Lecture Outline

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Lecture Outline
MAN 6721 Strategic Management
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Class 8
Corporate Level Strategy Saturday, February 18,
2006
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Types of Corporate Level Strategies
Strategic Alliances
Vertical Integration
Corporate Level Strategy
Mergers Acquisitions
Corporate Diversification
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The Strategic Management Process
External Analysis
Strategic Choice
Strategy Implementation
Competitive Advantage
Mission
Objectives
Internal Analysis
Business Level Strategy
Corporate Level Strategy
Which Businesses to Enter?
How to Position a Business in the Market?
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Strategic Alliance Defined
Any cooperative effort between two or more
independent organizations to develop,
manufacture, or sell products or services
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Types of Alliances
Nonequity Alliance
Equity Alliances
Cooperating firms agree work work together to
develop, manufacture, or sell products or
services, but they do not take equity positions
in each other or form an independent
organizational unit to manage their cooperative
efforts.
Cooperating firms supplement contracts with
equity holdings in alliance partners.
Example Joint ventures. In a joint venture,
cooperating firms create a legally independent
firm in which they invest and from which they
share any profits that are created.
Examples Licensing agreements, supply
agreements, distribution agreements
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Examples of Non Equity AlliancesStrategic
Alliances
Small biotech firms partnering with large drug
companies
Digital Living Network Alliance
Blimpie Subs and Salads
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Examples of Equity AlliancesJoint Ventures
Name
Joint Venture Partners
Dow-Corning
Dow Chemical Corning
Cingular
BellSouth SBC
Sony and Ericsson
Sony Ericsson
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Demonstration of Complexity in Alliance Formations
Helio, a cellphone venture targeted at affluent
young people, is a joint venture between
Internet-service provider EarthLink of Atlanta
and South Korean wireless operator SKI Telecom
Has just entered into a strategic alliance with
the popular social networking MySpace, to allow
Helio users access to MySpace. Helio users will
be able to use their phones to post blog enteries
on MySpace or to access their MySpace contacts or
photos.
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Company Founded to Help Bring Alliance Partners
Together
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Types of Alliances(1 of 3)

• Joint Venture
• An entity that is created when two or more firms
  pool a portion of their resources to create a
  separately jointly owned firm.
• Network
• A hub and wheel configuration with a local firm
  at the hub organizing the interdependencies of a
  complex array of firms.

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Types of Alliances(2 of 3)

• Consortia
• Specialized joint ventures encompassing many
  different arrangements. Consortia are often
  grouping of firms oriented towards problem
  solving and technology development, such as RD
  consortia like SEMATECH.
• Alliance
• An arrangement between two or more firms that
  establishes an exchange relationship but has no
  joint ownership involved.

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Types of Alliances(3 of 3)

• Trade Association
• Organizations (typically non-profit) that are
  formed by firms in the same industry to collect
  and disseminate trade information, offer legal
  and technical advice, furnish industry-related
  training, and provide a platform for collective
  lobbying.

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Advantages and Disadvantages of Participating in
Alliances
Refer to class handout
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How Cheating Takes Place in Alliances
Misrepresenting the value of inputs
Withholding inputs
Exploiting the transaction- specific investment
of partners
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Sustained Competitive Advantage(1 of 3)

• Are Strategic Alliances Rare?
• As a form of organizing economic exchange, NO!
• However,
• The sources of value creation within alliances
  may be rare
• Firms may form a combination of complementary
  resources within an alliance that is rare
• The stock of such complementary resources may be
  limited so that first movers have a rare
  combination

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Sustained Competitive Advantage(2 of 3)

• Are Strategic Alliances Costly to Imitate?
• As a form or organizing economic exchange, NO!
• The organizational form per se is easily
  duplicated
• However,
• The resource combinations that create value in
  alliances may be very costly, if not impossible,
  to imitate if
• The value creating combination depends on social
  complexity (trust), causal ambiguity, and/or
  historical uniqueness.

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Sustained Competitive Advantage(3 of 3)
Are strategic alliances substitutable?
Internal Development
Mergers Acquisitions
If
If
there are no anti-trust issues
no partner is available
low uncertainty about the investment
transaction-specific investment is high
firms can be integrated easily
low uncertainty about the investment
value of combined firms is not tied to
independence
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Organizing Strategic Alliances(1 of 3)
Governance Responses to the Challenges of Value
Creation and Allocation
creates mutual understanding
aligns interests of partners
through ownership in each other
aligns interests of partners
through ownership of independent firm
imposes costs for cheating
direct effect
indirect effect
conflict resolution
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Organizing Strategic Alliances(2 of 3)
Governance Responses to the Challenges of Value
Creation and Allocation
the shadow of the future constrains cheating
may allow partners to exploit
opportunities that would be infeasible with
other mechanisms
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Organizing Strategic Alliances(3 of 3)

• Governance Responses to the Challenges of Value
  Creation and Allocation
• These responses are not mutually exclusive
• Contracts may be used with equity investments and
  joint ventures along with firm reputation and
  trust.
• Reputation and trust come into play in every type
  of alliance.
• Reputation and Trust May be Sources of
  Competitive Advantage Because They Are Costly to
  Imitate

