Chapter 11

Corporate Level Strategy

Merger & Acquisition, Strategic
alliances

Rapeeporn Rungsithong, PhD

Rapeeporn@cbs.chula.ac.th
 Chapter Outline

Mergers and Acquisitions

 Merging with Competitors
 Why Do Firms Make Acquisitions?
 M&A and Competitive Advantage

Strategic Alliances
 Why Do Firms Enter Strategic Alliances?
 Governing Strategic Alliances
 Alliance Management Capability
 The Build-Borrow-or-Buy Framework

Aids in determining whether firms should pursue:

 Internal development (build)

 Enter a contract /strategic alliance (borrow)

 Acquire new resources, capabilities, and

competencies (buy)
The Build-Borrow-or-Buy Framework
The Main Issues in the Build-Borrow-or-Buy Framework

 Relevancy
 How relevant are existing internal resources to solving the
resource gap – do they pass the VRIO(N) test (chapter 4)?
 Tradability
 How tradable are the targeted resources that may be available
externally? -- e.g., biotech firm licenses to pharmaceutical
company.
 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 you need to acquire the resource partner?
Types of Growth Strategies

International
Concentration business
growth

Organizational
Growth

Vertical
Diversification Integration
•Related •Backward
•Unrelated Horizontal •Forward
Integration
Concentration Strategy (Build)
A growth strategy where the firm
 Concentrates on its primary line of business
 Looks for ways to meet its growth objectives
through increasing its level of operation in
this primary business
 Whena single-business organization
pursues growth, it is using the
concentration strategy
Firm make: Organic growth

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 Internal Development
 Corporateentrepreneurship & new
venture development motives:
 No need to share the wealth with alliance
partners
 No need to face difficulties associated with
combining activities across the value chains
 No need to merge diverse corporate cultures

 Limitations:
 Time-consuming
 Need to continually develop new capabilities
Mergers and Acquisitions (Buy)

 Mergers involve a combination or

consolidation of two firms to form a new
legal entity:
 Are relatively rare
 The two firms are on a relatively equal basis

 Acquisitions involve one firm buying

another either through stock purchase,
cash, or the issuance of debt
 M&A and Competitive Advantage

 Many M&As actually destroy shareholder

value!
• When there is value, it often goes to the acquiree.
• Acquirers tend to pay a premium.

 Why still desire M&As?

• Overcome competitive disadvantage
• Superior acquisition and integration capability

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 Example: Hotel Du Lourve

 China's Jin Jiang to acquire Groupe Du Louvre for

up to 1.2 billion euros
 The deal came as Chinese investors are snapping
up renowned hotels on foreign soil.

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 Food Fight: Kraft’s Hostile Takeover of
Cadbury

 Kraft acquired Cadbury in UK in 2010.

 Hostile
takeover, $20 billion deal
 Cadbury has strong position in emerging
economies.
 Perfected distribution system in countries like India
 Kraftfaces strong rivalries worldwide,
including China.
Kraft merged with Heinz.
 Itis now the 4th largest
food competitor in the
world
 Kraft Heinz’s ambitious
to bid Unilever in 2017
 Why Do Firms Acquire Other Firms?

 To access new markets and distribution channels

 Toovercome entry barriers (e.g., Kraft acquiring
Cadbury)
 To access new capabilities or competencies
 To preempt rivals
 Example: Facebook acquired:
 Instagram (photo & video sharing)
 WhatsApp (text messaging service)
 Oculus (virtual reality headsets)

 Example: Google acquired:

 YouTube (video sharing)
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 Horizontal integration
– The process of merging with competitors
– (e.g. Disney and Pixar, Major Cineplex and EGV)
– Leads to industry consolidation

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 Strategic Alliances (Borrow)
A voluntary agreement to cooperate with
business partners

Why?....

