Module 5 Critical Thinking Exercise… Uber, Lyft and Tesla are three major companies discussed in chapter 9.? Uber is still a much larger and more v
Module 5 Critical Thinking Exercise…
Uber, Lyft and Tesla are three major companies discussed in chapter 9. “Uber is still a much larger and more valuable firm than Lyft. Uber is also more diversified in that it offers services beyond ride-hailing, which is its core service” (Rothaermel, 2021, p. 343). Is an alliance in anyone’s future? Would an alliance lead to a competitive advantage? Is a merger or acquisition the best choice? Not only a strategic alliance or merger with another company but perhaps an alliance or merger with each other. The information below could help with your research. Uber Technologies, Inc. (NYSE:UBER)Lyft, Inc. (NASDAQ: LYFT)Tesla (NASDAQ:TSLA)
Chapter 9
Corporate Strategy: Strategic Alliances, Mergers and Acquisitions
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Learning Objectives
Apply the build-borrow-or-buy framework to guide corporate strategy.
Define strategic alliances, and explain why they are important to implement corporate strategy and why firms enter into them.
Describe three alliance governance mechanisms and evaluate their pros and cons.
Describe the three phases of alliance management and explain how an alliance management capability can lead to a competitive advantage.
Differentiate between mergers and acquisitions, and explain why firms would use either to execute corporate strategy.
Define horizontal integration and evaluate the advantages and disadvantages of this option to execute corporate-level strategy.
Explain why firms engage in acquisitions.
Evaluate whether mergers and acquisitions lead to competitive advantage.
© McGraw Hill
How Firms Achieve Growth
Build:
Internal organic growth through development.
Borrow:
External growth through a contract / strategic alliance.
Buy:
External growth through acquiring new resources, capabilities, and competencies.
© McGraw Hill
When acquiring a firm, you buy an entire “resource bundle,” not just a specific resource. This resource bundle, if obeying VRIO principles and successfully integrated, can then form the basis of competitive advantage.
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Guiding Corporate Strategy: The Build-Borrow-or-Buy Framework
Exhibit 9.1
Source:. Adapted from L. Capron and W. Mitchell (2012), Build, Borrow, or Buy: Solving the Growth Dilemma (Boston: Harvard Business Review Press).
Access the text alternate for slide image.
© McGraw Hill
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Main Issues in the Build-Borrow-Buy Framework
Relevancy:
How relevant are the firm’s existing internal resources to solving the resource gap?
Tradability:
How tradable are the targeted resources that may be available externally?
Closeness:
How close do you need to be to your external resource partner?
Integration:
How well can you integrate the targeted firm should you determine to acquire?
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As shown in Exhibit 9.1, the answers to these questions lead to a recommended action or the next question.
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Relevance
Internal resources are relevant if:
They are similar to those the firm needs to develop.
They are superior to those of competitors in the targeted area.
Are the firm’s internal resources highly relevant?
If so, the firm should develop internally.
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Tradability
The firm creates a contract to:
Transfer ownership.
Allow use of the resource.
Contracts support borrowing resources:
Ex. Licensing and franchising, or contracts.
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If a resource is highly tradable, then the resource should be borrowed via a licensing agreement or other contractual agreement. If the resource in 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.
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Closeness
Closeness can be achieved through alliances
Equity alliances
Joint ventures
This enables resource borrowing
M&As are complex and costly
Used only when extreme closeness is needed
© McGraw Hill
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.
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Integration
Conditions for integrating the target firm:
Low relevancy.
Low tradability.
High need for closeness.
Consider other options first.
Examples of post integration failures abound.
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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.
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What are Strategic Alliances?
A voluntary arrangement between firms
Involves the sharing of:
Knowledge.
Resources.
Capabilities.
To develop:
Processes, products, services.
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Why Do Firms Enter Strategic Alliances?
Strengthen competitive position.
Enter new markets.
Hedge against uncertainty.
Access critical complementary assets.
Learn new capabilities.
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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 making internal combustion engines obsolete.
Examples of each:
Strengthen competitive position:
Change industry structure, influence standards.
Enter new markets:
Product, service, or geographic markets
Hedge against uncertainty:
Real options perspective—Breaks down investment into smaller decisions
Staged sequentially over time.
Access critical complementary assets:
Marketing, manufacturing, after-sale service.
Helps complete the value chain.
Learn new capabilities:
Co-opetition: cooperation among competitors.
Learning races: to exit the alliance quickly.
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Strategic Alliances Can Be Governed By:
Non-Equity Alliances:
Partnerships based on contracts.
Equity Alliances:
One partner takes partial ownership in the other.
Joint Ventures:
A standalone organization.
Jointly owned by two or more companies.
© McGraw Hill
Exhibit 9.2 provides an overview of the key characteristics of the three alliance types, including their advantages and disadvantages.
Examples of non-equity alliances: supply agreements, distribution agreements, and licensing agreements
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Alliance Management Capability
Exhibit 9.3
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Partner Selection and Alliance Formation
Expected benefits must exceed the costs.