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International Expansion

• Alliances May be Attractive Because
• Local market knowledge is usually crucial
• Governments may require a local partner
• International expansion may be
• Fraught with uncertainty
• High risk
• Expensive
• Alliances investment may be more easily reversed
  than internal development or acquisition

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Summary For Alliances(1 of 2)

• Successful Alliance Managers Will
• Create alliances that will produce gains from
  tradecomplementary resources
• Identify the sources of value creation
• Assess the likelihood of challenges to value
  creation and allocation
• Adopt appropriate governance responses to the
  challenges to value creation and allocation

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Summary For Alliances(2 of 2)

• Alliances May Generate Competitive Advantage If
• Combinations of complementary resources meet the
  VRIO criteria
• Governance responses meet the VRIO criteria

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Types of Corporate Level Strategies
Strategic Alliances
Vertical Integration
Corporate Level Strategy
Mergers Acquisitions
Corporate Diversification
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Mergers Acquisitions Defined(1 of 3)
one firm buys another firm
two firms are combined on a relatively
co-equal basis
the words are often used interchangeably
even though they mean something very different
merger sounds more amicable, less threatening
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Mergers Acquisitions Defined(2 of 3)
can be a controlling share, a majority, or
all of the target firms stock
parent stocks are usually retired and new
stock issued
name may be one of the parents or a
combination
can be friendly or hostile
one of the parents usually emerges as the
dominant management
usually done through a tender offer
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Mergers Acquisitions Defined(3 of 3)
Types of MA Activity
Vertical
suppliers or customers
Horizontal
competitors
Related
Product Extension
complementary products
complementary markets
Market Extension
Conglomerate
everything else
Unrelated
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Do Mergers and Acquisitions Create Value(1 of 4)
The Logic
Unrelated MA Activity
there would be no expectation of value
creation due to the lack of synergies between
businesses
there might be value creation due to
efficiencies from an internal capital market
there might be value creation due to the
exploitation of a conglomerate discount
a corporate raider who buys and restructures
firms
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Do Mergers and Acquisitions Create Value(2 of 4)
The Logic
Related MA Activity
value creation would be expected due
to synergies between divisions
economies of scale
economies of scope
transferring competencies
sharing infrastructure, etc.
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Do Mergers and Acquisitions Create Value(3 of 4)
The Empirical Evidence
Research is based on stock market reaction to the
announcement of MA activity
this reflects the markets assessment of
the expected value of the merger or acquisition
these studies look at what happens to the
price of both the acquirers stock and the
targets stock
thus, we can see who is capturing any
expected value that may be created
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Do Mergers and Acquisitions Create Value(4 of 4)
The Empirical Evidence
MA Activity creates value, on average, as
follows
Target Firms
Acquiring Firms
related MA activity creates more value
than unrelated MA activity
MA activity creates value, but target firms
capture it
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Why Is MA Activity So Prevalent?(1 of 3)
If managers know that acquiring firms do
not capture any value from MAs, why do
they continue to merge and acquire?
avoid competitive disadvantage
avoid scale disadvantages
cash generating, normal return investment
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Why Is MA Activity So Prevalent?(2 of 3)
If managers know that acquiring firms do
not capture any value from MAs, why do
they continue to merge and acquire?
managers benefit from increases in size
managers benefit from diversification
managers believe they can beat the odds
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Why Is MA Activity So Prevalent?(3 of 3)
If managers know that acquiring firms do
not capture any value from MAs, why do
they continue to merge and acquire?
some MA activity does generate above normal
profits (expected and operational over the long
run)
proposed MA activity may satisfy the logic of
corporate level strategy
managers may see economies that the market
cant see
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Competitive Advantage(1 of 6)
Can an MA strategy generate sustained competitive
advantage?
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Competitive Advantage(2 of 6)
Recognizing and Exploiting Economies of Scope
Firm Cs recognized value is 10,000
12,000
Firm A sees value of 12,000 in Firm C
10,000
Bidders
Target
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Competitive Advantage(3 of 6)
Recognizing and Exploiting Economies of Scope
if the economy between A C is costly to
imitate, it doesnt matter if other firms know
12,000
10,000
Firm A can still earn a 2,000 profit
Bidders
Target
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Competitive Advantage(4 of 6)
Recognizing and Exploiting Economies of Scope
Firm C has a market value of 10,000
10,000
12,000
Firm A buys Firm C for 10,000
10,000
Firm C turns out to be worth 12,000
Bidders
Target
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Competitive Advantage(5 of 6)
Doing the Deal
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Competitive Advantage(6 of 6)
Doing the Deal
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Implementation Issues(1 of 2)
Structure, Control, and Compensation
m-form structure is typically used
management controls compensation
policies are similar to those used in
diversification strategies
target firm may remain somewhat autonomous
target firm may be completely integrated
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Implementation Issues(2 of 2)
Cultural Differences
combining elements of both cultures
essentially replacing one culture with the other
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International Issues(1 of 2)
Government Policy
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International Issues(2 of 2)
Cultural Issues
(Hofstede, 1980)
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Summary