CHAPTER 9

Corporate Strategy:
Strategic Alliances,
Mergers and
Acquisitions

©ISerg/iStock/Getty Images RF

©McGraw-Hill Education. 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 Education.
• Strategic Alliance

We are gona conquer Africa!

©McGraw-Hill Education.
• The AFI Strategy Framework

Exhibit 1.3 Jump to Appendix 1 long image description

©McGraw-Hill Education.
• Learning Objectives (1 of 2)

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.

©McGraw-Hill Education.
• Learning Objectives (2 of 2)

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.

©McGraw-Hill Education.
• How Firms Achieve Growth

Build
• Internal development
Borrow
• Enter a contract / strategic alliance
Buy
• Acquire new resources, capabilities, and
competencies

©McGraw-Hill Education.
• 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, MA: Harvard Business Review Press).

Jump to Appendix 2 long image description

©McGraw-Hill Education.
• Main Issues in the
Build-Borrow-or-Buy Framework

Relevancy
Tradability
Closeness
Integration

©McGraw-Hill Education.
• Relevance

Are the firm’s internal resources highly relevant?

• If so, the firm should develop internally.
Internal resources are relevant if:
• They are similar to those the firm needs.
• They are superior to those of competitors.
• They pass the VRIO Framework.

©McGraw-Hill Education.
• Tradability

The firm creates a contract to:

• Transfer ownership
• Allow use of the resource
Contracts support borrowing resources
• Ex. Licensing and franchising

©McGraw-Hill Education.
• Closeness

M&As are complex and costly.

• Used only when extreme closeness is needed
Closeness can be achieved through alliances.
• Equity alliances
• Joint ventures
• This enables resource borrowing

©McGraw-Hill Education.
• 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

©McGraw-Hill Education.
• What are Strategic Alliances?

A voluntary arrangement between firms

Involves the sharing of:
• Knowledge, resources, capabilities
To develop:
• Processes, products, services

©McGraw-Hill Education.
• Why Strategic Alliances Are Attractive

Firm goals can be achieved faster and at lower costs.

• Complement or augment the value chain
• Can help a firm gain and sustain a competitive
advantage

©McGraw-Hill Education.
• Why Do Firms Enter Strategic Alliances? (1 of 2)

Strengthen competitive position

• Change industry structure
Enter new markets
• Product, service, or geographic markets
Hedge against uncertainty
• Real options perspective
• Breaks down investment into smaller decisions
• Staged sequentially over time

©McGraw-Hill Education.
• Why Do Firms Enter Strategic Alliances? (2 of 2)

Access critical complementary assets

• Marketing, manufacturing, after-sale service
• Helps complete the value chain
Learn new capabilities
• Co-opetition: cooperation among competitors
• Learning races: rate of learning changes

©McGraw-Hill Education.
• 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 Education.
• Key Characteristics of
Different Alliance Types
Alliance Type Governance Type of
Mechanism Frequency Knowledge Pros Cons Examples
Exchanged

Non-equity Contract Most Explicit • Flexible • Weak tie • Genentech–Lilly

(supply, common • Fast • Lack of trust (exclusive) licensing
licensing, and • Easy to and agreement for Humulin
distribution initiate and commitment
agreements) terminate

Equity Equity Less Explicit; • Stronger tie • Less flexible • Renault–Nissan alliance
(purchase of investment common than exchange of • Trust and • Slower based on cross equity
an equity stake non-equity tacit commitment • Can entail holdings, with Renault
or corporate alliances, but knowledge can emerge significant owning 44.4% in Nissan;
venture capital, more possible • Window into investments and Nissan owning 15%
CVC common than new in Renault
investment) joint ventures technology • Roche’s equity
(option investment in Genentech
value) (prior to full integration)
Joint venture Creation of Least Both tacit • Strongest tie • Can entail long • Hulu, owned by NBC,
(JV) new entity by common and explicit • Trust and negotiations Fox, and Disney-ABC
two or more knowledge commitment and significant
parent firms exchanged likely to investments
emerge • Long-term
solution
• Managers have
double
reporting lines
(2 bosses)
©McGraw-Hill Education.
• Mergers and Acquisitions

©McGraw-Hill Education.
• Three Alliance-Related Tasks Must Be
Managed Concurrently

Strengthen competitive position Contractual agreement Make relation-specific investments

Enter new markets Equity alliances Establish knowledge-sharing routines
Hedge against uncertainty Joint venture Build interfirm trust
Access critical complementary resources Trust All of the above lead to VRIO
Learn new capabilities

Exhibit 9.3
©McGraw-Hill Education.
• Alliances Not Working!!!!

50% of alliances are not meeting strategic objectives

©McGraw-Hill Education.
• How to Make Alliances Work–Post
Management
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.

Jump to Appendix 4 long image description

©McGraw-Hill Education.
• Mergers and Acquisitions

Merger:
• The joining of two independent companies
• Forms a combined entity
Acquisition:
• Purchase of one company by another
• Can be hostile
• When the target firm does not wish to be acquired

©McGraw-Hill Education.
• Why Merge and Acquire?

• Reduction in competitive intensity (FB and Insta)

• Lower costs (economies of scale and scope)

• Increased differentiation (more products: Insta story)

• To access new markets & distribution channels (Google and Luxottica)

• To overcome entry barriers (Starting a chocolate brand)

• To access new capabilities or competencies (Intel purchased Altera)

• To preempt rivals
• Facebook and Google are famous for this

©McGraw-Hill Education.
• Question

Do you think Mergers and Acquisitions lead to competitive advantage?

©McGraw-Hill Education.
• M&A and Competitive Advantage

In most cases mergers and acquisitions:

• Do not create competitive advantage
• Do not realize anticipated synergies
Why mergers take place:
• The desire to overcome competitive disadvantage
• Superior acquisition and integration capability

©McGraw-Hill Education.
• Questions

1) How do strategic alliances differ from M & A? Do they mean the

same thing?

2) What is meant by vertical integration and horizontal integration?

3) Can you achieve competitive advantage without M & A?

4) What is the first step to consider when expanding your company?

5) How do you make M&A work?

©McGraw-Hill Education.