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EXTERNAL GROWTH: ALLIANCES

EXTERNAL GROWTH: ALLIANCES. GROWTH OF A FIRM. Internal expansion. External expansion (mergers and takeovers). (1) Differentiation: horizontal expansion (same product, increase in market share). (1) Horizontal integration: mergers of firms producing the same product.

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EXTERNAL GROWTH: ALLIANCES

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  1. EXTERNAL GROWTH: ALLIANCES GROWTH OF A FIRM Internal expansion External expansion (mergers and takeovers) (1) Differentiation: horizontal expansion (same product, increase in market share) (1) Horizontal integration: mergers of firms producing the same product (2) Vertical integration: different products, but technically related by belonging to different stages of the same productive process (2) Vertical integration: mergers of firms producing different products at different stages of the same technical process (3) Conglomerate diversification: introduction of totally different and unrelated products or activities (3) Conglomerate diversification: merger of firms producing totally unrelated products ORGANIC BUILD INORGANIC BUY Source: A.Koutsoyiannis, Non Price Decisions Session 6

  2. drivers cash constraints e.g. reduced combined cash burn w/o cutting core competencies need for critical mass spreading risk, e.g. develop complimentary product pipe lines broaden technology/skill base exit route 4 investor opportunities 2 turn shares = cash consolidation of pharma, e.g. fewer customers for biotech products antagonists executive + staff conflicts poor technology + product fit investor conflicts technology or financial skeletons cash burn not reduced by consolidation valuation disagreements On prospects for mergers in European biotech industry Source: “Let’s Get Together” by Glenn Crocker, New Scientist, 15/03/03, p.65 Session 6

  3. “Leading SSL VPN technology company Aventail… opens sales and technical support offices in the Asia Pacific region for the company’s growing channel base, which now numbers more than 50 partners across the region.” In China’s mobile phone handset market, Siemens and Bird, the country’s largest mobile phone maker have a marketing alliance. In Hong Kong’s mobile phone handset market Alcatel has an alliance with TCL. South Korea’s largest TV shopping channel is to set up an alliance with Chongqing TV in a large industrial city in China … Zensar Technologies has partnered with the Shenzen Municipal Government in China to teach project management to 1,000 software professionals. China’s top telecomms equipment maker Huawei Technologies forms a partnership with the UK’s telecomms equipment maker Marconi. BT and Accenture signed a 10 year $575 million business process outsourcing and transformation contract for human resource administration services. Covers employees and pensioners in UK and 37 other countries. All from FT & GLOBAL NEWS WIRE Session 6

  4. Equity-Based Joint Ventures Contract-Based Licensing Franchising Functional Alliances ALLIANCES : WHAT ARE THEY ? Session 6

  5. grown by more than 20% / year over past two decades 1980s – early 1990s mostly cross-border and technology agreements now much broader: outsourcing agreements, channel partnerships, co-branding, co-marketing better received (by investors) than M + A in fast moving, highly uncertain industries such as electronics, mass media and software reduces risks and costs of building business in turbulent environments Source: “When to think alliance” by David Ernst and Tammy Halevy, McKinsey Quarterly, 2000, no 4 ALLIANCES: contract - based Session 6

  6. ALLIANCES : ADVANTAGES • Can’t Do It Alone, e.g. Technology • Don’t Want to Go Alone, e.g. FDI • Create Industry Standards • Creating Good Competitors Session 6

  7. good example of research alliance organisations working together trying to create open standards DVB project – started 1993 high definition TV, multiple standard definition TV (PAL, NTSC or SECAM), broadband multimedia content, interactive services examples of members: Alcatel, Bang and Olufson, BBC, BSkyB, BT, Dolby Labs, Danish Broadcasting Corp, European Space Agency, France Telecom… see www.dvb.org DIGITAL AND INTERACTIVE TV Session 6

  8. GOOD COMPETITORS • Absorb Demand Fluctuations • Standards of Comparison • Serve Unattractive Segments • Cost Umbrella • Anti-Trust, Motivation Session 6

  9. GOOD COMPETITORS : CHARACTERISTICS • Credible & Viable ; • Knows Weaknesses • Understand Rules; • Realistic Assumptions • Knows Costs; • Strategy Improves Structure • Moderate Exit Barriers • Consistent Goals Session 6

  10. ALLIANCES : DISADVANTAGES • Agreeing • Co-ordinating and Managing • Splitting the Benefit Session 6

  11. ALLIANCES : THE PROBLEM OF CO-ORDINATION The Prisoner’s Dilemma BLAKE Confess Don’t Confess JESSICA 10 7 0 7 Confess Don’t Confess 1 0 10 1 In each box: Pay-off for JESSICA in bottom left; Pay-off for BLAKE in top right Session 6

  12. THE PRISONER’S DILEMMA : SOLUTIONS • Communication • Commitment • Hierarchy Session 6

  13. ALLIANCES : SUMMARY • Advantages • Problems • Solutions : ‘relational contracts’ • NEXT • BENCHMARKING- called auditing in textbook • RELATIONSHIPS, ARCHITECTURE AND CONTRACTS • TRANSACTIONS ANALYSIS Session 6

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