources needed for the existing and new business opportunity differ. An executive at a newspaper publisher such as The New York Times may conclude that the researching, reporting, writing, and editing activities done for a printed newspaper are similar to those done for an online one. Although the activities may be similar, they are also different because the underlying business model and technology for online publishing are radically different from that of traditional print media. Managing the community interactions of online publishing as well as applying data analytics to understand website traffic and reader engagement are also elements that are entirely new. To make the challenge even greater, online news reporting is required in real time, 24/7, 365 days a year. To make matters worse, old-line news companies are now competing with millions of so-called citizen journalists on social media, such as Twitter, which often have an edge on breaking news.5 The second test, determining whether your internal resources are superior to those of competitors in the targeted area, can best be assessed by applying the VRIO framework (see Exhibit 4.5). In the case of the print publisher, the answer to both questions is likely a “no.” This implies that building the new resource through internal development is not an option. The firm then needs to consider external—borrow or buy—options. This then leads us to the next question. 2. HOW TRADABLE ARE THE TARGETED RESOURCES THAT MAY BE AVAILABLE EXTERNALLY? For external options, the firm needs to determine how tradable the targeted resources may be. The term tradable 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 as well as long-term contracts, such as licensing or franchising, are a way to borrow resources from another company (see discussion in Chapter 8). In the biotechpharma industry, some producers use licensing agreements to transfer knowledge and technology from the licensor’s R&D to the licensee’s manufacturing. Eli Lilly, for example, has commercialized several breakthrough biotech drugs using licensing agreements with new ventures. The implication is that if a resource is highly tradable, then the resource should be borrowed via a licensing agreement or other contractual agreement. If the resource in CHAPTER 9 Corporate Strategy: Strategic Alliances, Mergers and Acquisitions 313 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. 3. HOW CLOSE DO YOU NEED TO BE TO YOUR EXTERNAL RESOURCE PARTNER? Many times, 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 (see Exhibit 8.4) rather than through 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 to understand and obtain its underlying 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. 4. HOW WELL CAN YOU INTEGRATE THE TARGETED FIRM, SHOULD YOU DETERMINE YOU NEED TO ACQUIRE THE RESOURCE PARTNER? The final decision question using the build-borrow-buy lens is: Can you integrate the target firm? The list of post-integration failures, often due to cultural differences, is long. Multibillion-dollar failures include the Daimler-Chrysler integration, AOL and Time Warner, HP and Autonomy, and Bank of America and Merrill Lynch. More than cultural differences were involved in Microsoft’s 2015 decision to write down $7.6 billion in losses (or more than 80 percent) on its $9.4 billion acquisition of Nokia some 15 months earlier. It’s now up to Microsoft CEO Satya Nadella to decide how to compete in the mobile device arena after former CEO Steve Ballmer made a desperate gamble on acquiring the Finnish cell phone maker.6 Only if the three prior conditions (low relevancy, low tradability, and high need for closeness) shown in the decision tree in Exhibit 9.1 are met, should the firm’s strategic leaders consider M&A: 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. In all other cases, the firms should consider finding a less costly borrow arrangement when building is not an option. Since strategic alliances are the less costly and more common tool to execute corporate strategy, we discuss alliances first before mergers and acquisitions. Per the build-borrow-buy decision framework, strategic alliances (borrow) also need to be considered before mergers and acquisitions (buy). 9.2 Strategic Alliances Firms enter many types of alliances, from small contracts that have no bearing on a firm’s competitiveness to multibillion-dollar joint ventures that can make or break the company. An alliance, therefore, qualifies as strategic only if it has the potential to affect a firm’s competitive advantage. Strategic alliances are voluntary arrangements between firms that involve the sharing of knowledge, resources, and capabilities with the intent of developing processes, products, or services.7 The use of strategic alliances to implement corporate strategy has grown significantly in the past few decades, with thousands forming each year. As the speed of technological change and innovation has increased (see discussion in Chapter 7), firms have responded by entering more alliances. Globalization has also contributed to an increase in cross-border strategic alliances (see discussion in Chapter 10). Strategic alliances are attractive for a number of reasons. They enable firms to achieve goals faster and at lower costs than going it alone. Strategic alliances may join LO 9-2 Define strategic alliances, and explain why they are important to implement corporate strategy and why firms enter into them. strategic alliances Voluntary arrangements between firms that involve the sharing of knowledge, resources, and capabilities with the intent of developing processes, products, or services. 314 CHAPTER 9 Corporate Strategy: Strategic Alliances, Mergers and Acquisitions 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. complementary parts of a firm’s value chain, such as R&D and marketing, or they may focus on joining the same value chain activities. In contrast to mergers and acquisitions, strategic alliances also allow firms to circumvent potential legal repercussions including potential lawsuits filed by U.S. federal agencies or the European Union. A strategic alliance has the potential to help a firm gain and sustain a competitive advantage when it joins together resources and knowledge in a combination that obeys the VRIO principles (introduced in Chapter 4).8 The locus of competitive advantage is often not found within the individual firm but within a strategic partnership. According to this relational view of competitive advantage, 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. 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.9 WHY DO FIRMS ENTER STRATEGIC ALLIANCES? To affect a firm’s competitive advantage, an alliance must promise a positive effect on the firm’s economic value creation through increasing value and/or lowering costs (see discussion in Chapter 5). This logic is reflected in the common reasons firms enter alliances.10 They do so to ■ ■ ■ ■ ■ Strengthen competitive position. Enter new markets. Hedge against uncertainty. Access critical complementary assets. Learn new capabilities. STRENGTHEN COMPETITIVE POSITION. Firms frequently resort to strategic alliances to strengthen their competitive position. Firms can also use strategic alliances to change the industry structure in their favor.11 Moreover, firms frequently use strategic alliances when competing in setting an industry standard (see discussion in Chapter 7). Strategy Highlight 9.1 shows how Tesla used alliances strategically to strengthen its competitive standing and to position itself advantageously in making battery-powered vehicles a serious contender for the future standard in car propulsion, eventually obsoleting internal combustion engines. ENTER NEW MARKETS. Firms may use strategic alliances to enter new markets, either in terms of products and services or geography.12 Using a strategic alliance, HP and DreamWorks Animation SKG created the Halo Collaboration Studio, which makes virtual communication possible around the globe.13 Halo’s conferencing technology gives participants the vivid sense that they are in the same room. The conference rooms of clients match, down to the last detail, giving participants the impression that they are sitting together at the same table. DreamWorks produced the computer-animated movie Shrek 2 using this new technology for its meetings. People with different creative skills—script writers, computer animators, directors—though dispersed geographically, were able to participate as if in the same room, even seeing the work on each other’s laptops. Use of the technology enabled faster decision making, enhanced productivity, reduced (or even eliminated) travel time and expense, and increased job CHAPTER 9 Corporate Strategy: Strategic Alliances, Mergers and Acquisitions 315 Strategy Highlight 9.1 How Tesla Used Alliances Strategically Since its initial public offering in 2010, the electric-car manufacturer Tesla has had tremendous impact. Indeed, by 2017 it had become the most valuable car company in the United States, ahead of GM and Ford. One critical factor in the success of the California startup is the role played by Tesla’s strategy involving alliances with larger, more established companies. Two key strategic alliances in particular— one with Daimler and the other with Toyota—were crucial to Tesla’s early success. The Daimler partnership provided a much-needed cash injection; the Toyota partnership gave Tesla access to a world-class automobile manufacturing facility located near its headquarters in Palo Alto, California. Initially, Tesla, which began selling its all-electric Roadster model in 2008, had neither a market nor legitimacy. Moreover, it was plagued with both thorny technical problems and cost overruns. Yet it managed to overcome these early challenges, in part by turning prospective rivals into alliance partners. In 