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Joe Mahoney

Corporate Strategy: Acquisitions, Alliances, and Networks. Joe Mahoney. Facebook: From Dorm Room to Dominant Social Network. Facebook: “most powerful and transformative social change” Started by Mark Zuckerberg in 2004

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Joe Mahoney

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  1. Corporate Strategy: Acquisitions, Alliances, and Networks Joe Mahoney

  2. Facebook: From Dorm Room to Dominant Social Network • Facebook: “most powerful and transformative social change” • Started by Mark Zuckerberg in 2004 • Overcame the first-mover advantage held by MySpace • True global strategy: more users first, profits later • Adding different functions to go after a wide-range of users • Innovative network marketing approach • Word of mouth through online social network • Frequently attacked for insufficient protection of users’ privacy • Needs a sustainable business model • Implications for alliances and networks

  3. Global Users of Facebook and MySpace Facebook passes MySpace on number of users in 2008 and continues exponential growth

  4. Integrating Companies: Mergers and Acquisitions • Merger: combining two companies • Friendly approach • Example: Disney & Pixar • Generally similar in size • Acquisition: purchase or takeover a company • Can be friendly or unfriendly • Hostile takeover • Example: Vodafone buys Mannesmann

  5. Horizontal Integration: Merging with Competitors Horizontal integration: process of merging and acquiring competitors HP buys Compaq in 2002 Pfizer buys Wyeth in 2009 Live Nation buys Ticketmaster in 2010 Benefits: Reduce competitive intensity Lower costs Boost differentiation Access to new markets and distribution channels

  6. Source of Value Creation and Costs in Horizontal Integration

  7. Reduction in Competitive Intensity Changes underlying industry structure Taking out excessive capacity from rivals Increased industry consolidation Example: U.S. airlines in recent years Increasing bargaining power vis-à-vis suppliers and buyers Stable industry and more profits Usually need government’s approval Example: FTC rejected Office Depot and Staples merger

  8. Horizontal Integration: Lower Costs How? Through economies of scale Enhancing economic value creation Crucial to the industries with high fixed costs Example: pharmaceutical industry Large sales force = fixed cost Need $1billion in drug revenues to cover these costs

  9. Horizontal Integration Increased differentiation Strengthen competitive positions Differentiation of products and services Example: Oracle buys PeopleSoft ($10B in 2005) Joined enterprise software with HR management software Access to new markets and distribution channel Enter new markets by M&A Example: Kraft buys Cadbury New distribution in emerging markets & domestically

  10. Mergers and Acquisitions Many M&As actually destroy shareholder value! When there is value, it often goes to the acquiree Acquirers tend to pay a premium Why still desire M&As? Overcome competitive disadvantage Superior acquisition and integration capability Principal–agent problems

  11. Value Destruction in M&A: The Worst Offenders Shareholder value destroyed based on up to 3 years post-merger analysis compared to overall stock market

  12. Desire to Overcome Competitive Disadvantage Adidas acquired Reebok in 2006 Benefits from economies of scale and scope Compete more effectively with #1 Nike Superior Acquisition and Integration Capability Some firms have superior M&A abilities They identify, acquire, and integrate target companies Example: Cisco Systems Sought complementary assets Bought over 130 firms since 2001, including large firms: Linksys, Scientific Atlanta, & WebEx Mergers and Acquisitions

  13. Mergers and Acquisitions • Principal–agent problems • Managers have incentives to diversify through M&As to receive more prestige, power, and pay. • Not for shareholder value appreciation • This is principal—agent problem • Managerial hubris • Self-delusion • Beliefs in their own capability despite evidence to the contrary • “Exception to the rule” • Example: Quaker Oats purchase of Snapple • Sony purchase of Columbia Pictures

  14. Strategic Alliances: Causes and Consequences of Partnering Strategic alliances: voluntary arrangements between firms Sharing knowledge, resources, and capabilities Leading to gaining and sustaining competitive advantage Relational view of competitive advantage VRI resources are embedded in alliances (VRIO framework) HP’s alliance with DreamWorks SKG Resulted in Halo Collaboration conferencing

  15. Number of R&D Alliances Explosive growth since the 1980s yields faster products at lower costs and aids globalization.

