Corporate Strategy: Acquisitions, Alliances,

and Networks

Joe Mahoney

Facebook: From Dorm Room to Dominant Social Network

• Facebook: “most powerful and transformative social change”

Started by Mark Zuckerberg in 2004

Overcame the first-mover advantage held by MySpace

True global strategy: more users first, profits later

Adding different functions to go after a wide-range of users

Innovative network marketing approach

Word of mouth through online social network

• Frequently attacked for insufficient protection of users’ privacy

• Needs a sustainable business model

• Implications for alliances and networks

Global Users of Facebook and MySpace

Facebook passes MySpace on number of users in 2008 and continues exponential growth

9–3

Integrating Companies: Mergers and Acquisitions

• Merger: combining two companies

Friendly approach

Example: Disney & Pixar

Generally similar in size

• Acquisition: purchase or takeover a company

Can be friendly or unfriendly

Hostile takeover

Example: Vodafone buys Mannesmann

Horizontal Integration: Merging with Competitors

• Horizontal integration: process of merging and acquiring competitors HP buys Compaq in 2002 Pfizer buys Wyeth in 2009 Live Nation buys Ticketmaster in 2010

• Benefits: Reduce competitive intensity Lower costs Boost differentiation Access to new markets and distribution channels

9–5

Source of Value Creation and Costs in Horizontal Integration

9–6

Reduction in Competitive Intensity

• Changes underlying industry structure Taking out excessive capacity from rivals Increased industry consolidation

Example: U.S. airlines in recent years

• Increasing bargaining power vis-à-vis suppliers and buyers

• Stable industry and more profits

• Usually need government’s approval Example: FTC rejected Office Depot and Staples merger

9–7

Horizontal Integration: Lower Costs

• How? Through economies of scale Enhancing economic value creation

• Crucial to the industries with high fixed costs Example: pharmaceutical industry Large sales force = fixed cost

Need $1billion in drug revenues to cover these costs

9–8

Horizontal Integration

• Increased differentiation Strengthen competitive positions

Differentiation of products and services– Example: Oracle buys PeopleSoft ($10B in 2005)

• Joined enterprise software with HR management software

• Access to new markets and distribution channel Enter new markets by M&A

– Example: Kraft buys Cadbury• New distribution in emerging markets & domestically

Mergers and Acquisitions

• Many M&As actually destroy shareholder value! When there is value, it often goes to the acquiree

Acquirers tend to pay a premium

• Why still desire M&As?

1. Overcome competitive disadvantage

2. Superior acquisition and integration capability

3. Principal–agent problems

9–10

Value Destruction in M&A: The Worst Offenders

Shareholder value destroyed based on up to 3 years post-merger analysis compared to overall stock market 9–11

• Desire to Overcome Competitive Disadvantage Adidas acquired Reebok in 2006

Benefits from economies of scale and scope Compete more effectively with #1 Nike

• Superior Acquisition and Integration Capability

• Some firms have superior M&A abilities They identify, acquire, and integrate target companies

Example: Cisco Systems • Sought complementary assets

• Bought over 130 firms since 2001, including large firms: Linksys, Scientific Atlanta, & WebEx

Mergers and Acquisitions

Mergers and Acquisitions

• Principal–agent problems Managers have incentives to diversify through M&As to

receive more prestige, power, and pay. Not for shareholder value appreciation This is principal—agent problem

• Managerial hubris Self-delusion

Beliefs in their own capability despite evidence to the contrary

“Exception to the rule” Example: Quaker Oats purchase of Snapple Sony purchase of Columbia Pictures

Strategic Alliances: Causes and Consequences of Partnering

• Strategic alliances: voluntary arrangements between firms Sharing knowledge, resources, and capabilities Leading to gaining and sustaining competitive advantage

• Relational view of competitive advantage VRI resources are embedded in alliances

(VRIO framework)

• HP’s alliance with DreamWorks SKG Resulted in Halo Collaboration conferencing

Number of R&D Alliances

Explosive growth since the 1980s yields faster products at lower costs and aids globalization.

