1. Be sure to see the NEW integrated Instructor’s Manual located in the Connect Library under Instructor’s Resources.
Chapter 9 Corporate Strategy: Strategic Alliances and Mergers and Acquisitions

2. The AFI Strategy Framework
Jump to Appendix 1 long image description

3. Chapter 9 Outline 9.1 How Firms Achieve Growth 9.2 Strategic Alliances
The Build-Borrow-Buy Framework
9.2 Strategic Alliances
Why Do Firms Enter Strategic Alliances?
Governing Strategic Alliances
Alliance Management Capability
9.3 Mergers and Acquisitions
Why Do Firms Merge with Competitors?
Why Do Firms Acquire other Firms?
M&A and Competitive Advantage
9.4 Implications for the Strategist

4. 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.

5. 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.

6. How Firms Achieve Growth

7. The Build-Borrow-or-Buy Framework
Conceptual model
Aids in determining whether firms should pursue:
Internal development (build)
Enter a contract / strategic alliance (borrow)
Acquire new resources, capabilities, and competencies (buy)

8. Jump to Appendix 2 long image description
Exhibit 9.1 Guiding Corporate Strategy: The Build-Borrow-or-Buy Framework
Placeholder
Jump to Appendix 2 long image description

9. The Main Issues in the Build-Borrow-or-Buy Framework
Relevancy
How relevant are 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 you need to acquire the resource partner?

10. Relevancy Are the firm’s internal resources high or low in relevance?
In relation to solving the resource gap
If high, the firm should develop internally.
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.
Resources are relevant if they pass the VRIO Framework (from Chapter 4).

11. Tradability The firm creates a contract.
Allows for the transfer of ownership
Allows for use of the resource
Short-term and long-term contracts are a way to borrow resources from another company.
Ex. Licensing and franchising
Example: biotech-pharma industry:
Producers use licensing agreements to transfer knowledge and technology.

12. Closeness Can be achieved through integrated alliances
Equity alliances
Joint ventures
Also enables the borrowing of resources

13. Integration Mergers and acquisitions are:
The most costly
The most complex
The most difficult to reverse strategic option
Examples of post-integration failure:
Daimler-Chrysler
AOL and Time Warner
HP and Autonomy
Bank of America and Merrill Lynch

14. Strategic Alliances

15. What are Strategic Alliances?
A voluntary arrangement between firms
Involves the sharing of:
Knowledge
Resources
Capabilities with the intent of developing:
Processes
Products
Services
Instructors:
The digital companion to this book McGraw-Hill Connect has an interactive exercise on this section of the textbook. It builds student confidence on the reasons firms go into alliances. (LO 9-2).

16. How Do Strategic Alliances Assist Firms?
They may complement a firm’s value chain.
They may focus on similar value chain activities.
They enable:
Firm’s to achieve their goals faster
Lower cost
Fewer legal repercussions
An alliance qualifies as strategic if:
It has the potential to affect a firm’s competitive advantage

17. Why Do Firms Enter Strategic Alliances?
Strengthen competitive position
Enter new markets
Hedge against uncertainty
Access critical complementary assets
Learn new capabilities

18. Strengthen Competitive Position
Strategic alliances can help:
Change industry structure to the firm’s favor
Influence industry standards
Example: IBM & Apple
Entered a strategic alliance
Desired to strengthen their competitive position
In mobile computing and business productivity apps
Put competitive pressure on rivals such as Microsoft

19. IBM and Apple: From Big Brother to Alliance Partner
Strategy Highlight 9.1
IBM and Apple: From Big Brother to Alliance Partner
IBM was a fierce competitor with Apple (‘80s).
Then Apple dominated
2014: Apple & IBM form a strategic partnership
Both parties benefit.
Apple sold mostly to consumers, IBM to businesses.
They plan to collaborate on business apps.

20. Enter New Markets Product markets Service markets Geographical markets
Governments such as Saudi Arabia or China may require that foreign firms have a local joint venture partner before doing business in their countries.

