1. Mergers and Acquisitions, Strategic Alliances
Be sure to see experienced and newer versions of the Instructor’s Manual at 
Chapter 9
Corporate Strategy:
Mergers and Acquisitions, Strategic Alliances

3. 9.1 Mergers and Acquisitions
Merger: combining two companies usually similar in size
Friendly approach
Ex: Ernst & Young
Acquisition: purchase or takeover of a company
Can be friendly
Ex: Disney buys Pixar
Hostile takeover
Ex: Vodafone buys Mannesmann
Instructors:
The following example is from the IM.
What is motivating the cross-border merger of two major advertising firms, Omnicom and Publicis? This merger will certainly provide economies of scale and could potentially increase the firm’s negotiating power with its customers and suppliers. However, will it give the combined firm the resources and capabilities that it needs to compete effectively against the new disruptors in the advertising business, like Google and Facebook. Ask students to do an industry analysis of the ad agency business and create a competency development wish list for a large traditional advertising agency. What types of acquisition targets might accelerate the process of gaining those skills? (See “Advertising giants to merge,” The Wall Street Journal, 7/29/13.)
Article link is here: ?mg=reno64-wsj
The IM also has a discussion of Ethical/Social question 2 from the EOC regarding the Comcast purchase of NBC and the important issue of “net neutrality”. An additional and updated article on this subject is below: “Netflix’s Deal With Comcast Isn’t About Net Neutrality—Except That It Is”
isnt-about-net-neutrality-except-that-it-is

4. 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
Increased differentiation
Access to new markets and distribution channels
Instructors:
The digital companion to this book McGraw-Hill Connect has an interactive exercise on this section of the textbook. It builds student confidence on the advantages and disadvantages of horizontal integration (LO 9-2).
There is a discussion question at the end of the chapter related to one of these mergers that many students who attend concerts and shows will be very interested in learning about….
Horizontal integration has benefits to the firms involved. Consider the consolidation in the event promotion business when Live Nation bought Ticketmaster in List some specific advantages of the acquisition for Live Nation. Do you see any downside to the merger?
Recall from the chapter the benefits of horizontal integration strategy. Live Nation enjoyed the reduced competitive intensity, lowered the cost through scale economies, gained access to new markets and distribution channels, and increased differentiation with more brand names. The downside of the mergers perhaps is the integration failure that might occur during the M&As, because combining two firms requires strong leadership and cultural compatibility and it takes time to fully integrate two firms as well. So those might be a downside of the merger. Also, as a consumer, the consolidation could lead to higher prices unless a substitute service is found.

5. Exhibit 9.1 Sources of Value Creation and Costs in Horizontal Integration

6. Food Fight: Kraft’s Hostile Takeover of Cadbury
Strategy Highlight 9.1
Food Fight: Kraft’s Hostile Takeover of Cadbury
Kraft acquired Cadbury in UK.
Hostile takeover, $20 billion deal
Cadbury has strong position in emerging economies.
Perfected distribution system in countries like India
Kraft faces strong rivalries worldwide, including China.
2012 − Kraft restructured
With Hershey’s attention on China (2013 entry), Kraft has an opportunity for gaining U.S. market share.
Instructors:
The IM has a suggested exercise to build upon this strategy highlight.
Ask students to research Hershey’s recent candy product launches in China ( and compare them to Mondelez China’s ( new Oreo products and Cadbury products. National and international news outlets have carried stories on the product launches. The Hershey China site does not have English text (though many browsers will offer a rough translation), but students may comment on the fact that most of the people featured in the ads are Caucasian. The Mondelez China website has English text, but if you have students who can read Mandarin, they could be asked to make a presentation to the class comparing snack firm product development strategies in China
to those in the country of your university. Cadbury has much more expertise than both Hershey and Kraft in international marketing. Can they see evidence of Mondelez benefiting from this capability? You may want to refer back to this discussion in Chapter 10 when you discuss localization.

