Chapter 9: Corporate Strategy:

Acquisitions, Alliances, and Networks

Firms often form ties such as alliances to share information and pursue common interests.
Organizations also join networks in order to get access to a diverse pool of knowledge and
resources to advance strategic objectives that they couldn’t pursue in isolation. Firms have
several critical strategic options to pursue common interests, enhance competitiveness, and
increase revenue: acquisitions, alliances, and networks.

1. Integrating Companies: Mergers and Acquisitions

Merger= The joining of two independent companies to form a combined entity; friendly, good
idea for the two firms.

Acquisition= The purchase or takeover of one company by another; can be friendly or

unfriendly.

Hostile Takeover= Acquisition in which the target company does not wish to be acquired.

 Umbrella term M&A for Merger&Acquisition, because distinction is a little blurry.

1.1 Horizontal Integration: Merging with Competitors

Horizontal Integration= The process of acquiring and merging with competitors, leading to
industry consolidation.
 can improve companies’ strategic position in a single industry
 an industry-wide trend toward horizontal integration leads to industry consolidation
 four main benefits:
- Reduction in competitive intensity
- Lower costs
- Increased differentiation
- Access to new markets and distribution channels

Reduction in Competitive Intensity

structure-conduct-performance (SCP)  horizontal integration changes the industry structure
in favour of the surviving firms. Excess capacity is taken out of the market, and competition
decreases. The industry structure becomes more consolidated, and thus more profitable. If
oligopolistic industry, and their focus is on non-price competition (R&D spending, customer

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service etc.), rivalry decreases. It can favourably affect several of Porter’s five forces for the
surviving firms. Government authorities must approve any large horizontal integration.

Lower Costs
Firms use horizontal integration to lower costs through economies of scale and thus enhance
their economic value creation and performance. Lowering costs by merging with other
companies, sharing e.g pipelines and portfolios  less need for sales force.

Increased Differentiation
It can help firms to strengthen their competitive positions by increasing the differentiation of
their product and service offering. Filling gaps in a firm’s product offering  combined entity is
able to offer a complete suite of products and services

Access to New Markets and Distribution Channels

Speaks for itself.

1.2 Mergers and Acquisitions

In most cases mergers and acquisitions do not create competitive advantage, but even destroy
shareholders value (because the anticipated synergies never materialize). If there is any value
creation, it generally accrues to the shareholders of the firm that was taken over (the acquiree).

Companies merge because of:

 The desire to overcome competitive disadvantage

 Superior acquisition and integration capability
 Principal-agent problems

Desire to overcome Competitive Disadvantage

Overcome competitive disadvantage that might lead to competitive advantage in the long-run,
but not necessarily. It leads to economies of scale and scope. Most importantly the firm does not
want to have a competitive disadvantage anymore

Superior Acquisition and Integration Capability

Acquisition and integration capabilities are not equally distributed across firms. Since it is
valuable, rare and difficult to imitate, a superior acquisition and integration capacity, together
with past experiences, can lead to competitive advantage

Principal-Agent Problems
Managers, agents, are supposed to act in the sharholders best interest, principal, however,
some may have incentives to build a larger empire  prestige, power, pay, job security
(especially if the company pursues unrelated diversification); this often goes wrong
because of:

Managerial Hubris= A form of self-delusion, in which managers convince themselves of

their superior skills in the face of clear evidence to the contrary. It comes in two forms:

1. The managers of the acquiring company convince themselves that they can manage
the business of the target company more effectively and thus create shareholder value.

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 2. Most top-managers are aware that the vats majority of acquisitions detroys rather than
creates shareholder valye, they see themselves as the exeptions to the rule.
2. Strategic Alliances: Causes and Consequences of Partnering
Strategic Alliances= A voluntary arrangement btw firms that involves the sharing of
knowledge, resources, and capabilities with the intent of developing processes, products, or
services to lead to competitive advantage. A strategic alliance has the potential to help a firm
gain and sustain a competitive advantage when it joins together resources and knowledge in a
combination that obeys the VRIO principles. They are attractive because they enable firms to
achieve goals faster and at lower costs than going it alone.

Relational View of Competitive Advantage= Strategic mngmt framework that proposes that
critical resources and capabilities frequently are embedded in strategic alliances that span firm
boundaries. The basis for competitive advantage is formed when strategic alliances create
resource combination that are valuable, rare, and difficult to imitate, and the alliances are
organized appropriately to allow for value capture.

2.1 Why Do Firms Enter Strategic Alliances?

 strengthen competitive position: to change the industry structure, and use it when
competing in so-called battles for industry standards.
 enter new markets: either in terms of geography or products and services. Sometimes,
governments require that foreign firms have local joint venture partner. This have both
benefits (local expertise and contacts) and risks (exposed its proprietary know-how)
 protect themselves against uncertainty
 access critical complementary assets: New firms are in need of it to complete the
value chain from upstream innovation to downstream commercialization. Strategic
alliances allow firms to match complementary skills and resources to complete the value
chain. Licensing agreements of this sort allow the partner to benefit from a division of
labour, allowing each to efficiently focus on its core expertise.
 learn new capabilities: co-opetition can lead to learning races in strategic alliances 
Situations in which both partners in a strategic alliance are motivated to form an alliance
for learning, but the rate at which the firms learn may vary; the firm that accomplishes
its goal more quickly has an incentive to exit the alliance or reduce its knowledge
sharing.