  16. Why Do Firms Enter Strategic Alliances? Strengthen competitive position Apple vs. Amazon Enter new markets Local partner for global growth Microsoft partners with Yahoo on search Hedge against uncertainty Real options approach Roche invests in Genentech 1990 and buys it in 2009 Access critical complementary assets Pixar partners with Disney Learn new capabilities GM & Toyota (NUMMI) – formed in1984

  17. Pixar and Disney: From Alliance to Acquisition • Pixar and Disney • Early strategic alliance • Successful products: Toy Story, Monsters, Inc., Finding Nemo, etc. • In 2005, Disney acquired Pixar for $7.4 billion • Steve Jobs became the largest shareholder of Disney • Early alliance serves as a vehicle to match two parties’ complementary assets and eventually led to the acquisition • Disney later acquired Marvel Entertainment, which made Spiderman, Iron Man, The Incredible Hulk…etc. 1–17

  18. Governing Strategic Alliances Governing mechanisms: Contractual agreements for non-equity alliances Based on contracts Equity alliances One firm takes partial ownership in the other Joint ventures Stand-alone organization owned by 2 or more firms

  19. Non-Equity Alliances Most common forms of contracts Supply agreements Distribution agreements Licensing agreements Vertical strategic alliances Firms tend to share explicit knowledge that is codified Licensing agreements, partners exchange codified knowledge regularly Ex: Genentech and Eli Lilly Genentech R&D focused Eli Lilly manufacturing & FDA approvals

  20. Equity Alliances At least one partner takes partial ownership position Stronger commitment toward the relationship Allow the sharing of tacit knowledge Tacit knowledge concerns the “know how” Partners exchange personnel to acquire tacit knowledge 1984 Toyota + GM = NUMMI (New United Motor Manufacturing Inc.) 2010 Toyota + Tesla to use the NUMMI plant Corporate venture capital is another equity source Established firms invest in new startups Tends to produce stronger ties and greater trust

  21. Joint Ventures Created and owned by two or more companies Hulu owned by NBC, ABC, and Fox Long-term commitment Exchange both tacit and explicit knowledge Frequent interaction of personnel Stepping stone toward full integration of the partnership “Try before you buy” concept Used to enter foreign markets

  22. Key Characteristics of Different Alliance Types

  23. Alliance Management Capability

  24. Alliance Management Capability • Partner selection and alliance formation • Ascertain that expected benefits exceeds costs • Must select the best possible alliance partner • Partner compatibility • Partner commitment • Willingness to share resources & long-term view • Alliance design and governance • Choose and agree upon governance structure • Non-equity contractual agreement • Equity alliances • Joint venture • Inter-organizational trust is critical

  25. Alliance Management Capability Post-formation alliance management To effectively manage the ongoing relationship Tips: Make relationship-specific investments Establish knowledge-sharing routines Build interfirm trust Example: HP’s dense network of alliances vs. DEC Dedicated alliance function Coordinate alliance-related tasks – at corporate level Knowledge base about how to manage alliance Ex: Eli Lilly is a clear leader in alliance management Best to develop a relational capability

  26. How to Make Alliances Work

  27. Strategic Networks Social structure with multiple organizations Network nodes – the organizations Network ties – the links between organizations Network achieves goals that cannot be done by only one firm Example - Star Alliance 1st global airline network Air Canada, Air China, Continental Airlines, Lufthansa, Singapore Airlines, United Airlines, etc. Seamless travel on 25 international airlines

  28. Analyzing Strategic Networks Enable us to understand the benefits and costs of a network Quality of the tie: strong or weak? Firm’s position in a network Network centrality Knowledge broker Ex: IDEO design consultancy Structural holes Small-world phenomenon Network in local cluster High degree of centrality of each firm

  29. Firms Embedded in Strategic Networks A hypothetical strategic network. Firm B is in a key position - knowledge broker

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