7. M&A and Competitive Advantage
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?
Principal–agent problems
Overcome competitive disadvantage
Superior acquisition and integration capability
Instructors:
In Chapter 8 we discussed the Adidas' shift towards Nike’s more vertically disintegrated position. Adidas acquired Reebok in 2006 to overcome a competitive disadvantage by generating synergies and economies of scale so the company could at least compete with Nike and other competitors. On the other hand, some firms do possess a better capability in using M&As to establish a competitive edge, such as Cisco acquiring Linksys and WebEx to enjoy
complementary assets. Managers sometimes have their own agenda when using M&As for their own benefits in terms of pay, power, and prestige, and this is part of the “principal–agent problem.”
The IM also points out a weblink for a classroom exercise that might be useful for more in depth discussion of this topic. “Winners Curse at Gourmet Adventures” is an exercise that demonstrates the risks of overbidding for acquisitions. It can be found on Russ Coff’s Carpenter Strategy Toolbox site.
curse-in-ma/

8. 9.2 Strategic Alliances STRATEGIC ALLIANCE STRATEGIC CRITERIA
A voluntary arrangement between firms that involves the sharing of knowledge, resources, and capabilities with the intent of developing processes, products, or services
STRATEGIC CRITERIA
An alliance qualifies as strategic only if it has the potential to affect a firm’s competitive advantage.
RATIONAL VIEW OF COMPETITIVE ADVANTAGE
Framework where critical resources and capabilities are embedded in strategic alliances that span firm boundaries
Instructors:
The digital companion to this book McGraw-Hill Connect has an interactive exercise on this section of the textbook. It builds student confidence on the importance of strategic alliances (LO 9-5).
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.

9. 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 & buys it in 2009
Access critical complementary assets
Pixar partners with Disney
Learn new capabilities
GM & Toyota (NUMMI) – formed in 1984
Who won the learning race? Probably Toyota….
Instructors:
The end of chapter material has a discussion question that can lead to an interesting classroom activity about IKEA.
End of Chapter Ethical/Social Issues 3
IKEA is the world’s largest furniture retailer. It has many non-equity alliances with suppliers and manufacturers around the world. IKEA also makes strategic use of non- equity alliances and stakeholder partnerships to participate in finding solutions to social and environmental challenges. For example, IKEA has had longstanding relationships with Save the Children, UNICEF (United Nations Children’s Fund), and the WWF (World Wildlife Fund, the global conservation organization). Go to IKEA’s website and use your Internet search expertise to find more information about these and other active partnerships. In what ways does IKEA participate? What projects have shown success? How do these partnerships relate to maintaining IKEA’s competitive advantage as the world’s largest furniture retailer?
This discussion can tie into corporate social responsibility and firm value discussions from earlier in the course. In particular, when asking about project success, press students to define what constitutes success for IKEA and success for the non-profit partner. What resources and capabilities does each party bring to the alliance? Refer to Exhibit 9.4 and ask students to consider which of these governance considerations would be most important to this particular type of non-equity
alliance.

10. Strategic Alliances to Challenge Amazon
Strategy Highlight 9.2
Strategic Alliances to Challenge Amazon
Amazon’s Kindle
Content providers do not want fixed price for e-books. ($9.99)
Below cost is thesame strategy Amazon started for printed books.
Apple’s iPad
Let publishers set the prices directly (Agency model)
Worked with publishers to increase bargaining power
Challenge Amazon’s early lead in the delivery of e-content
Amazon share dropped from 90 to 60% in e-books.
2013 – a federal judge ruled that Apple colluded with publishers to drive up prices of e-books
Instructors:
At press time Apple was appealing the 2013 decision and you may want to check for more recent updates (or assign a student to give an update report perhaps for extra credit) as your class discussion approaches. Here is an article as of Feb when the appeal is still underway.
antitrust-ruling.html
For MBA students the following exercise from the IM may be a value added example.
MBA students, they should be able to relate to the benefits and disadvantages to Thunderbird of a strategic partnership with a for-profit university. While they might see the sale/leaseback of the campus as having a relatively benign effect on the students and on the university’s reputation, the joint venture has far deeper implications. Ask students to analyze the market for full-time MBA students. How might this strategic alliance help the two firms to compete more effectively in that market? One partner brings money and the other brings reputation. Which partner is getting the more valuable resource? (See “Struggling Thunderbird Business School finds a for-profit lifeline,” The Wall Street Journal, 7/9/13.)
Article link is HERE:

11. Governing Strategic Alliances
Governing mechanisms:
Non-equity alliances
Based on contracts
Equity alliances
One firm takes partial ownership in the other
Joint ventures
Standalone organization owned by 2 or more firms
Instructors:
A related classroom activity is “Global Alliance Game” is an exercise that demonstrates many of the principles of strategic alliances. It can be found on
Russ Coff’s Carpenter Strategy Toolbox site.
Link is HERE: game/