2009, the year before its IPO, Tesla worked out the alliance with Daimler, whose roots in automobile engineering extend back to early days of the automobile powered by an internal combustion engine about 130 years ago. The deal provided Tesla with access to superior engineering expertise and a cash infusion of $50 million, helping to save the company from potential bankruptcy. The alliance with Toyota, signed the following year, brought other benefits. It enabled Tesla to buy the former New United Motor Manufacturing Inc. (NUMMI) factory in Fremont, California—created as a joint venture between Toyota and General Motors Corp. in 1984—and to learn large-scale, highquality manufacturing from a pioneer of lean manufacturing. As it happened, the NUMMI plant was the only remaining largescale car manufacturing plant in California, and some 25 miles from Tesla’s Palo Alto headquarters. Without this factory, Tesla would not have been able to initiate production planning for its new Model 3, which received more than 350,000 preorders within three months of its announcement in March 2016. In 2014, Tesla signed another strategic alliance—this one with Osaka-based Panasonic, the Japanese consumer electronics company and a world leader in battery technology. As Tesla tries to position itself in the business of sustainable and decentralized energy, the relationship with Panasonic is significant. The two companies are jointly investing in a new $5 billion lithium-ion battery plant in Nevada. Tesla’s ability to attract and manage leading companies in the automotive and other key industries as strategic alliance partners is an important part of its formula for success. The decisions by Daimler, Toyota, and Panasonic to collaborate with Tesla highlight that individual companies may not need to own all of the resources, skills, and knowledge necessary to undertake key strategic growth initiatives.14 satisfaction. Neither HP nor DreamWorks would have been able to produce this technology breakthrough alone, but moving into the videoconferencing arena together via a strategic alliance allowed both partners to pursue related diversification. Moreover, HP’s alliance with DreamWorks Animation SKG enabled HP to compete head on with Cisco’s high-end videoconferencing solution, TelePresence.15 The HP and DreamWorks Animation SKG alliance was motivated by the desire to enter a new market, in terms of products and services offered, that neither could enter alone. When entering new geographic markets, in some instances, governments such as Saudi Arabia or China may require that foreign firms have a local joint venture partner before doing business in their countries. These cross-border strategic alliances have both benefits and risks. While the foreign firm can benefit from local expertise and contacts, it is exposed to the risk that some of its proprietary know-how may be appropriated by the foreign partner. We will address such issues in Chapter 10 when studying global strategy. HEDGE AGAINST UNCERTAINTY. In dynamic markets, strategic alliances allow firms to limit their exposure to uncertainty in the market.16 For instance, in the wake of the 316 CHAPTER 9 Corporate Strategy: Strategic Alliances, Mergers and Acquisitions 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. co-opetition Cooperation by competitors to achieve a strategic objective. 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. biotechnology revolution, incumbent pharmaceutical firms such as Pfizer, Novartis, and Roche entered into hundreds of strategic alliances with biotech startups.17 These alliances allowed the big pharma firms to make small-scale investments in many of the new biotechnology ventures that were poised to disrupt existing market economics. In some sense, the pharma companies were taking real options in these biotechnology experiments, providing them with the right but not the obligation to make further investments when new drugs were introduced from the biotech companies. A real-options perspective to strategic decision making breaks down a larger investment decision (such as whether to enter biotechnology or not) into a set of smaller decisions that are staged sequentially over time. This approach allows the firm to obtain additional information at predetermined stages. At each stage, after new information is revealed, the firm evaluates whether or not to make further investments. In a sense, 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. Once the new biotech drugs were a known quantity, the uncertainty was removed, and the incumbent firms could react accordingly. For example, in 1990 the Swiss pharma company Roche initially invested $2.1 billion in an equity alliance to purchase a controlling interest (greater than 50 percent) in the biotech startup Genentech. In 2009, after witnessing the success of Genentech’s drug discovery and development projects in subsequent years, Roche spent $47 billion to purchase the remaining minority interest in Genentech, making it a wholly owned subsidiary.18 Taking a wait-and-see approach by entering strategic alliances allows incumbent firms to buy time and wait for the uncertainty surrounding the market and technology to fade. Many firms in fast-moving markets subscribe to this rationale. Waiting can also be expensive, however. To acquire the remaining less than 50 percent of Genentech some 20 years after its initial investment required a price that was some 24 times higher than the initial investment, as uncertainty settled and the biotech startup turned out to be hugely successful. Besides biotechnology, the use of a real-options perspective in making strategic investments has also been documented in nanotechnology, semiconductors, and other dynamic markets.19 ACCESS CRITICAL COMPLEMENTARY ASSETS. The successful commercialization of a new product or service often requires complementary assets such as marketing, manufacturing, and after-sale service.20 In particular, new firms are in need of complementary assets to complete the value chain from upstream innovation to downstream commercialization. This implies that a new venture that has a core competency in R&D, for example, will need to access distribution channels and marketing expertise to complete the value chain. Building downstream complementary assets such as marketing and regulatory expertise or a sales force is often prohibitively expensive and time-consuming, and thus frequently not an option for new ventures. Strategic alliances allow firms to match complementary skills and resources to complete the value chain. Moreover, licensing agreements of this sort allow the partners to benefit from a division of labor, allowing each to efficiently focus on its core competency. LEARN NEW CAPABILITIES. Firms also enter strategic alliances because they are motivated by the desire to learn new capabilities from their partners.21 When the collaborating firms are also competitors, co-opetition ensues.22 Co-opetition is a portmanteau describing cooperation by competitors. They may cooperate to create a larger pie but then might compete about how the pie should be divided. Such co-opetition can lead to learning races CHAPTER 9 Corporate Strategy: Strategic Alliances, Mergers and Acquisitions 317 in strategic alliances,23 a situation in which both partners 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, to reduce its knowledge sharing. Since the cooperating firms are also competitors, learning races can have a positive effect on the winning firm’s competitive position vis-à-vis its alliance partner. NUMMI (New United Motor Manufacturing, Inc.) was the first joint venture in the U.S. automobile industry, formed between GM and Toyota in 1984. Recall from Chapter 8 that joint ventures are a special type of a strategic alliance in which two partner firms create a third, jointly owned entity. In the NUMMI joint venture, each partner was motivated to learn new capabilities: GM entered the equity-based strategic alliance to learn the lean manufacturing system pioneered by Toyota to produce high-quality, fuel-efficient cars at a profit. Toyota entered the alliance to learn how to implement its lean manufacturing program with an American work force. NUMMI was a test-run for Toyota before building fully owned greenfield plants (new manufacturing facilities) in Alabama, Indiana, Kentucky, Mississippi, Texas, and West Virginia. In this 25-year history, GM and Toyota built some 7 million high-quality cars at the NUMMI plant. In fact, NUMMI was transformed from worst performer (under GM ownership before the joint venture) to GM’s highestquality plant in the United States. In the end, as part of GM’s bankruptcy reorganization during 2009–2010, it pulled out of the NUMMI joint venture. Toyota later sold the NUMMI plant to Tesla (as mentioned in Strategy Highlight 9.1). The joint venture between GM and Toyota can be seen as a learning race. Who won? Strategy scholars argue that Toyota was faster in accomplishing its alliance goal—learning how to manage U.S. labor—because of its limited scope.24 Toyota had already perfected lean manufacturing; all it needed to do was learn how to train U.S. workers in the method and transfer this knowledge to its subsidiary plants in the United States. On the other hand, GM had to learn a completely new production system. GM was successful in transferring lean manufacturing to its newly created Saturn brand (which was discontinued in 2010 as part of GM’s reorganization), but it had a hard time implementing lean manufacturing in its existing plants. These factors suggest that Toyota won the learning race with GM, which in turn helped Toyota gain and sustain a competitive advantage over GM in the U.S. market. Also, note that different motivations for forming alliances are not necessarily independent and can be intertwined. For example, firms that collaborate