21. Hedge Against Uncertainty
Real-options perspective:
Approach to strategic decision making
Breaks down a larger investment decision into a set of smaller decisions
Staged sequentially over time
Allows firms to obtain information in stages

22. Access Critical Complementary Assets
Complementary assets such as:
Marketing
Manufacturing
After-sale service
Helps complete the value chain:
From upstream innovation to downstream commercialization

23. Learn New Capabilities
Firms are motivated by the desire to learn from their partners.
Co-opetition
Cooperation by competitors to achieve a strategic objective
Learning can take place at different rates.
The firm that learns more quickly is motivated to exit the alliance / reduce knowledge sharing.
Referred to as “learning races”

24. Governing Strategic Alliances
Non-Equity Alliances
Partnerships based on contracts
Examples: supply agreements, distribution agreements, and licensing agreements
Equity Alliances
One partner takes partial ownership in the other.
Joint Ventures
A standalone organization created and jointly owned by two or more parent companies

25. Exhibit 9.2 Key Characteristics of Different Alliance Types
Governance Mechanism
Frequency
Type of Knowledge Exchanged
Pros
Cons
Examples
Non-equity (supply, licensing, and distribution agreements)
Contract
Most common
Explicit
Flexible
Fast
Easy to initiate and terminate
Weak tie
Lack of trust and commitment
Genentech–Lilly (exclusive) licensing agreement for Humulin
Microsoft–IBM (nonexclusive) licensing agreement for MS-DOS
Equity (purchase of an equity stake or corporate venture capital, CVC investment)
Equity investment
Less common than non-equity alliances, but more common than joint ventures
Explicit; exchange of tacit knowledge possible
Stronger tie
Trust and commitment can emerge
Window into new technology (option value)
Less flexible
Slower
Can entail significant investments
Renault–Nissan alliance based on cross equity holdings, with Renault owning 44.4% 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
Can entail long negotiations and significant investments
Long-term solution
JV managers have double reporting lines (2 bosses)
Hulu, owned by NBC, Fox, and Disney-ABC
Dow Corning, owned by Dow Chemical and Corning

26. Exhibit 9.3 Alliance Management Capability
The three phases of Alliance Management:
Partner selection and alliance formation
Alliance design and governance
Post-formation alliance management
Can lead to a competitive advantage
Instructors:
The digital companion to this book McGraw-Hill Connect has a case exercise on this section of the textbook. It builds student confidence on the features of alliance management by looking at a brief case about Starbucks (LO 9-4).

27. Partner Selection and Alliance Formation
The benefits must exceed the costs.
Five reasons for alliance formation:
To strengthen competitive position
To enter new markets
To hedge against uncertainty
To access critical complementary resources
To learn new capabilities
Partner compatibility & commitment are necessary.
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.

28. Alliance Design and Governance
Possible governance mechanisms:
Non-equity contractual agreement
Equity alliances
Joint venture
Joining specialized complementary assets increases the likelihood that the alliance is governed hierarchically.
Inter-organization trust is critical.

29. Post-Formation Alliance Management
To create VRIO resource combinations:
Make relation-specific investments.
Establish knowledge-sharing routines.
Build interfirm trust.
Build capability through repeated experiences over time.
Repeated alliance exposure improves learning.

30. Exhibit 9.4 How to Make Alliances Work
Jump to Appendix 3 long image description

31. Mergers and Acquisitions

32. Mergers and Acquisitions
The joining of two independent companies
Forms a combined entity
Acquisition:
Purchase of one company by another
Can be friendly or unfriendly.
Hostile takeover:
The target company does not wish to be acquired.

33. Why Do Firms Merge? Horizontal integration: Three main benefits:
The process of merging with competitors
Leads to industry consolidation
Three main benefits:
Reduction in competitive intensity
Changes underlying industry structure in favor of surviving firms
Lower costs
Economies of scale
Increased differentiation
Fills product gaps
Instructors:
The digital companion to this book McGraw-Hill Connect has an interactive exercise on this section of the textbook. It builds student confidence on horizontal integration. (LO 9-6).

34. Sources of Value Creation (V)
Exhibit 9.5 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
Lower costs
Increased differentiation
Integration failure
Reduced flexibility
Increased potential for legal repercussions

35. Food Fight: Kraft’s Hostile Takeover of Cadbury
Strategy Highlight 9.2
Food Fight: Kraft’s Hostile Takeover of Cadbury
In 2012, Kraft bought Cadbury for $20B
Cadbury was focused solely on candy & gum.
Cadbury had a mature distribution system overseas.
Kraft then restructured in 2012.
Separated grocery foods from snack foods
In 2015, Kraft merged with Heinz.
Is now the 5th largest food competitor in the world

36. Why Do Firms Acquire Other Firms?
To access new markets & distribution channels
To overcome entry barriers
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)
Motorola (mobile technology)
Waze (interactive mobile maps)

37. M&A and Competitive Advantage
Benefits of mergers & acquisitions are often hard to achieve.
Anticipated synergies don’t materialize.
Other reasons to merge:
Principal-agent problems
The desire to overcome competitive disadvantage
Superior acquisition and integration capability

38. Principal – Agent Problems
Managers may have incentives to acquire.
Not for anticipated shareholder value appreciation
To build a larger empire
To receive more prestige, power, and pay
Managerial hubris:
A form of self-delusion
Managers convince themselves of their superior skills
Happens even if there’s clear evidence to the contrary

39. Implications for the Strategist

40. The Business Environment Is Constantly Changing
New opportunities come and go quickly.
Firms need to develop new resources, capabilities, or competencies.
Helps them take advantage of opportunities
Examples:
Traditional book publishers: offer online content
Bank institutions: offer online banking services
Food companies: offer organic and gluten free products

41. Firms Need to Grow To Survive & Prosper
Corporate strategy is critical to pursuing growth.
Firms must possess VRIO resources.
Firms must leverage existing resources.
Strategic alliances help execute corporate strategy.