 Alliance formation is frequently motivated by leveraging economies of scale, scope,

specialisation, and learning.

2.2 Governing Strategic Alliances

Non-Equity Alliances
Partnership based on contracts btw firms. The most frequent forms are supply agreements,
distribution agreements, and licensing agreements. (they are all vertical strategic alliances,
connecting different parts of the industry value chain)

Here firms tend to share explicit knowledge: Knowledge that can be codified (e.g., information,
facts, instructions, recipes); concerns knowing about a process or product. Licensing agreements
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are contractual alliances in
which the participants
regularly exchange codified
knowledge. Sometime, lack of
trust and commitment due to
weak ties btw the alliance
partners.

Equity Alliances

Partnership in which at least

one partner takes partial
ownership in the other
partner. Less common, due to
larger investments. Stronger
commitments.

Here sharing of tactic

knowledge: Knowledge that
cannot be codified; concerns
knowing how to do a certain
task and can be acquired only
through active participation in
that task. Partners exchange
personnel to make this
possible.

Another governance
mechanism of equity alliances:
Corporate Venture Capital (CVC)  Equity investments by established firms in
entrepreneurial ventures; CVC falls under the broader rubric of equity alliances.

Joint Ventures (JV)

A standalone organisation created and jointly owned by two or more parent companies.
Exchange of both: explicit and tactic knowledge. Used to enter foreign markets. Any rewards
from the collaboration must be shared between the partners. Undoing the JV can take some time
and involve considerable cost.

 Equity alliances and joint ventures are frequently stepping stones toward full
integration if the partner firms through M&A, try before you buy strategic option.

2.3 Alliance Management Capability

= A firm’s ability to effectively manage three alliance-related tasks concurrently: (1) partner
selection and alliance formation, (2) alliance design and governance, and (3) post-formation
alliance mngmt.

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Partner Selection and Alliance Formation
The expected benefits of the alliance must exceed its costs. The firm must select the best possible
alliance partner. Necessary conditions for successful alliance formation:

Partner compatibility: aspects of cultural fits btw different firms

Partner commitment: willingness to make available necessary resources and acceptance of

short-term sacrifices to ensure long-term rewards

Alliance Design and Governance

Mangers must design the alliance and choose an appropriate governance mechanism among :
non-equity contractual agreement, equity alliances, or joint ventures.

inter-organisational trust: contracts are necessarily incomplete  trust btw alliance partners
plays an important role for the effective post-formation alliance mngmt (combination of formal
and informal mechanisms essential for effective governance)

Post-Formation Alliance Mngmt

Concerns the ongoing management of the alliance. The
partnership needs to create resource combinations that
obey the VRIO criteria. Interfirm trust entails the
expectation that each alliance partner will behave in good
faith and develop norms of reciprocity and fairness. The
systematic differences in firms’ allicance-mngmt capability
can be a source of competitive advantage. Build capability
through repeated experiences over time. Alliances are best
managed at the corporate-level.

 To accomplish effective alliance management, firms

should create a dedicated alliance function: led by a vice
president or director of alliance mngmt and endowed
with its own resources and support staff to accomplish effective alliance mngmt. Should
coordinate all alliance-related activity taking a corporate-level perspective.
 Three person team to manage an alliance:
- alliance champion: a senior, corporate-level executive responsible for high-level support
and oversight; making sure the alliance fits within the firm’s existing alliance portfolio
and corporate-level strategy
- alliances leader: has technical expertise and knowledge needed for the specific technical
area and is responsible for the day-to-day mngmt of the alliance
- alliance manager: (Office of Alliance Mngmt) serves as an alliance process resource and
business integrator btw the tow alliance partners, provides training and development, as
well as diagnostic tools
 relational capability: allows for the successful mngmt of both strategic alliances AND
mergers and acquisitions

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3. Strategic Networks
Strategic Network= A social structure composed of multiple organisations (network nodes)
and the links among the nodes (network ties). It emerges as companies add more and more
partners over time to an existing alliance. Pursuing it enables firms to achieve goals they cannot
or wouldn’t want to accomplish alone or with more traditional two-company alliances. It
provides advantages but can constrain individual members.

3.1 Analysing Strategic Networks

 Strong ties: trusting relationships established through frequent, face-to-face interactions
btw managers over time; may even include friendships across different firms; may
contain equity-sharing element (such as an R&D joint venture). Beneficial to the transfer
of tacit knowledge and for rapid decision making.
 Weak ties: infrequent and shallower interactions; governed by contractual agreements;
transfer of explicit knowledge only (mostly)
 Degree centrality: The number of direct ties a firm has in a network, out of the possible
ties, the more centrally located the firm is.
 Closure: Degree of connection, most of the firms are connected to another
 Knowledge broker: a firm bridges and connects the various clusters that make up a
network, powerful position because continuous innovation is based on a firm’s ability to
broker connect and recombine different strands of knowledge.
 Structural holes: Spaces where two organisations are connected to the same
organisation, but are not connected to one another. Firms that bridge structural holes
(brokers) gain information and control benefits over the nonconnected firms.
 Isolates: firms that are not connected to any firm in the network
 Small-World Phenomenon: Situation in which a network exhibits local clusters, each with
high degree centrality.

 Strategic networks are powerful vehicles to execute business and corporate-level

strategy. Managers need to be aware of the potential benefits to be had from networks,
but also of potential downsides.