to access critical complementary assets may also want to learn from one another to subsequently pursue vertical integration. In sum, alliance formation is frequently motivated by leveraging economies of scale, scope, specialization, and learning. GOVERNING STRATEGIC ALLIANCES In Chapter 8, we showed that strategic alliances lie in the middle of the make-or-buy continuum (see Exhibit 8.4). Alliances can be governed by the following mechanisms:25 ■ ■ ■ Non-equity alliances Equity alliances Joint ventures Exhibit 9.2 provides an overview of the key characteristics of the three alliance types, including their advantages and disadvantages. LO 9-3 Describe three alliance governance mechanisms and evaluate their pros and cons. 318 CHAPTER 9 EXHIBIT 9.2 Corporate Strategy: Strategic Alliances, Mergers and Acquisitions / Alliance Type Non-equity (supply, licensing, and distribution agreements) Equity (purchase of an equity stake or corporate venture capital investment, or investment in kind such as a plant and equipment) Key Characteristics of Different Alliance Types Governance Mechanism Contract Frequency Type of Knowledge Exchanged Pros Cons Examples Most common Explicit • Flexible • Weak tie • Fast • Lack of trust and commitment • Genentech-Lilly (exclusive) licensing agreement for Humulin • Easy to initiate and terminate Equity investment Less common than non-equity alliances, but more common than joint ventures Explicit; exchange of tacit knowledge possible • Microsoft-IBM (nonexclusive) licensing agreement for MS-DOS • Stronger tie • Less flexible • Trust and commitment can emerge • Slower • Window into new technology (option value) • Can entail significant investments • Renault-Nissan alliance based on cross equity holdings, with Renault owning 43.4% in Nissan; and Nissan owning 15% in Renault • Roche’s equity investment in Genentech (prior to full integration) Joint venture (JV) Creation of new entity by two or more parent firms Least common Both tacit and explicit knowledge exchanged • Strongest tie • Trust and commitment likely to emerge • May be required by institutional setting non-equity alliance Partnership based on contracts between firms. • Can entail long negotiations and significant investments • Long-term solution • JV managers have double reporting lines (2 bosses) • Hulu, owned by NBC (30%), Fox (30%), DisneyABC (30%), and Turner Broadcasting System (10%) • The A++ trans-Atlantic joint venture, owned by United Airlines, Lufthansa, and Air Canada NON-EQUITY ALLIANCES. The most common type of alliance is a non-equity alliance, which is based on contracts between 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, CHAPTER 9 Corporate Strategy: Strategic Alliances, Mergers and Acquisitions 319 connecting different parts of the industry value chain. In a non-equity alliance, firms tend to share explicit knowledge—knowledge that can be codified. Patents, user manuals, fact sheets, and scientific publications are all ways to capture explicit knowledge, which concerns the notion of knowing about a certain process or product. Licensing agreements are contractual alliances in which the participants regularly exchange codified knowledge. The biotech firm Genentech licensed its newly developed drug Humulin (human insulin) to the pharmaceutical firm Eli Lilly for manufacturing, facilitating approval by the Food and Drug Administration (FDA), and distribution. This partnership was an example of a vertical strategic alliance: One partner (Genentech) was positioned upstream in the industry value chain focusing on R&D, while the other partner (Eli Lilly) was positioned downstream focusing on manufacturing and distribution. 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. When Humulin reached the market, it was the first approved genetically engineered human therapeutic drug worldwide.26 Subsequently, Humulin became a billion-dollar blockbuster drug. Because of their contractual nature, non-equity alliances are flexible and easy to initiate and terminate. However, because they can be temporary in nature, they also sometimes produce weak ties between the alliance partners, which can result in a lack of trust and commitment. explicit knowledge Knowledge that can be codified; concerns knowing about a process or product. EQUITY ALLIANCES. In an equity alliance, at least one partner takes partial ownership in the other partner. Equity alliances are less common than contractual, non-equity alliances because they often require larger investments. Because they are based on partial ownership rather than contracts, equity alliances are used to signal stronger commitments. Moreover, equity alliances allow for the sharing of tacit knowledge—knowledge that cannot be codified.27 Tacit knowledge concerns knowing how to do a certain task. It can be acquired only through actively participating in the process. In an equity alliance, therefore, the partners frequently exchange personnel to make the acquisition of tacit knowledge possible. Toyota used an equity alliance with Tesla, a designer and maker of electric cars (featured in ChapterCase 1 and Strategy Highlight 9.1), to learn new knowledge and gain a window into new technology. In 2010, Toyota made a $50 million equity investment in the California startup. In the same year, Tesla purchased the NUMMI plant in Fremont, California, where it now manufactures its Models S, X, and 3. Tesla CEO Elon Musk stated, “The Tesla factory effectively leverages an ideal combination of hardcore Silicon Valley engineering talent, traditional automotive engineering talent, and the proven Toyota production system.” Toyota in turn hopes to infuse its company with Tesla’s entrepreneurial spirit. Toyota President Akio Toyoda commented, “By partnering with Tesla, my hope is that all Toyota employees will recall that ‘venture business spirit’ and take on the challenges of the future.” Toyoda hoped that a transfer of tacit knowledge would occur, in which Tesla’s entrepreneurial spirit would reinvigorate Toyota.28 This equity-based learning race ended in 2014 when Toyota sold its stake in Tesla.29 The Japanese automaker is shifting away from electric cars, renewing its focus on hybrid vehicles and exploring fuel-cell technology. Another governance mechanism that falls under the broad rubric of equity alliances is corporate venture capital (CVC) investments, which are equity investments by established firms in entrepreneurial ventures.30 The value of CVC investments is estimated to be in the double-digit billion-dollar range each year. Larger firms frequently have dedicated CVC units, such as Google Ventures, Siemens Venture Capital, Kaiser Permanente Ventures, and Johnson & Johnson Development Corp. Rather than hoping primarily for equity alliance Partnership in which at least one partner takes partial ownership in the other. tacit knowledge Knowledge that cannot be codified; concerns knowing how to do a certain task and can be acquired only through active participation in that task. corporate venture capital (CVC) Equity investments by established firms in entrepreneurial ventures; CVC falls under the broader rubric of equity alliances. 320 CHAPTER 9 Corporate Strategy: Strategic Alliances, Mergers and Acquisitions financial gains, as venture capitalists traditionally do, CVC investments create real options in terms of gaining access to new, and potentially disruptive, technologies.31 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.32 Taken together, equity alliances tend to produce stronger ties and greater trust between partners than non-equity alliances do. 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.33 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. JOINT VENTURES. A joint venture (JV) is a standalone organization created and jointly owned by two or more parent companies (as discussed in Chapter 8). For example, Hulu (a video-on-demand service) is jointly owned by NBC, Disney-ABC, Fox, and Turner Broadcast System (TBS). Since partners contribute equity to a joint venture, they are making a long-term commitment. Exchange of both explicit and tacit knowledge through interaction of personnel is typical. Joint ventures are also frequently used to enter foreign markets where the host country requires such a partnership to gain access to the market in exchange for advanced technology and know-how. In terms of frequency, joint ventures are the least common of the three types of strategic alliances. The advantages of joint ventures are the strong ties, trust, and commitment that can result between the partners. 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. LO 9-4 Describe the three phases of alliance management and explain how an alliance management capability can lead to a competitive advantage. 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, and (3) post-formation alliance management. ALLIANCE MANAGEMENT CAPABILITY Strategic alliances create a paradox for managers. Although alliances appear to be necessary to compete in many industries, between 30 and 70 percent of all strategic alliances do not deliver the expected benefits, and are considered failures by at least one alliance partner.34 Given the high failure rate, effective alliance management is critical to gaining and sustaining a competitive advantage, especially in high-technology industries.35 Alliance management capability is a firm’s ability to effectively manage three alliance-related tasks concurrently, often across a portfolio of many different alliances (see Exhibit 9.3):36 ■ ■ ■ Partner selection and alliance formation. Alliance design and governance. Post-formation alliance management. PARTNER SELECTION AND ALLIANCE FORMATION. When making the business case for an alliance, the expected benefits of the alliance must exceed its costs. When one or more of the five reasons for alliance formation are present—to strengthen competitive position, enter new markets, hedge against uncertainty, access critical complementary resources, or learn new capabilities—the firm must select the best possible alliance partner. Partner CHAPTER 9 Corporate Strategy: Strategic Alliances, Mergers and Acquisitions EXHIBIT 9.3 Alliance Management Capability 321 / Alliance Management Capability Partner Selection and Alliance Formation Alliance Design and Governance Post-Formation Alliance Management compatibility and partner commitment are necessary conditions for successful alliance formation.37 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. ALLIANCE DESIGN AND GOVERNANCE. 