12. Exhibit 9.2 Key Characteristics of Different Alliance Types

13. Most common forms of alliance
NON-EQUITY ALLIANCES
Most common forms of alliance
Supply agreements
Distribution agreements
Licensing agreements
Vertical strategic alliances
Firms share explicit knowledge
Knowledge that can be codified
Patents
User manuals and fact sheets,
Scientific publications

14. At least one partner takes partial ownership position
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”
Partial ownership, thus equity alliances signal stronger commitments
Moreover, equity alliances allow for the sharing of tacit knowledge that can not be codified.
Toyota has an equity alliance with Tesla.
Instructors:
If you are interested in the Tesla factory purchased from Toyota, for this alliance or for the Tesla full case in the back of this text, in February 2014 the National Geographic Channel did a show on the Megafactory and Elon Musk. The show is 45 minutes long but shows quite a bit of the factory processes.
A video link is here:

15. EQUITY ALLIANCES: CORPORATE VENTURE CAPITAL
Corporate venture capital (CVC) – Equity investments by established firms in entrepreneurial ventures
Equity alliances produce stronger ties and greater trust between partners than non-equity alliances do.
Examples:
Dow Venture
Siemens
Kaiser Permanente

16. Created and owned by two or more companies Long-term commitment
JOINT VENTURES
Joint ventures (JVs) are the strong ties, trust, and commitment that can result.
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
Used to enter foreign markets
Least common of the 3 types of alliances

17. Alliance Management Capability
A firm’s ability to effectively manage three alliance-related tasks concurrently
30 to 70% of all alliances yield disappointing results
Partner selection and alliance formation
Alliance design and governance
Post-formation alliance management
Instructors:
The digital companion to this book McGraw-Hill Connect has a brief case exercise on this section of the textbook. It builds student confidence on alliance management using a case on Starbucks (LO 9-7).

18. Exhibit 9.3 Alliance Management Capability

19. PARTNER SELECTION AND ALLIANCE FORMATION
The expected alliance benefits must exceed its costs.
One or more of the five alliance formation reasons should be present:
Strengthen competitive position
Enter new markets
Hedge against uncertainty
Access critical complementary resources
Learn new capabilities
Partner compatibility and commitment are necessary conditions a for successful alliance.
Instructors:
The following example is one of several in the IM.
International Paper’s strategic alliance with a Russian partner in Siberia offers a good opportunity to discuss the advantages of having local partners when entering a new, unfamiliar geographic territory. Ask students what benefits this investment brings to Russia, to the Russian partners, and to International Paper. In what ways are the interests of the partners aligned?
What factors should IP consider in managing the alliance? See “International Paper’s Big Pulp Bet Hits a Frosty Siberia,” The Wall Street Journal, 7/17/13.) The example also illustrates operating challenges in one of the important BRIC countries. There is a 2 minute video associated with the article that discusses the reasons behind the investment in Siberia as well as the challenges of doing business in Siberia. You could follow this video with a discussion about how a Russian partner might help manage and mitigate some of these risks.
Link to article & video is HERE:

20. Exhibit 9.4 How to Make Alliances Work

21. POST-FORMATION ALLIANCE MANAGEMENT
To effectively manage the ongoing relationship
Tips:
Make relationship-specific investments
Establish knowledge-sharing routines
Build interfirm trust
Ex: 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

22. 9.3 Implications for the Strategist
A strategist has three options to drive firm growth:
Organic growth through internal development
External growth through alliances
External growth through acquisition
The build-borrow-or-buy framework:
Aids strategists in deciding whether to pursue internal development (build)
Enter a contract arrangement or strategic alliance (borrow)
Acquire new resources, capabilities, and competencies (buy)
Instructors:
The IM has some good discussion ideas to close out the chapter (besides the end of chapter material).
Alliances can be mixed blessings. They can provide a strong competitive advantage, but this may evolve into competitive dependence and create the potential for hold-up. Two examples to illustrate this point are Google/Samsung and Zynga/Facebook. For either of these examples, you could develop an exercise in decision-making skills by asking the students to develop two mutually exclusive strategies for either Samsung, Google, Facebook, or Zynga and then explain why one is superior to the other using sound strategic logic grounded in analysis.
Zynga built its casual gaming business primarily through its strategic alliance with Facebook. Eventually it grew to a substantial segment of Facebook’s revenue. Which firm gained more from that alliance can be the subject of a meaty debate, as students are probably quite familiar with both firms. Zynga decided to break free to develop its own direct connection to customers, critical to growth in the mobile market. Both firms launched IPOs. Both firms underperformed expectations post-IPO. However, Facebook has continued to thrive despite the weakening of its Zynga partnership, while Zynga has struggled. See “Zynga’s virtual pain,” The Wall Street Journal, 6/4/13, and a related 4 minute video. A few weeks after this article came out, Zynga brought in a new CEO to replace the founder. An interesting extension of this discussion of interdependence in strategic alliances could be an analysis of the resources and capabilities to which the alliance provides access and how the firm replaces that access as the alliance weakens.
Article link is HERE:
Video link is HERE: reboot/04C44E7E C A227AF35017C.html?KEYWORDS=Zynga#!04C44E7E C A227AF35017C