42. Strategic Alliances and Acquisitions is a Strategic Tool
Should be managed at the corporate level
Helps harness spillovers between the different corporate development activities
To coordinate the firm’s portfolio of alliances
To leverage relationships
To successfully engage in mergers and acquisitions
Relational capability
The successful management of both strategic alliances and mergers and acquisitions

43. Chapter 9 Summary

44. Take Away Concepts (1 of 8)
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.

45. Take Away Concepts (2 of 8)
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.
The most common reasons why 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.

46. Take Away Concepts (3 of 8)
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).

47. Take Away Concepts (4 of 8)
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 alliance-related 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.

48. Take Away Concepts (5 of 8)
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.

49. Take Away Concepts (6 of 8)
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.

50. Take Away Concepts (7 of 8)
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.

51. Take Away Concepts (8 of 8)
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.

52. Key Terms Acquisition Alliance management capability
Build-borrow-or-buy framework
Co-opetition
Corporate venture capital (CVC)
Equity alliance
Explicit knowledge
Horizontal integration
Hostile takeover
Learning races
Managerial hubris
Merger
Non-equity alliance
Real-options perspective
Relational view of competitive advantage
Strategic alliance
Tacit knowledge

53. Chapter 9 Cases & Exercises

54. Chapter Case 9: Consider This… (1 of 2)
Disney: creates billion-dollar franchises
Frozen, Toy Story, Star Wars
Why this is risky:
Many obtained through acquisition (ex. Star Wars)
Only so many can be acquired.
This may reduce originality / increase boredom.
Recipe for success becomes predictable.
Half of Disney profits come from TV networks
This industry is being disrupted.

55. Chapter Case 9: Consider This… (2 of 2)
Is this a good strategy for Disney?
Outline the pros & cons
Should Disney seek alternatives to acquisition?
Why was Disney successful with Pixar & Marvel while others experience less success?
Ex: Sony’s acquisition of Columbia Pictures or News Corp.’s acquisition of MySpace
Is Disney now a global consumer products company?

56. My Strategy Exercise: What’s Your Career Network Strategy?
Many people participate in social networking
Do you have a network strategy?
Social networks represent social capital.
Potential advantages through connection
List the top 12 people that you communicate with.
Draw connections if these people know each other.
Determine the degree of closure (see slide notes).
How can you optimize your network structure?
How to calculate degree of closure (network density):
Step 1: Create a simple matrix in which you list the names of the people in your network on both the horizontal and vertical axis. (This can be easily done in an Excel spreadsheet.) Then put an X in each box, indicating who knows whom in your network. Each X corresponds to a social tie in your network. Count the total number of Xs in your matrix. Let’s assume X = 8.
Step 2: If your network contains 12 people (including yourself), N = 12. The maximum network density is calculated by the following formula: [N ´ (N - 1)] / 2. If your network size is 12, then your maximum network density is [12 ´ (12 - 1)] / 2 = 66. This is the maximum number of ties in your network when everybody knows everybody.
Step 3: To calculate your actual network density, divide X by N: Network density = (X/N). In the example with eight ties in a network of 12 people, the network density is The closer this number is to 1, the denser the network.

57. Small Group Exercise #1
Furniture manufacturers are acquiring others and the industry is consolidating.
Charter Capital Partners is an M&A adviser.
They have hired you to conduct research.
See slides notes for information about this client.
Should the client upgrade, partner, or sell?
Your task:
Use the build-borrow-or-buy framework.
Develop a set of questions to gather key information.
What information can help them decide?
Notes about this client: The client is a small manufacturer of office furniture in a medium-sized 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.

58. Small Group Exercise #2 Many firms now participate in social media
Twitter, Facebook, YouTube, and blogs
Ensures effective communication with stakeholders
They may have multiple accounts with these tools
Research the social media presence of 3 firms
More insights gleaned if they’re in the same industry
Questions to answer:
Do they do a good job managing their web identity?
What differences do you find among them?

