Corporate Strategy: Integration, Acquisitions & Alliances Flashcards
What question does this answer?
In what stages of industry value chain should firm participate in?
What is vertical integration?
Vertical integration is the ownership of production of needed inputs or of the channels by which it distributes its outputs
When should a firm integrate?
Transaction costs are found both internally within firms and externally across firms
If cost of making is less than the cost of procuring externally, the firm should vertically integrate in order to save costs
ie. firm is more efficient than market in organising economic activity, vertical integration is encouraged
When should a firm not integrate even when market is able to produce at a lower cost?
When the market has a better access to:
- Efficiency:
- Lower costs through economies of experience/ scale; specialisation of provider; true costing; incentives; professionalisation - Effectiveness:
- Greater WTP through access to better tech and continual improvements
3: Flexibility:
- Move assets on and off B/S and meet changing market demands by converting fixed costs to variable costs and increasing scalability
When should a firm not procure from the market?
Higher transaction costs in the market
- Friction costs:
- Finding vendor
- Drafting contracts - Motivation costs:
- Resources spent on guarding against “sharp practice” by vendor
- Monitoring vendor
- Enforcing contracts
- Dispute resolutions
- Legal costs of punishing defection & associated business costs
- Costs of opportunistic renegotiation - Coordination costs:
- Resources spent on managing
- Transitioning and interactions with a vendor that would have occured naturally in-house
- Knowledge acquisition and transfer
- Coordination mistakes
- Travel and telecommunications
Issues with firm boundaries and why they should not procure from the market?
- When one party makes asset specific investments to a transaction that has little value outside the transaction then it opens itself to opportunistic renegotiation by the other party
- Also assumes that the future is uncertain: it cannot be perfectly predicted thus writing an exhaustive contract is either infeasible or costly
- Given an opportunity, decision makers are opportunistic (take actions in self interest that may be detrimental of the counterpart)
What is the framework on “Make or Buy”
If any of the answer to the 4 steps is no, then use the market
- Are there existing suppliers that can attain EOS that an in-house unit could to attain? Do they possess execution capabilities that a in-house unit would not?
- Are there any significant r/s specific assets? Are there significant coordination or involving the leakage of private information?
- Is a detailed contracting infeasible or too costly?
- Is common ownership needed to mitigate contracting problems?
Ways for firms to enter into new businesses or scale the current one
Inorganic Growth:
- Strategic Partnerships
- Non-equity alliances, equity alliances and acquisitions
- Line between acquisition and alliances are grey to firms
Organic Growth:
- New product development, internal corporate ventures
How to make alliances work
Alliance function is extremely function
Have a post-merger plan
Limits of contracts (Benefits of A&A)
- Difficulty of specifying contract ex ante
- Cost of negotiating and agreeing each decision
- Difficult and costly to enforce contracts in courts
- Does not provide much exclusivity/ hard to keep gains proprietary
- Does not give sufficient control to dramatically re-design organisational linkages between partners
Benefits and Costs of Equity Ownership
Benefits:
- Exclusivity
- Alignment of interests
- Coordination of interest
- Continuing access to capabilities
Costs:
- Buying equity is costly
- Lower employee motivation
- Commitment
Prominent Causes for Acquirer value destruction
5 main causes
- Overpaying:
- Escalation of commitment
- Could be driven by own interest
- Sticking to the plan - Overconfidence
- Target does not fit strategic goals:
- Hard to sell after
- Could be due to lack of research
- Buying a company to realise its nothing - Incentive conflict:
- CEO vs shareholders - Poor post-merger integration/ implementation:
- Requires due diligence to ensure smooth post-merger
CAGE Framework
Cultural Differences:
- Languages, ethnicities , religions
Administrative Differences:
- Lack of colonial ties, different legal systems, political hostility
Geographic Differences:
- Physical Distances
- Lack of shared border
- Differences in climate
Economic Differences:
- Differences in income
- Differences in availability of resources/ human capital
Types of organisational structures
Organization is a collection of value
Each output, activity or user has its own distinct value chain
Global Product structure
- Differentiate by output
- Eg. Anheuser-Busch Companies
Multi-domestic structure
- Differentiate by user: geography/ customers
- Eg. Kraft Foods
Functions
- Differentiate by activities and functions
- The manufacturing, sales or R&D processes
- Eg Inbev
Combination of different structures
- Eg. Cadbury (activity and output)
Types of cross-business linkage option
- International strategy context
Higher global integration but lower local responsiveness
- Global Strategy
- the other end of the spectrum: multi-domestic strategy
- mix of both: transnational strategy
- trade off because of distance differences and causal ambiguity that makes it difficult to replicate strategy in foreign countries
- enter small first - Corporate Strategy Linkages (from highest shared activities and capabilities and from lowest business unit responsiveness)
- Dominant Business
- Related Diversification
- Unrelated Diversification
- Conglomerate