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. For example, 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.38 In addition to the formal governance mechanisms, interorganizational trust is a critical dimension of alliance success.39 Because all contracts are necessarily incomplete, trust between the alliance partners plays an important role for effective post-formation alliance management. Effective governance, therefore, can be accomplished only by skillfully combining formal and informal mechanisms. POST-FORMATION ALLIANCE MANAGEMENT. The third phase in a firm’s alliance management capability concerns the ongoing management of the alliance. To be a source of competitive advantage, the partnership needs to create resource combinations that obey the VRIO criteria. As shown in Exhibit 9.4, this can most likely be accomplished if the alliance partners make relation-specific investments, establish knowledge-sharing routines, and build interfirm trust.40 Trust is a critical aspect of any alliance. Interfirm trust entails the expectation that each alliance partner will behave in good faith and develop norms of reciprocity and fairness.41 Such trust helps ensure that the relationship survives and thereby increases the possibility of meeting the intended goals of the alliance. Interfirm trust is also important for fast decision making.42 Several firms such as Eli Lilly, HP, Procter & Gamble, and IBM compete to obtain trustworthy reputations in order to become the alliance “partner of choice” for small technology ventures, universities, and individual inventors. Indeed, the systematic differences in firms’ alliance management capability can be a source of competitive advantage.43 But how do firms build alliance management capability? The answer is to build capability through repeated experiences over time. In support of this idea, several empirical studies have shown that firms move down the learning curve and become better at managing alliances through repeated alliance exposure.44 The “learning-by-doing” approach has value for small ventures in which a few key people coordinate most of the firms’ activities.45 However, there are clearly limitations for larger companies. Conglomerates such as ABB, GE, Philips, or Siemens are engaged in hundreds of alliances simultaneously. In fact, if alliances are not managed from a 322 CHAPTER 9 EXHIBIT 9.4 Corporate Strategy: Strategic Alliances, Mergers and Acquisitions / portfolio perspective at the corporate level, serious negative repercussions can emerge.46 Groupe Danone, a large French food conglomerate, lost its leading position in the highly lucrative and Relation-Specific Ef fec fast-growing Chinese market because Investments Go tive its local alliance partner, Hangzhou ve Al rn lia an nc Wahaha Group, terminated the longce e standing alliance.47 Wahaha accused different Danone business units of subsequently setting up partnerships with other Chinese firms that were a direct Interfirm Knowledge-Sharing competitive threat to Wahaha. This Trust Routines example makes it clear that although alliances are important pathways by which to pursue business-level strategy, they are best managed at the corporate Effective Alliance level. Governance To accomplish effective alliance management, strategy scholars suggest 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. that firms create a dedicated alliance function,48 led by a vice president or director of alliance management and endowed with its own resources and support staff. The dedicated alliance function should be given the tasks of coordinating all alliancerelated 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. Research shows that firms with a dedicated alliance function are able to create value from their alliances above and beyond what could be expected based on experience alone.49 Pharmaceutical company Eli Lilly is an acknowledged leader in alliance management.50 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 threeperson team: an alliance champion, alliance leader, and alliance manager. Eff ec Go tive ve Al rn lia an nc ce e How to Make Alliances Work ■ ■ ■ 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. Some companies are also able to leverage the relational capabilities obtained through managing alliance portfolios into a successful acquisition strategy.51 Eli Lilly has an entire department at the corporate level devoted to managing its alliance portfolio. Following up on an earlier 50/50 joint venture formed with Icos, maker of the $1 billion-plus erectiledysfunction drug Cialis, Lilly acquired Icos in 2007. Just a year later, Eli Lilly outmaneuvered Bristol-Myers Squibb to acquire biotech venture ImClone for $6.5 billion. ImClone CHAPTER 9 Corporate Strategy: Strategic Alliances, Mergers and Acquisitions 323 discovered and developed the cancer-fighting drug Erbitux, also a $1 billion blockbuster in terms of annual sales. The acquisition of these two smaller biotech ventures allowed Lilly to address its problem of an empty drug pipeline.52 9.3 Mergers and Acquisitions A popular vehicle for executing corporate strategy is mergers and acquisitions (M&A). Hundreds of mergers and acquisitions occur each year, with a cumulative value in the trillions of dollars.53 Although the terms are often used interchangeably, and usually in tandem, mergers and acquisitions are, by definition, distinct from each other. A merger describes the joining of two independent companies to form a combined entity. Mergers tend to be friendly; in mergers, the two firms agree to join in order to create a combined entity. In the live event-promotion business, for example, Live Nation merged with Ticketmaster. An acquisition describes the purchase or takeover of one company by another. Acquisitions can be friendly or unfriendly. For example, Disney’s acquisition of Pixar, for example, was a friendly one, in which both management teams believed that joining the two companies was a good idea. When a target firm does not want to be acquired, the acquisition is considered a hostile takeover. British telecom company Vodafone’s acquisition of Germany-based Mannesmann, a diversified conglomerate with holdings in telephony and internet services, at an estimated value of $150 billion, was a hostile one. It was also the largest takeover in corporate history. In defining mergers and acquisitions, size can matter as well. The combining of two firms of comparable size is often described as a merger even though it might in fact be an acquisition. For example, the integration of Daimler and Chrysler was pitched as a merger, though in reality Daimler acquired Chrysler, and later sold it. After emerging from bankruptcy restructuring, Chrysler is now majority-owned by Fiat, an Italian auto manufacturer. In contrast, when large, incumbent firms such as GE, Cisco, or Microsoft buy start-up companies, the transaction is generally described as an acquisition. Although there is a distinction between mergers and acquisitions, many observers simply use the umbrella term mergers and acquisitions, or M&A. LO 9-5 Differentiate between mergers and acquisitions, and explain why firms would use either to execute corporate strategy. merger The joining of two independent companies to form a combined entity. acquisition The purchase or takeover of one company by another; can be friendly or unfriendly. hostile takeover Acquisition in which the target company does not wish to be acquired. WHY DO FIRMS MERGE WITH COMPETITORS? In contrast to vertical integration, which concerns the number of activities a firm participates in up and down the industry value chain (as discussed in Chapter 8), horizontal integration is the process of merging with a competitor at the same stage of the industry value chain. Horizontal integration is a type of corporate strategy that can improve a firm’s strategic position in a single industry. As a rule of thumb, firms should go ahead with horizontal integration (i.e., acquiring a competitor) if the target firm is more valuable inside the acquiring firm than as a continued standalone company. This implies that the net value creation of a horizontal acquisition must be positive to aid in gaining and sustaining a competitive advantage. An industry-wide trend toward horizontal integration leads to industry consolidation. 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. There are three main benefits to a horizontal integration strategy: ■ ■ ■ Reduction in competitive intensity. Lower costs. Increased differentiation. LO 9-6 Define horizontal integration and evaluate the advantages and disadvantages of this option to execute corporate-level strategy. horizontal integration The process of merging with competitors, leading to industry consolidation. 