23. Exhibit 9.5 How to Implement a Corporate Strategy: The Build-Borrow-or-Buy Framework

24. Take-Away Concepts Merger LO 9-1
A merger describes the joining of two independent companies to form a combined entity.
Acquisition
An acquisition describes the purchase or takeover of one company by another. Can be friendly or hostile.
M&A Umbrella Term
Although there is a distinction between mergers and acquisitions, many observers simply use the umbrella term “Mergers & Acquisitions,” or M&A.
Superior Relational Capability
Firms use M&A activity for competitive advantage when they possess a superior relational capability, which is built on a superior alliance management capability.
LO 9-1
Differentiate between mergers and acquisitions, and explain why firms would use either as a vehicle for corporate strategy.

25. Take-Away Concepts Horizontal Integration Reasons
Horizontal integration is the process of merging with competitors, leading to industry consolidation.
Reasons
As a corporate strategy, firms use horizontal integration to:
Reduce competitive intensity
Lower costs
Increase differentiation
LO 9-2
Define horizontal integration and evaluate the advantages and disadvantages of this corporate-level strategy.

26. Explain why firms engage in acquisitions.
Take-Away Concepts
Firms engage in acquisitions to (1) access new markets and distributions channels, (2) gain access to a new capability or competency, and (3) preempt rivals.
LO 9-3
Explain why firms engage in acquisitions.

27. Take-Away Concepts LO 9-4
Evaluate whether mergers and acquisitions lead to competitive advantage.
Most mergers and acquisitions destroy shareholder value because anticipated synergies never materialize.
If there is any value creation in M&A, it generally accrues to the shareholders of the firm that is taken over (the acquiree), because acquirers often pay a premium when buying the target company.
Mergers and acquisitions are a popular vehicle for corporate-level strategy implementation for three reasons: (1) because of principal–agent problems, (2) the desire to overcome competitive disadvantage, and (3) the quest for superior acquisition and integration capability.

28. Take-Away Concepts Strategic Alliances Competitive Advantage
LO 9-5
Define strategic alliances, and explain why they are important corporate strategy vehicles and why firms enter into them.
Strategic Alliances
Strategic alliances have the goal of sharing knowledge, resources, and capabilities in order to develop processes, products, or services.
Competitive Advantage
An alliance qualifies as strategic if it has the potential to affect a firm’s competitive advantage by increasing value and/or lowering costs.
Reasons for Alliances
The most common reasons why firms enter alliances are to: (1) strengthen competitive position, (2) enter new markets, (3) hedge against uncertainty, (4) access critical complementary resources, and (5) learn new capabilities.

29. Take-Away Concepts
Alliances can be governed by the following mechanisms: contractual agreements for non-equity alliances, equity alliances, and joint ventures.
Exhibit 9.2 presents the pros and cons of each alliance governance mechanism.
LO 9-6
Describe three alliance governance mechanisms and evaluate their pros and cons.

30. Take-Away Concepts
An alliance management capability can be a source of competitive advantage.
An alliance management capability consists of 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 management.
Firms build a superior alliance management capability through “learning-by-doing” and by establishing a dedicated alliance function.
LO 9-7
Describe the three phases of alliance management and explain how an alliance management capability can lead to a competitive advantage.

31. Apply the build-borrow-or-buy framework to guide corporate strategy.
Take-Away Concepts
The build-borrow-or-buy framework provides a conceptual model that aids strategists in deciding whether to pursue internal development (build), enter a contract arrangement or strategic alliance (borrow), or acquire new resources, capabilities, and competencies (buy).
Firms that are able to learn how to select the right pathways to obtain new resources are more likely to gain and sustain a competitive advantage.
LO 9-8
Apply the build-borrow-or-buy framework to guide corporate strategy.