Five reasons for alliance formation:
Strengthen competitive position.
Enter new markets.
Hedge against uncertainty.
Access critical complementary resources.
Learn new capabilities.
Partners must be compatible and committed.
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Partner compatibility captures aspects of cultural fit between different firms. Partner commitment concerns the willingness to make available necessary resources and to accept short-term sacrifices to ensure long-term rewards.
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Alliance Design and Governance
Governance mechanisms:
Contractual agreement.
Equity alliances.
Joint venture.
Inter-organizational trust is a critical dimension of alliance success.
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In a study of over 640 alliances, researchers found that the joining of specialized complementary assets increases the likelihood that the alliance is governed hierarchically. This effect is stronger in the presence of uncertainties concerning the alliance partner as well as the envisioned tasks.
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Post Formation Alliance Management
To be a source of competitive advantage, the partnership has to create VRIO resource combinations:
Make relation-specific investments.
Establish knowledge-sharing routines.
Build interfirm trust.
Build capability through repeated experiences over time.
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How to Make Alliances Work
Exhibit 9.4
Source:. Adapted from J.H. Dyer and H. Singh (1998), “The relational view: Cooperative strategy and the sources of intraorganizational advantage,” Academy of Management Review 23: 660–679.
Access the text alternate for slide image.
© McGraw Hill
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Mergers and Acquisitions
Merger:
The joining of two independent companies.
Forms a combined entity.
Tends to be friendly.
Acquisition:
Purchase of one company by another.
Can be friendly or unfriendly.
Considered a hostile takeover when the target firm does not wish to be acquired.
© McGraw Hill
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Why Do Firms Merge?
Horizontal integration:
The process of merging with a competitor.
Occurs at the same stage of the value chain.
Three main benefits:
Reduction in competitive intensity.
Lower costs.
Increased differentiation.
© McGraw Hill
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.
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Why Do Firms Acquire Other Firms?
To access new markets & distribution channels.
To overcome entry barriers.
To access new capabilities or competencies.
Access to a new capability or competency.
To preempt rivals.
Facebook and Google are famous for this.
© McGraw Hill
Example: Facebook acquired: Instagram (photo & video sharing), WhatsApp (text messaging service), Oculus (virtual reality headsets).
Example: Google acquired: YouTube (video sharing), Motorola (mobile technology), Waze (interactive mobile maps).
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M&A and Competitive Advantage
In most cases mergers and acquisitions:
Do not create competitive advantage.
Do not realize anticipated synergies.
Result in destroyed shareholder value.
Why mergers take place:
Principal-agent problems.
The desire to overcome competitive disadvantage.
Superior acquisition and integration capability.
© McGraw Hill
Examples of mergers that destroyed significant shareholder value (as measured one year after the deal closed) include: Bayer – Monsanto (down 47 percent); Bank of America – Countrywide (down 45 percent); Alcatel – Lucent (down 39 percent); AOL – Time Warner (down 37 percent), and Spring – Nextel (down 30 percent).
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Principal-Agent Problems with M&A
Managers may have personal incentives to acquire:
To build a larger empire.
To receive prestige, power, and higher pay.
Managerial hubris:
A form of self-delusion.
May lead to ill-fated business deals.
© McGraw Hill
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. The difference was that Gatorade had been a standalone company and was easily integrated, but Snapple relied on a decentralized network of independent distributors and retailers who did not want Snapple to be taken over and who made it difficult and costly for Quaker Oats to integrate Snapple. The acquisition failed—and Quaker Oats itself was taken over by PepsiCo. Snapple was spun out and eventually ended up being part of the Dr. Pepper Snapple Group.
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End of Main Content
© 2021 McGraw Hill. All rights reserved. Authorized only for instructor use in the classroom.
No reproduction or further distribution permitted without the prior written consent of McGraw Hill.
Because learning changes everything.®
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Accessibility Content: Text Alternatives for Images
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© McGraw Hill
Guiding Corporate Strategy: The Build-Borrow-or-Buy Framework Text Alternate
This image shows sequential diamond boxes which represent questions to ask to help guide the corporate strategy.
In this approach, executives 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. How relevant are internal resources? If high, conduct internal development (BUILD), if low then ask:
2. How tradable are the targeted resources? If high, determine the type of strategic alliance (contract, licensing, equity alliance, joint venture aka BORROW), if low then ask:
3. How close to your resource partner? If high, determine the type of strategic alliance, if low then ask:
4. How well can you integrate the target firm? If high, acquire (BUY), if low, revisit the build-borrow-buy options or reformulate strategy.
© McGraw Hill
How to Make Alliances Work Text Alternate
This image shows three boxes, titled relation-specific investments, knowledge-sharing routines, and interfirm trust. Each of these three boxes have arrows pointing to each other, and are all contained within the same outer circle with the words "effective alliance governance” written.
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