Class 8, 9, 10 - Strategic Alliances Flashcards
What are strategic Alliances?
- Involve shared risks and shared control
- Non-equity alliance: open-ended agreement, pool resources and capabilities together
- Equity alliance: may have similar goals as a joint venture, but funded differently, existing entity
- A joint venture is a particular form of equity alliance where the partners form a new company that
they jointly own
“A collaborative agreement between two or more independent firms, which contributes resources to a common endeavour of potentially important competitive consequences, while maintaining their individuality” (Gulati, 1995)
Why do companies search for strategic alliances?
- To exploit complementarities between resources and capabilities
- To exploit business/industry complementarities
- To explore opportunities with limited risks
- To acquire resources and capabilities through learning
- To expand into a new market
- To develop more effective processes
- To specialize in a limited range of capabilities while accessing other opportunities through the partners
E.g. uber and spotify, apple pay and master card, red bull and go pro
What are M&As?
It includes mergers, acquisitions, consolidations, tender offers, purchase of assets and management acquisitions
* In an acquisition (takeover), one company purchases the other outright. The acquired firm does not necessarily change its legal name or structure but is now owned by the parent company.
* Mergers are the combination of two firms, which subsequently form a new legal entity under the banner of one corporate name (the companies may choose to keep separated brands, but under one legal entity).
* Mergers are normally the combination of two similarly sized companies combined to form a new company, such as Exxon Mobil.
* Mergers require the agreement of the shareholders of both companies, who then exchange their shares for shares of the new company.
Merger vs. Acquisition
The consolidation or combination of one firm to another
The purchase of one firm by another so that ownership transfers
Motives of M&A
- to deal with overcapacity through consolidation in mature industries;
- to roll-up competitors in geographically fragmented industries to gain market share and efficiency;
- to extend into new products or markets without starting from scratch
- as a substitute for R&D - M&A helps bypass the risk and cost of in-house research by acquiring firms with the desired innovation.
Motive 1: The Overcapacity of M&As
Explanation: In mature industries, where growth has plateaued and competition is intense, companies often face overcapacity. Overcapacity means that the industry has more production capability than there is demand for the product or service. This leads to lower profits as firms struggle to utilize their full capacity efficiently.
M&A Motive: Companies merge or acquire competitors to reduce the number of players in the industry, streamline operations, and reduce excess capacity. This consolidation can help increase profitability by cutting redundant operations, improving economies of scale, and creating a more efficient supply-demand balance.
▪ Aims: greater market share; more efficient operations; less excess industry capacity
▪ Typical of Automotive, Steel and Petrochemical industries (capital intensive, reduce excess manufacturing plants and improve overall efficiency)
▪ “Eat of be eaten” law
▪ Win-Lose game
▪ Usually among big companies and one time event = > integration is critical
▪ Horizontal M&A
Considering resources, rationalization is a hard goal to get:
▪ Inter-organizational power dynamics (among CEOs, best people leave
and culture)
▪ Closing facilities: location, product mix, accounting costs, staffing, etc..
▪ Business process integration: performance evaluation systems, developing products, allocating resources
▪ Corporate values and culture
Some recommendations:
▪ Run the merged company only when integration at any level is done
▪ Impose your own processes quickly
▪ If a high premium is required, there is less time to return on the investment ▪ If the value is on the processes, do not rush too much integration
▪ Mergers of equal….consider it very well before doing it
Motive 2: The Geographic Roll-up M&As
M&A Motive: A roll-up strategy involves acquiring smaller, geographically fragmented competitors to create a larger, more unified organization. This allows the acquiring company to achieve scale, increase market share, and benefit from centralized operations (e.g., shared resources, branding, or administrative functions).
▪ Typical of early stage industry life cycle
▪ Operating unit remains local when downstream activities are important ▪ Acquirer lowers operating cost and bring value to the customer base
▪ Some differences with overcapacity acquisitions are:
- Economies of scale and scope vs. capacity reduction and duplication - Complementarities vs. redundancies
▪ Retention of local management
▪ Processes, such as IT and Purchasing, are usually imposed by the acquirer
▪ Integration of processes is done very smoothly
▪ Typical of hotel chains and banking
Some recommendations:
▪ Keep the key employees and customers rather than gaining efficiency
▪ Step-by-step integration is needed
Motive 3: The Product or Market Expansion
Explanation: Companies often seek growth by expanding their product offerings or entering new markets. However, developing new products or entering new markets from scratch can be costly, time-consuming, and risky.
M&A Motive: By acquiring a company that already operates in a desired product category or market, the acquiring company can rapidly gain access to new revenue streams, reduce entry barriers, and leverage the acquired company’s customer base, brand, or distribution network.
▪ Relative size matters
▪ Critical challenges coming from introduction of new processes
▪ Example of P&G and Gillette
Some recommendations:
▪ Core processes implementation is extremely important but very critical, especially at the international level
▪ What are the key successful capabilities of your target? ▪ Inequality in size helps! Digestibility…
Motive 4: The M&A as R&D
Explanation: Developing new products, technologies, or innovations internally through research and development (R&D) can be expensive and uncertain. It often requires significant investment, time, and specialized expertise.
M&A Motive: Instead of investing in lengthy R&D processes, companies may choose to acquire another firm that has already developed the desired technology, product, or innovation. This allows the acquiring company to quickly integrate these advancements without bearing the risk or cost of internal development.
▪ Useful to shorten product life-cycle
▪ Critical is the talented people mobility post acquisitions
▪ If integration is needed, then it has to be quickly implemented!
Some recommendations:
▪ Pay attention to soft assets
▪ Precise value estimation of the target is needed
Dyer et al 3 set of factor model
Dyer et al. (2004) propose a model showing that executives must analyze 3 sets of factors before deciding on a collaboration option:
1. Resources and Synergies they desire.
2. Market place they compete in.
3. Competencies at Collaborating.
Dyer et al
1. Resources and Synergies
1.1 Types
Companies create 3 kinds of synergies by combining and customizing resources differently. Those resource combinations, or interdependencies, require different levels of coordination between firms and result in different forms of collaboration.
a) Modular: when they manage resources independently and pool only the results for greater profit (example: Airline and Hotel chain) –> non-equity alliance
b) Sequential: when one company completes its tasks and passes on the results to a partner to do its bit (example: Abgenix and AstraZeneca)
–> equity alliance
c) Reciprocal: by working closely together and executing tasks through an iterative knowledge-sharing process (Exxon and Mobil) –> acquisition
Dyer et al
1. Resources and Synergies
1.2 Nature of resources
Companies should check if they must create the synergies they desire by combining hard resources or soft resources
* Hard resources: easy to value and synergies can be created quickly
(example: manufacturing plants) –> acquisition
* Soft resources: difficult to value and to appropriate (example: people) –> alliance
* Companies have to look at the relative value of soft resources to hard resources (level)
Dyer et al
1. Resources and Synergies
1.3 Extent of redundant resources
Companies must estimate the amount of redundant resources they’ll be saddled with if they team up with other organizations
Low - Non equity-based Alliance
Medium - Equity-based Alliance
High - Acquisition
Dyer et al
2. Market Factors
2.1 Degrees of Uncertainty
Technological and market uncertainty
Low - Acquisition
High / Medium - Equity based Alliance / non-equity based alliance
Dyer et al
2. Market Factors
2.1 Forces of competition for resources
Forces of competition for resources
Low - Non equity-based Alliance
Medium - Equity-based Alliance
High - Acquisition