324 CHAPTER 9 EXHIBIT 9.5 Corporate Strategy: Strategic Alliances, Mergers and Acquisitions / Sources of Value Creation and Costs in Horizontal Integration Corporate Strategy Sources of Value Creation (V) Sources of Costs (C) Horizontal integration through M&A • Reduction in competitive intensity • Integration failure • Lower costs • Reduced flexibility • Increased differentiation • Increased potential for legal repercussions Exhibit 9.5 previews the sources of value creation and costs in horizontal integration, which we discuss next. REDUCTION IN COMPETITIVE INTENSITY. Looking through the lens of Porter’s five forces model with a focus on rivalry among competitors (introduced in Chapter 3), 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 as a consequence of horizontal integration, assuming no new entrants. As a whole, the industry structure becomes more consolidated and potentially more profitable. If the surviving firms find themselves in an oligopolistic industry structure and maintain a focus on non-price competition (i.e., focus on R&D spending, customer service, or advertising), the industry can indeed be quite profitable, and rivalry would likely decrease among existing firms. The wave of recent horizontal integration in the U.S. airline industry, for example, provided several benefits to the surviving carriers. By reducing excess capacity, the mergers between Delta and Northwest Airlines, United Airlines and Continental, Southwest and AirTran, and American and US Airways lowered competitive intensity in the industry overall. Horizontal integration can favorably affect several of Porter’s five forces for the surviving firms: strengthening bargaining power vis-à-vis suppliers and buyers, reducing the threat of entry, and reducing rivalry among existing firms. Because of the potential to reduce competitive intensity in an industry, government authorities such as the Federal Trade Commission (FTC) in the United States and/or the European Commission usually must approve any large horizontal integration activity. Industry dynamics, however, are in constant flux as new competitors emerge and others fall by the wayside. In 2005, for example, the FTC did not approve the proposed merger between Staples and Office Depot, arguing that the remaining industry would have only two competitors, with Office Max being the other. Staples and Office Depot argued that the market for office supplies needed to be defined more broadly to include large retailers such as Walmart and Target. The U.S. courts sided with the FTC, which argued that the prices for end consumers would be significantly higher if the market had only two category killers.54 A few years later, however, the competitive landscape had shifted further as Walmart and Amazon had emerged as ferocious competitors offering rock-bottom prices for office supplies. Subsequently, in 2013, the FTC approved the merger between Staples and Office Max. Just two years later, the FTC also approved the merger between the now much larger Staples and Office Depot.55 LOWER COSTS. Firms use horizontal integration to lower costs through economies of scale and to enhance their economic value creation, and in turn their performance.56 In industries that have high fixed costs, achieving economies of scale through large output is critical in lowering costs. The dominant pharmaceutical companies such as Pfizer, Roche, and Novartis, for example, maintain large sales forces (“detail people”) who call on doctors and hospitals to promote their products. These specialized sales forces often number 10,000 or more and thus are a significant fixed cost to the firms, even though part of their CHAPTER 9 Corporate Strategy: Strategic Alliances, Mergers and Acquisitions 325 compensation is based on commissions. Maintaining such a large and sophisticated sales force (many with MBAs) is costly if the firm has only a few drugs it can show the doctor. As a rule of thumb, if a pharma company does not possess a blockbuster drug that brings in more than $1 billion in annual revenues, it cannot maintain its own sales force.57 When existing firms such as Pfizer and Wyeth merge, they join their drug pipelines and portfolios of existing drugs. They are likely to have one sales force for the combined portfolio, consequently reducing the size of the sales force and lowering the overall cost of distribution. INCREASED DIFFERENTIATION. Horizontal integration through M&A can help firms strengthen their competitive positions by increasing the differentiation of their product and service offerings. In particular, horizontal integration can do this by filling gaps in a firm’s product offering, allowing the combined entity to offer a complete suite of products and services. As an example, Disney acquired Marvel for $4 billion in 2009. This acquisition certainly allowed Disney to further differentiate its product offering as an entire new lineup of superheroes was joining Mickey’s family, besides being able to offer Marvel superhero themed-rides and merchandise such as clothing (T-shirts, PJs, etc.) and toys. The Marvel acquisition passed an important test of value creation because Marvel is seen as more valuable inside Disney than outside Disney.58 Because of economies of scope and economies of scale, Marvel is becoming more valuable inside Disney than as a standalone enterprise. The same argument could be made for other recent Disney acquisitions, including Pixar (acquired for $7.4 billion in 2006) and Lucasfilm (acquired for $4 billion in 2012). WHY DO FIRMS ACQUIRE OTHER FIRMS? When first defining the terminology at the beginning of the chapter, we noted that an acquisition describes the purchase or takeover of one company by another. Why do firms make acquisitions? Three main reasons stand out: ■ ■ ■ To gain access to new markets and distribution channels. To gain access to a new capability or competency. To preempt rivals. TO GAIN ACCESS TO NEW MARKETS AND DISTRIBUTION CHANNELS. Firms may resort to acquisitions when they need to overcome entry barriers into markets they are currently not competing in or to access new distribution channels. Strategy Highlight 9.2 discusses Kraft’s history with aggressive acquisitions, both successful and otherwise, in this regard. Firms often resort to M&A to obtain new capabilities or competencies. To strengthen its capabilities in server systems and equipment and to gain access to the capability of designing mobile chips for the internet of things (the concept that everyday objects such as cell phones, wearable devices, temperature controls, household appliances, cars, etc., have network connectivity, allowing them to send and receive data), Intel acquired Altera for $17 billion in 2015.59 TO PREEMPT RIVALS. 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. Let’s look at the acquisitions made by two of the leading internet companies: Facebook and Alphabet’s Google.60 To preempt rivals Facebook spent more than $25 billion since 2012 buying promising startups. It acquired, among others, Instagram, a photo- and video-sharing site, for $1 billion in 2012. Facebook then went on to buy the text messaging service startup LO 9-7 Explain why firms engage in acquisitions. 326 CHAPTER 9 Corporate Strategy: Strategic Alliances, Mergers and Acquisitions Strategy Highlight 9.2 Kraft’s Specialty: Hostile Takeovers in a $37 billion merger, creating the fifth-largest food company in the world, behind Nestlé, Mondelez, PepsiCo, and One example of a firm that pursues acquisitions aggresUnilever. sively is Kraft, a trait that can be traced through the years. In the U.S. market, the Cadbury acquisition allows In 2010, Kraft Foods bought UK-based Cadbury PLC for close Mondelez greater access to convenience stores, gives it a to $20 billion in a hostile takeover. Unlike the more divernew distribution channel, and opens a market for it that is sified food-products company Kraft, Cadbury was focused growing fast and tends to have high profit margins. Monsolely on candy and gum. Hailing to 1824, Cadbury estabdelez, which does not directly compete in the United States, lished itself in markets across the globe, in concert with the licenses its famous Oreo cookie to its subsidiary Nabisco. British Empire. Moreover, Mondelez licenses the sale Kraft was attracted to Cadbury due of Cadbury chocolate to The Herto its strong position in fast-growing shey Co., the largest U.S. chocolate countries such as India, Egypt, and manufacturer. Thailand and in many Latin American Hershey’s main strategic focus is markets. Cadbury held 70 percent of squarely on its home market. With the U.S. the market share for chocolate in India, population growing slowly and becoming with more than 1 billion people. Chilmore health-conscious, however, Hershey dren there specifically ask for “Caddecided in 2013 to enter the Chinese marbury chocolate” instead of just plain ket, the world’s fastest-growing candy mar“chocolate.” It is difficult for outsidket. Since its founding in 1894, Hershey’s ers like Kraft to break into emerging entry into China is the company’s first economies because earlier entrants product launch outside the United States. have developed and perfected their disHershey’s sales growth in China, however, tribution systems to meet the needs of has been disappointing so far. Combined millions of small, independent vendors. with little or no growth in the United To secure a strong strategic position in States, Hershey had to cut jobs in 2015. these fast-growing emerging markets, Inheriting a penchant for hostile therefore, Kraft felt that horizontal takeovers from its parent Kraft Foods, integration with Cadbury was critical. Mondelez saw an opportunity. SpotKraft continues to face formidable ting a weakness in the Hershey Co., competitors in global markets, includMondelez made an unsolicited takeover “Cadbury loyalist” vocally opposing ing Nestlé and Mars, both of which are A offer to buy the U.S. chocolate maker Kraft’s acquisition of a company with especially strong in China. symbolic value in the United Kingdom. for some $23 billion. The goal was to We can see Kraft’s approach even ©John HARRIS/REPORT DIGITAL-REA/Redux create the world’s largest candymaker. through its divisions. To focus its difBut Hershey’s board rebuffed the Monferent strategic business units more effectively and