9-15

Why Do Firms Enter Strategic Alliances?

• Strengthen competitive position Apple vs. Amazon

• Enter new markets Local partner for global growth Microsoft partners with Yahoo on search

• Hedge against uncertainty Real options approach

Roche invests in Genentech 1990 and buys it in 2009

• Access critical complementary assets Pixar partners with Disney

• Learn new capabilities GM & Toyota (NUMMI) – formed in1984

9–16

1–17

Pixar and Disney: From Alliance to Acquisition

• Pixar and Disney

• Early strategic alliance

• Successful products: Toy Story, Monsters, Inc., Finding Nemo, etc.

• In 2005, Disney acquired Pixar for $7.4 billion

• Steve Jobs became the largest shareholder of Disney

• Early alliance serves as a vehicle to match two parties’ complementary assets and eventually led to the acquisition

• Disney later acquired Marvel Entertainment, which made Spiderman, Iron Man, The Incredible Hulk…etc.

9–17

Governing Strategic Alliances

• Governing mechanisms:

Contractual agreements for non-equity alliances Based on contracts

Equity alliances One firm takes partial ownership in the other

Joint ventures Stand-alone organization owned by 2 or more firms

9–18

Non-Equity Alliances

• Most common forms of contracts Supply agreements Distribution agreements Licensing agreements

• Vertical strategic alliances Firms tend to share explicit knowledge that is codified Licensing agreements, partners exchange codified

knowledge regularly Ex: Genentech and Eli Lilly

• Genentech R&D focused

• Eli Lilly manufacturing & FDA approvals

Equity Alliances

• At least one partner takes partial ownership position Stronger commitment toward the relationship

• Allow the sharing of tacit knowledge Tacit knowledge concerns the “know how”

• Partners exchange personnel to acquire tacit knowledge 1984 Toyota + GM = NUMMI

(New United Motor Manufacturing Inc.)

2010 Toyota + Tesla to use the NUMMI plant

• Corporate venture capital is another equity source Established firms invest in new startups

• Tends to produce stronger ties and greater trust

9–20

Joint Ventures

• Created and owned by two or more companies Hulu owned by NBC, ABC, and Fox

• Long-term commitment Exchange both tacit and explicit knowledge Frequent interaction of personnel

• Stepping stone toward full integration of the partnership

• “Try before you buy” concept

• Used to enter foreign markets 9–21

Key Characteristics of Different Alliance Types

Alliance Management Capability

9–23

Alliance Management Capability

• Partner selection and alliance formation Ascertain that expected benefits exceeds costs Must select the best possible alliance partner

Partner compatibility Partner commitment

– Willingness to share resources & long-term view

• Alliance design and governance Choose and agree upon governance structure

Non-equity contractual agreement Equity alliances Joint venture

Inter-organizational trust is critical9–24

Alliance Management Capability

• Post-formation alliance management

• To effectively manage the ongoing relationship Tips:

Make relationship-specific investments Establish knowledge-sharing routines Build interfirm trust

Example: HP’s dense network of alliances vs. DEC

• Dedicated alliance function Coordinate alliance-related tasks – at corporate level Knowledge base about how to manage alliance

Ex: Eli Lilly is a clear leader in alliance management

Best to develop a relational capability

9–25

How to Make Alliances Work

9–26

Strategic Networks

• Social structure with multiple organizations Network nodes – the organizations Network ties – the links between organizations

• Network achieves goals that cannot be done by only one firm

• Example - Star Alliance 1st global airline network

Air Canada, Air China, Continental Airlines,

Lufthansa, Singapore Airlines, United Airlines, etc. Seamless travel on 25 international airlines

9–27

Analyzing Strategic Networks

• Enable us to understand the benefits and costs of a network Quality of the tie: strong or weak?

• Firm’s position in a network Network centrality Knowledge broker

Ex: IDEO design consultancy

Structural holes

• Small-world phenomenon Network in local cluster High degree of centrality of each firm

9–28

Firms Embedded in Strategic Networks

A hypothetical strategic network. Firm B is in a key position - knowledge broker 9–29