 Strengthen competitive position

 Enter new markets
• Local partner for global growth
 Hedge against uncertainty
 Access critical complementary assets
• Pixar partners with Disney

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 Key Characteristics of
Different Alliance Types

• Non-equity alliances
 Based on contracts, the most popular alliances

• Equity alliances
 One firm takes partial ownership in the other

• Joint ventures
 Standalone organization owned by 2 or more firms

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 NON-EQUITY ALLIANCES

 Most common forms of alliance

• Supply agreements
• Distribution agreements
• Licensing agreements
 Vertical strategic alliances
 Firms share explicit knowledge
• Knowledge that can be codified
 Patents
 User manuals and fact sheets,
 Scientific publications

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 Example: Strategic alliances

April 2014
"This agreement was developed through collaboration with a
group of our hotel owners with deep F&B knowledge, as well as
through guest insights.

When our guests walk into an IHG hotel, just as they expect
exceptional service and an outstanding branded experience,
they can now expect a consistent, high-quality beverage
experience whether sitting down at a Crowne Plaza hotel bar or
grabbing a Coca-Cola soft drink from the Candlewood
Cupboard™ at a Candlewood Suites hotel."
 EQUITY ALLIANCES

 At least one partner takes partial ownership position

• Stronger commitment toward the relationship
 Allow the sharing of tacit knowledge
• Tacit knowledge concerns the “know-how”
 Partial ownership, thus equity alliances signal stronger
commitments
 Moreover, equity alliances allow for the sharing of tacit
knowledge that can not be codified.
• Toyota has an equity alliance with Tesla.

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EQUITY ALLIANCES: CORPORATE VENTURE CAPITAL

 Equity alliances produce stronger ties and

greater trust between partners than non-
equity alliances do.

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 JOINT VENTURES

 Joint ventures (JVs) are the strong ties, trust,

and commitment that can result.
 Created and owned by two or more
companies
 Long-term commitment
• Exchange both tacit and explicit knowledge
• Frequent interaction of personnel
 Used to enter foreign markets
 Least common of the 3 types of alliances

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 Strategic Alliances (Borrow)
 Learn new capabilities
• New United Motor Manufacturing Inc. (JV) is formed
in 1984
• GM wanted to learn LEAN
• Toyota wanted to implement LEAN in US
before owned greenfield plants
• Co-opetition strategy
• Produced 7 Million cars
• Who won the learning race?

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 Alliance Management Capability

 A firm’s ability to effectively manage three

alliance-related tasks concurrently

 30 to 70% of all alliances yield disappointing results

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 PARTNER SELECTION AND ALLIANCE FORMATION

 The expected alliance benefits must exceed

its costs.
 Partner compatibility and commitment are
necessary conditions a for successful alliance.
 Business background
 Business performance
 Corporate culture/ Value
 Nationality??
 Complementary capability

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How to Make Alliances Work

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 POST-FORMATION ALLIANCE MANAGEMENT

 To effectively manage the ongoing

relationship
 Make relationship-specific investments
 Establish knowledge-sharing routines
 Build inter-firm trust

 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.

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 Organizational Stability

A strategy where the organization maintains

its current size and current level of business
operations
 When is stability an appropriate strategy?
 Industry is in a period of future highly uncertain
 Industry is facing slow or no growth
opportunities

 Implementation of Stability Strategy

 Notexpanding organization’s level of operation
 Should be a short-run strategy
 Organizational Renewal

Pressure for Change

 Market. • Downsizing.
 Product. • Reengineering.
 Competition. • Flattening
structures.
• Going global.

Make adaptive changes to environment.

 RESTRUCTURING

 The process of reorganizing and divesting business

units such as GE in ChapterCase 8
• InBev sold Busch Gardens and SeaWorld to focus
on core.
 Boston Consulting Group (BCG) growth-share matrix
• Build market share with stars and question marks.
• Hold market share with cash cows.
 Harvest (milk) as much short-term cash as
possible.
• Divest a dog business unit.

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 Restructuring the Corporate Portfolio:
The Boston Consulting Group Growth-Share Matrix

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 Implications for the Strategist

 A strategist has three options to drive firm growth:

• Organic growth through internal development
• External growth through alliances
• External growth through acquisition

 The build-borrow-or-buy framework:

• Aids strategists in deciding whether to pursue internal
development (build)
• Enter a contract arrangement or strategic alliance
(borrow)
• Acquire new resources, capabilities, and competencies
(buy)
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What is your network strategy in your career?

 Social network
• Strong ties
• Weak ties
 How to leverage (utilize) your social
capital more fully as part of your
career network strategy?

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