to delez takeover bid unanimously. The Hershey Co. is owned by reduce costs, Kraft Foods restructured in 2012. It separated the Hershey Trust, which was established by Milton Hershey its North American grocery-food business from its global some 125 years ago. The trust’s main beneficiary is a school snack-food and candy business (including Oreos and Cadbury for underprivileged children in Hershey, Pennsylvania, the chocolate), which is now Mondelez International. In 2015, hometown of the namesake company. Kraft Foods merged with Heinz (owned by Warren Buffett’s The dominant trait of a preference for hostile takeovers Berkshire Hathaway and 3G Capital, a Brazilian hedge fund) inherited from its progenitor also became apparent in 2017 CHAPTER 9 Corporate Strategy: Strategic Alliances, Mergers and Acquisitions when Kraft Heinz made a whopping $143 hostile takeover bid for Unilever, a British-Dutch consumer goods company. The intent was to merge the world’s two largest packaged-food companies. Unilever CEO Paul Polman, however, made it 327 clear that the multinational with a strong focus on corporate social responsibility was not interested in pursuing any merger talks with Kraft Heinz.61 WhatsApp for $22 billion in 2014, making it one of the largest tech acquisitions ever. In the same year, Facebook paid $2 billion to acquire Oculus, a virtual reality (VR) firm. Alphabet’s Google has also made a string of acquisitions of new ventures to preempt rivals. In 2006, Google bought YouTube, the video-sharing website, for $1.65 billion. Google engaged in a somewhat larger acquisition when it bought Motorola’s cell phone unit for $12.5 billion in 2011. This was done to gain access to Motorola’s valuable patent holdings in mobile technology. Google later sold the cell phone unit to Lenovo, while retaining Motorola’s patents. In 2013, Google purchased the Israeli start-up company Waze for $1 billion. Google acquired Waze to gain access to a new capability and to prevent rivals from gaining access. Waze’s claim to fame is its interactive mobile map app. Google is already the leader in online maps and wanted to extend this capability to mobile devices. Perhaps even more importantly, Google’s intent was to preempt Apple and Facebook from buying Waze. Apple and Facebook are each comparatively weaker than Google in the increasingly important interactive mobile map and information services segment. In 2014, Google purchased the UK-based technology startup DeepMind for $625 million to enhance its competitive position in artificial intelligence. Moreover, this move also prevented others such as Facebook or Amazon from acquiring DeepMind. M&A AND COMPETITIVE ADVANTAGE Do mergers and acquisitions create competitive advantage? Despite their popularity, the answer, surprisingly, is that in most cases they do not. In fact, the M&A performance track record is rather mixed. Many mergers destroy shareholder value because the anticipated synergies never materialize.62 If value is created, it generally accrues to the shareholders of the firm that was taken over (the acquiree), because acquirers often pay a premium when buying the target company.63 Indeed, sometimes companies get involved in a bidding war for an acquisition; the winner may end up with the prize but may have overpaid for the acquisition—thus falling victim to the winner’s curse. Given that mergers and acquisitions, on average, destroy rather than create shareholder value, why do we see so many mergers? Reasons include: ■ ■ ■ Principal–agent problems. The desire to overcome competitive disadvantage. Superior acquisition and integration capability. PRINCIPAL–AGENT PROBLEMS. When discussing diversification in the previous chapter, we noted that some firms diversify through acquisitions due to principal–agent problems (see Chapter 8 discussion of managerial motives behind firm growth).64 Managers, LO 9-8 Evaluate whether mergers and acquisitions lead to competitive advantage. 328 CHAPTER 9 Corporate Strategy: Strategic Alliances, Mergers and Acquisitions Sometimes the combined value of two companies is less than the value of each company separately. Oatmeal: ©McGraw-Hill Education/Mark Dierker, photographer; Snapple: ©George W. Bailey/ RF managerial hubris A form of self-delusion in which managers convince themselves of their superior skills in the face of clear evidence to the contrary. as agents, are supposed to act in the best interest of the principals, the shareholders. However, managers may have incentives to grow their firms through acquisitions—not for anticipated shareholder value appreciation, but to build a larger empire, which is positively correlated with prestige, power, and pay. Besides providing higher compensation and more corporate perks, a larger organization may also provide more job security, especially if the company pursues unrelated diversification. A related problem is managerial hubris, a form of self-delusion in which managers convince themselves of their superior skills in the face of clear evidence to the contrary.65 Managerial hubris comes in two forms: 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. This justification is often used for an unrelated diversification strategy. 2. Although most top-level managers are aware that the majority of acquisitions destroy rather than create shareholder value, they see themselves as the exceptions to the rule. 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.66 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. THE DESIRE TO OVERCOME COMPETITIVE DISADVANTAGE. In some instances, mergers are not motivated by gaining competitive advantage, but by the attempt to overcome a competitive disadvantage. For example, to compete more successfully with Nike, the worldwide leader in sports shoes and apparel, Adidas (number two) acquired Reebok (number three) for $3.8 billion in 2006. This acquisition allows the now-larger Adidas group to benefit from economies of scale and scope that were unachievable when Adidas and Reebok operated independently. The hope was that this would help in overcoming Adidas’ competitive disadvantage vis-à-vis Nike. In the meantime, Under Armour has outperformed Adidas in the U.S. market and has become the number two after Nike. SUPERIOR ACQUISITION AND INTEGRATION CAPABILITY. Acquisition and integration capabilities are not equally distributed across firms. Although there is strong evidence that mergers and acquisitions, on average, destroy rather than create shareholder value, it does not exclude the possibility that some firms are consistently able to identify, acquire, and CHAPTER 9 Corporate Strategy: Strategic Alliances, Mergers and Acquisitions integrate target companies to strengthen their competitive positions. Since it is valuable, rare, and difficult to imitate, a superior acquisition and integration capability, together with past experience, can lead to competitive advantage. Disney has shown superior post-merger integration capabilities after acquiring Pixar, Marvel, and Lucasfilm. Disney managed its new subsidiaries more like alliances rather than attempting full integration, which could have destroyed the unique value of the acquisitions. In Pixar’s case, Disney kept the entire creative team in place and allowed its members to continue to work in Pixar’s headquarters near San Francisco with minimal interference. The hands-off approach paid huge dividends: Although Disney paid a steep $7.4 billion for Pixar, it made some $10 billion on Pixar’s Toy Story 3 franchise revenues alone. As a consequence, Disney has gained a competitive advantage over its rivals such as Sony and has also outperformed the Dow Jones Industrial Average over the past few years by a wide margin. 9.4 Implications for Strategic Leaders The business environment is constantly changing.67 New opportunities come and go quickly. Firms often need to develop new resources, capabilities, or competencies to take advantage of opportunities. Examples abound. Traditional book publishers must transform themselves into digital content companies. Old-line banking institutions with expensive networks of branches must now offer seamless online banking services. They must make them work between a set of traditional and nontraditional payment services on a mobile platform. Energy providers are in the process of changing their coal-fired power plants to gas-fired ones in the wake of the shale gas boom. Pharmaceutical companies need to take advantage of advances in biotechnology to drive future growth. Food companies are now expected to offer organic, all natural, and gluten-free products. The strategic leader also knows that firms need to grow to survive and prosper, especially if they are publicly traded stock companies. A firm’s corporate strategy is critical in pursuing growth. To be able to grow as well as gain and sustain a competitive advantage, a firm must not only possess VRIO resources but also be able to leverage existing resources, often in conjunction with partners, and build new ones. The question of how to build new resources, capabilities, and competencies to grow your enterprise lies at the center of corporate strategy. Strategic alliances, mergers, and acquisitions are the key tools that the strategist uses in executing corporate strategy. 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. 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.68 Rather than focusing on developing an alliance management 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. We now have concluded our discussion of corporate strategy. Acquisitions and alliances are key vehicles to execute corporate strategy, each with its distinct advantages and disadvantages. It is also clear from this chapter that strategic alliances, as well as mergers and acquisitions, are a global phenomenon. In the next chapter, we discuss strategy in a global world. 