59. End of Chapter 9

60. Strategy Smart Videos

61. Strategy Smart Videos (1 of 6)
The IBM Enterprise Conference
Overview of the IBM / Apple Strategic Partnership as outlined in Strategy Highlight 9.1
Link:
15:55 Minutes

62. Strategy Smart Videos (2 of 6)
Ratan Tata and Howard Schultz
Good Business Brew: Starbucks & Tata Joint Venture
Link:
8:49 Minutes

63. Strategy Smart Videos (3 of 6)
Recommendations for how to seek a strategic alliance
Focused on small businesses
Link:
1:38 Minutes

64. Strategy Smart Videos (4 of 6)
INSEAD Professor Laurence Capron
Corporate Growing Pains: Build, Borrow or Buy?
Link:
9:27 Minutes

65. Strategy Smart Videos (5 of 6)
Harvard Business Review / Laurence Capron
Evaluate M&As the Right Way
Link:
2:18 Minutes

66. Strategy Smart Videos (6 of 6)
Google Acquires YouTube
A (VERY informal) interview with YouTube founders about this from 2006
Link:
1:36 Minutes
CBC news interview regarding these impacts
5:02 Minutes

67. Chapter Case 9

68. Chapter Case 9: Disney (1 of 2)
Disney is the world’s largest media company
$50 billion in annual revenues
Has grown through high-profile acquisitions
Pixar (2006), Marvel (2009), and Lucasfilm (2012)
How Pixar became an acquisition
Originally produced graphic display systems, animated movies demonstrated systems capabilities
Steve Jobs bought it for $5 million
Rolled out one blockbuster after another
Toy Story, A Bug’s Life, Monsters, Inc.,
Finding Nemo, The Incredibles, and Cars

69. Chapter Case 9: Disney (2 of 2)
Disney acquisitions
Pixar for $7.4 billion in 2006
Marvel for $4 billion in 2009
Lucasfilm for $4 billion in 2012
Franchise model
Get a big movie hit, then derive spin-offs
TV shows, theme park rides, video games, toys, clothing
Disney’s hit Frozen
Most successful animated movie ever
Grossed $1.5 billion since 2013

70. Appendix 1 The AFI Strategy Framework
The important inside circle is titled "Gaining and Sustaining a Competitive Advantage" that is at the very center of the image, with five different circles on the outside of it. Arrows go back and forth from the center circle to each of the five outer circles. The five outer circles are labeled: (1) Getting Started, (2) External and Internal Analysis, (3) Formulation: Business Strategy, (4) Formulation, Corporate Strategy, and (5) Implementation. Each of these outer five circles have a brief description beside them to explain what the circle means: Under the first outer circle titled "Getting Started", it says: Part 1, Strategy Analysis, "What is Strategy (Chapter 1)" and "Strategic Leadership: Managing the Strategy Process (Chapter 2)". Under the second outer circle titled "External and Internal Analysis", it says: Part 1, Strategy Analysis, "External Analysis: Industry Structure, Competitive Forces and Strategic Groups (Chapter 3)", "Internal Analysis: Resources, Capabilities and Core Competencies (Chapter 4)", and "Competitive Advantage, Firm Performance, and Business Models (Chapter 5)". Under the third outer circle titled "Formulation: Business Strategy", it says: Part 2, Strategy Formulation, "Business Strategy: Differentiation, Cost Leadership and Integration (Chapter 6)" and "Business Strategy, Innovation and Entrepreneurship (Chapter 7)". Under the fourth outer circle titled "Formulation: Corporate Strategy", it says: Part 2, Strategy Formulation, "Corporate Strategy: Vertical Integration and Diversification (Chapter 8)", "Corporate Strategy: Strategic Alliances, Mergers and Acquisitions (Chapter 9)", and "Global Strategy: Competing Around the World (Chapter 10)". Under the fifth outer circle titled "Implementation", it says: Part 3, Strategy Implementation, "Organizational Design: Structure, Culture and Control (Chapter 11)", and "Corporate Governance and Business Ethics (Chapter 12)".
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71. Appendix 2 Exhibit 9.1 Guiding Corporate Strategy: The Build-Borrow-or-Buy Framework
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: 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: 3. How close to your resource partner? If high, determine the type of strategic alliance, if low: 4. How well can you integrate the target firm? If high, acquire (BUY), if low, revisit the build-borrow-buy options or reformulate strategy.
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72. Appendix 3 Exhibit 9.4 How to Make Alliances Work
This image shows how alliance partnerships need to create resource combinations that obey the VRIO criteria through relation-specific investments, establish knowledge-sharing routines, and build interfirm trust. Each of these three elements are presented in individual boxes with arrows pointing to each other, and are all contained within the same outer circle with the words "effective alliance governance" placed inside the circle.
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