329 330 CHAPTER 9 Corporate Strategy: Strategic Alliances, Mergers and Acquisitions CHAPTERCASE 9 Consider This. . . ONE OTHER STRATEGIC reason Lyft entered alliances with GM and Waymo is access to critical complementary assets. Both Lyft and GM bring critical complementary assets to bear in this alliance. GM has upstream core competencies in manufacturing cost-competitive and reliable cars at a large scale. Lyft, in turn, has downstream competencies by owning the second-largest mobile transportation network globally, and with it the data that allow Lyft to develop proprietary algorithms to have cars at the right time and at the right price. Alphabet’s Waymo, moreover, was an early leader in autonomous vehicle development. Where Waymo lags Tesla in driverless car technology, however, is the fact that Tesla has racked up more than a billion miles driven by its vehicles themselves as Tesla owners use its innovative autopilot feature. Every time a Tesla driver engages the autopilot, Tesla accrues more miles and with it data, allowing it to update its software driving the cars and making its autopilot even better. Much like Google’s Android mobile operating system for phones, Waymo provides the software that is the brains behind the self-driving car technology, but lacks an opportunity for large-scale deployment, which constrains testing and learning. The alliance with Lyft allows Waymo to deploy its self-driving car technology on a large scale. The goal is to create a fleet of autonomous GM vehicles on Lyft’s network, driving with Waymo’s autopilot technology. Questions 1. Describe the reasons Lyft entered strategic alliances with GM and Waymo? Are some reasons more important than others? Why or why not? Explain. 2. GM invested $500 million in Lyft in 2016. What are some possible reasons GM entered an equity alliance with Lyft? Are there any reasons GM would prefer Lyft over Uber as an alliance partner? 3. What are some possible reasons Waymo entered an alliance with Lyft? Are there any reasons Waymo would prefer Lyft over Uber as an alliance partner? 4. In terms of valuations, Uber (with $70 billion) is almost 10 times more valuable than Lyft (with $7.5 billion). Uber is active in some 600 cities worldwide, while Lyft services some 200 (in the United States only). Uber offers about five times as many rides as Lyft. Uber is clearly a giant compared to Lyft. Do you think the strategic alliances with GM and Waymo could help Lyft to overcome Uber’s lead? Can you think of other reasons Lyft could end up as the winner in the mobile transportation network competition? Explain. TAKE-AWAY CONCEPTS This chapter discussed two mechanisms of corporatelevel strategy—alliances and acquisitions—as summarized by the following learning objectives and related take-away concepts. LO 9-1 / Apply the build-borrow-or-buy framework to guide corporate strategy. ■ The build-borrow-or-buy framework provides a conceptual model that aids strategists in deciding whether to pursue internal development (build), enter a contract arrangement or strategic alliance (borrow), or 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. LO 9-2 / Define strategic alliances, and explain why they are important to implement corporate strategy and why firms enter into them. ■ ■ Strategic alliances have the goal of sharing knowledge, resources, and capabilities to develop processes, products, or services. An alliance qualifies as strategic if it has the potential to affect a firm’s competitive advantage by increasing value and/or lowering costs. CHAPTER 9 ■ Corporate Strategy: Strategic Alliances, Mergers and Acquisitions The most common reasons 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. LO 9-3 / Describe three alliance governance mechanisms and evaluate their pros and cons. ■ ■ Alliances can be governed by the following mechanisms: contractual agreements for non-equity alliances, equity alliances, and joint ventures. There are pros and cons of each alliance governance mechanism, shown in detail in Exhibit 9.2 with highlights as follows: Non-equity alliance’s pros: flexible, fast, easy to get in and out; cons: weak ties, lack of trust/ commitment. Equity alliance’s pros: stronger ties, potential for trust/commitment, window into new technology (option value); cons: less flexible, slower, can entail significant investment. Joint venture pros: strongest tie, trust/ commitment most likely, may be required by institutional setting; cons: potentially long negotiations and significant investments, long-term solution, managers may have two reporting lines (two bosses). LO 9-4 / Describe the three phases of alliance management and explain how an alliance management capability can lead to a competitive advantage. ■ ■ ■ An alliance management capability consists of a firm’s ability to effectively manage alliancerelated tasks through three phases: (1) partner selection and alliance formation, (2) alliance design and governance, and (3) post-formation alliance management. An alliance management capability can be a source of competitive advantage as better management of alliances leads to more likely superior performance. Firms build a superior alliance management capability through “learning by doing” and by establishing a dedicated alliance function. 331 LO 9-5 / Differentiate between mergers and acquisitions, and explain why firms would use either to execute corporate strategy. ■ ■ ■ ■ A merger describes the joining of two independent companies to form a combined entity. An acquisition describes the purchase or takeover of one company by another. It can be friendly or hostile. Although there is a distinction between mergers and acquisitions, many observers simply use the umbrella term mergers and acquisitions, or M&A. Firms can use M&A activity for competitive advantage when they possess a superior relational capability, which is often built on superior alliance management capability. LO 9-6 / Define horizontal integration and evaluate the advantages and disadvantages of this option to execute corporate-level strategy. ■ ■ Horizontal integration is the process of merging with competitors, leading to industry consolidation. As a corporate strategy, firms use horizontal integration to (1) reduce competitive intensity, (2) lower costs, and (3) increase differentiation. LO 9-7 ■ / Explain why firms engage in acquisitions. 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. LO 9-8 / Evaluate whether mergers and acquisitions lead to competitive advantage. ■ ■ ■ 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. 332 CHAPTER 9 Corporate Strategy: Strategic Alliances, Mergers and Acquisitions KEY TERMS Acquisition (p. 323) Alliance management capability (p. 320) Build-borrow-or-buy framework (p. 310) Co-opetition (p. 316) Corporate venture capital (CVC) (p. 319) Equity alliance (p. 319) Explicit knowledge (p. 319) Horizontal integration (p. 323) Hostile takeover (p. 323) Learning races (p. 316) Managerial hubris (p. 328) Merger (p. 323) Non-equity alliance (p. 318) Real-options perspective (p. 316) Relational view of competitive advantage (p. 314) Strategic alliances (p. 313) Tacit knowledge (p. 319) DISCUSSION QUESTIONS 1. The chapter identifies three governing mechanisms for strategic alliances: non-equity, equity, and joint venture. List the benefits and downsides for each of these mechanisms. 2. An alliance’s purpose can affect which governance structure is optimal. Compare a pharmaceutical R&D alliance with a prescription-drug marketing agreement, and recommend a governing mechanism for each. Provide reasons for your selections. 3. Alliances are often used to pursue business-level goals, but they may be managed at the corporate level. Explain why this portfolio approach to alliance management would make sense. ETHICAL/SOCIAL ISSUES 1. If mergers and acquisitions quite often end up providing a competitive disadvantage, why do so many of them take place? Given the poor track record, is the continuing M&A activity a result of principal–agent problems and managerial hubris? What can be done to overcome principal–agent problems? Are there other reasons for poor performance? 2. In this chapter three main reasons are given for why one firm would acquire another. In July 2016 Verizon announced it was going to acquire Yahoo for $4.8 billion in cash. The announcement discussed Verizon’s earlier purchase of AOL and noted Yahoo would speed up the digital advertising business. Verizon noted Yahoo has over 1 billion users globally and several premium brands in finance, news, and sports. Based on Verizon’s information, which of the three acquisition reasons seems most prevalent? In the fall of 2016 Yahoo disclosed several major security breaches involving more than 1.5 billion user accounts. The results of these disclosures delayed the purchase by Verizon and reduced the Yahoo purchase price by at least $300 million. In June 2017 Yahoo shareholders agreed to the final sale to Verizon, nearly a year after the purchase was announced. What responsibility do firms have for the protection of customer data provided in the operation of their firm? Should Verizon have backed out of the deal with Yahoo given the scale and duration of the security issues brought to light in the fall of 2016? CHAPTER 9 Corporate Strategy: Strategic Alliances, Mergers and Acquisitions 333 SMALL GROUP EXERCISES //// Small Group Exercise 1 In this chapter, we studied horizontal integration and the build-borrow-or-buy framework. One industry currently consolidating is furniture manufacturing, with thousands of manufacturers and suppliers. Manufacturers range from large recognizable brands, such as Baker, Steelcase, and La-Z-Boy, to small familyowned companies. Demand for both office furniture and residential furniture is experiencing postrecession growth. Analysts have observed that companies are shopping for acquisitions as consumers are shopping for furniture. Charter Capital Partners in Grand Rapids, Michigan, is a mergers and acquisitions adviser helping companies initiate, negotiate, and close deals on one company’s purchase of another. To take advantage of the increase in M&A activity in the furniture manufacturing industry, Charter recently launched a dedicated furniture practice. Western Michigan is home to the top three office furniture manufacturers, which is a key segment of the industry. The sales of the top three make up half of the industry’s $10 billion market. Charter Capital Partners has hired your small consulting team to do the basic research regarding a client that has recently approached the group. The client is a small manufacturer of office furniture in a mediumsized town in Michigan. The managers are seeking advice as they decide whether to upgrade capabilities in order to expand sales, to find a partner with complementary skills, or to sell to a larger company. The owner has stated that the firm is like a family, and he feels a sense of loyalty to the workers and the community. The firm has had steady sales over its history, although it experienced a slight dip in sales during the recession. The company is aware that other office furniture manufacturers are beginning to integrate technology into the furniture. For example, one competitor is building wireless technology into desk surfaces to power several devices at one time and avoid the need to plug them in. The owner sees the integration of technology as a game changer. Using the build-borrow-or-buy framework and other strategic concepts, develop a set of questions to ask the managers of this small business to help you gather information regarding whether to hire new employees with more sophisticated technology expertise in order to build capabilities in-house or whether to partner with another firm that already has these capabilities. Alternatively, consider information that could help the owner decide whether this is the time to sell to a larger company. Your consulting team will need adequate information to help put a value on the firm in order to advise Charter if/when it initiates a search for a partner or buyer. //// Small Group Exercise 2 In Strategy Highlight 9.2 Kraft is shown to be prone to using hostile takeovers. These acquisitions are completed over the objections of the acquired firm. As noted in the text, mergers and acquisitions sometimes have difficulty creating enhanced competitive advantage. In your group discuss what additional burdens a hostile takeover must overcome to generate positive advantages for the acquiring company. How is a hostile takeover more difficult than a cooperative merger or acquisition? mySTRATEGY What Is Your Network Strategy for Your Career? M ost of us participate in one or more popular social networks online such as Facebook, LinkedIn, Pinterest, Snapchat, or Twitter. While many of us spend countless hours in these social networks, you may not have given a lot of thought to your network strategy. Social networks describe the relationships or ties between individuals linked to one another. An important element of social networks is the different strengths of ties between individuals. Some ties between two people in a network may be very strong (e.g., soul mates or best friends), while others are weak (mere acquaintances—“I talk to her briefly in the cafeteria at work”). As a member of a social network, you have access to social capital, which is derived from the connections within and between social networks. It is a function of whom you know, Economist, March 25, 2017; “The world’s most valuable resource is no longer oil, but data,” The Economist, May 6, 2017; “Data is giving rise to a new economy,” The Economist, May 6, 2017; and Bensinger, G., and J. Nicas (2017, May 15), “Alphabet’s Waymo, Lyft to collaborate on self-driving cars,” The Wall Street Journal. 2. Capron, L., and W. Mitchell (2012), Build, Borrow, or Buy: Solving the Growth Dilemma (Boston, MA: Harvard Business Review Press). 3. Capron, L., and W. Mitchell (2012), Build, Borrow, or Buy: Solving the Growth Dilemma (Boston, MA: Harvard Business Review Press), 16. 4. Hoang, H., and Rothaermel, F.T. (2010), “Leveraging internal and external experience: Exploration, exploitation, and R&D project performance,” Strategic Management Journal 31: 734–758; and Gick, M.L., and K.J. Holyoak (1987), “The cognitive basis rot27628_ch09_308-337.indd 334 challenges faced by old-line media companies in making the transition to the internet, see also: Cozzolino, A. (2015), Three Essays on Technological Changes and Competitive Advantage: Evidence from the Newspaper Industry (Milan: Bocconi University); and Cozzolino, A., Rothaermel, F. T. (2017). Discontinuities, competition, and cooperation: Coopetitive dynamics between incumbents and entrants. Strategic Management Journal, forthcoming. 6. Ovide, S. (2015), “Microsoft to cut 7,800 jobs on Nokia woes,” The Wall Street Journal, July 8. 7. Gulati, R. (1998), “Alliances and networks,” Strategic Management Journal 19: 293–317. 8. This discussion draws on: Dyer, J.H., and H. Singh (1998), “The relational view: Cooperative strategy and the sources of interorganizational advantage,” Academy of Management Review 23: 660–679. where do we go from here?” Academy of Management Perspectives 23: 45–62; Lavie, D. (2006), “The competitive advantage of interconnected firms: An extension of the resourcebased view,” Academy of Management Review 31: 638–658; Ireland, R.D., M.A. Hitt, and D. Vaidyanath (2002), “Alliance management as a source of competitive advantage,” Journal of Management 28: 413–446; Inkpen, A. (2001), “Strategic alliances,” in M.A. Hitt, R.E. Freeman, and J.S. Harrison, Handbook of Strategic Management (Oxford, UK: BlackwellWiley); Gulati, R. (1998), “Alliances and networks,” Strategic Management Journal 19: 293–317; and Dyer, J.H., and H. Singh (1998), “The relational view: Cooperative strategy and the sources of interorganizational advantage,” Academy of Management Review 23: 660–679. 11. Kogut, B. (1991), “Joint ventures and the option to expand and acquire,” Management Science 37: 19–34. 12/12/17 03:26 PM CHAPTER 9 12. Markides, C.C., and P.J. Williamsen (1994), “Related diversification, core competences, and performance,” Strategic Management Journal 15: 149–165; and Kale, P., and H. Singh (2009), “Managing strategic alliances: What do we know now, and where do we go from here?” Academy of Management Perspectives 23: 45–62. 13. The author participated in the HP demo; see also: “HP unveils Halo collaboration studio: Life-like communication leaps across geographic boundaries,” HP press release, December 12, 2005. 14. This Strategy Highlight is based on: Hoang, H., and F.T. Rothaermel (2016), “How to manage alliances strategically,” MIT Sloan Management Review, Fall 58(1): 69–76. 15. “Bank of America taps Cisco for TelePresence,” InformationWeek, March 30, 2010. 16. Tripsas, M. (1997), “Unraveling the process of creative destruction: Complementary assets and incumbent survival in the typesetter industry,” Strategic Management Journal 18: 119–142. 17. Rothaermel, F.T., and C.W.L. Hill (2005), “Technological discontinuities and complementary assets: A longitudinal study of industry and firm performance,” Organization Science 16: 52–70; Hill, C.W.L., and F.T. Rothaermel (2003), “The performance of incumbent firms in the face of radical technological innovation,” Academy of Management Review 28: 257–274; Rothaermel, F.T. (2001), “Incumbent’s advantage through exploiting complementary assets via interfirm cooperation,” Strategic Management Journal 22: 687–699; and Rothaermel, F.T. (2001), “Complementary assets, strategic alliances, and the incumbent’s advantage: An empirical study of industry and firm effects in the biopharmaceutical industry,” Research Policy 30: 1235–1251. 18. Arthaud-Day, M.L., F.T. Rothaermel, and W. Zhang (2013), “Genentech: After the acquisition by Roche,” case study, in F.T. Rothaermel, Strategic Management (New York: McGraw-Hill), http://, ID# MHE-FTR-014-0077645065. 19. Jiang, L., J. Tan, and M. Thursby (2011), “Incumbent firm invention in emerging fields: Evidence from the semiconductor industry,” Strategic Management Journal 32: 55–75; Rothaermel, F.T., and M. Thursby (2007), “The nanotech vs. the biotech revolution: Sources of incumbent productivity in research,” Research Policy 36: 832–849. 20. This...
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Part 1:
It is getting more difficult for online brand owners and retailers to conduct business because of
EU and US regulations, as well as upcoming changes in the European Union (EU). Companies
that quickly adapt to these changes can acquire a competitive advantage. Several particular
changes to online commerce are expected as a result, including "right to erasure" laws and an
ever-changing patchwork of restrictions that vary from country to country around the world and
state to state inside the United States.
Everywhere you look, people are calling on businesses and politicians to give them greater
power over their personal data as the world grapples with its implications. Subscription models,
where customer-brand interactions are longer-term and more fluid, and personal data and
consumer behavior data are used more frequently, are only going to exacerbate this problem.
Brands that ignore their consumers' privacy preferences risk fines and penalties, as well as a loss
of confidence with their customers, which might lead to the company's demise. The following
compliance duties should be addressed as soon as possible by organizations:
1. Businesses have the ability to protect the personal information of their customers.
2. Endpoint, network, and email filtering should be in place to keep out viruses and other

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