1. 6/13/20151 Business Strategy & Policy PSU MGMT #562 Dave Garten daveoutside@alum.mit.edu Strategic Alliances and Acquisitions

2. 6/13/2015Dave Garten - Business Strategy2 Planning Concepts : Gaps Internal Analysis External Analysis Strategy “Basis of Competition” “What we have” Mission Make Buy Ally ? R & D Gap Planning “What we need” Supply Mftg Sales Mktg

3. 6/13/2015Dave Garten - Business Strategy3 Joining Forces: Why? (the logic) Driven by the gap  would like to achieve vs. what it can achieve X NPV (A+B) > NPV (A) + NPV (B)

4. 6/13/2015Dave Garten - Business Strategy4 Collaboration: Success & Failure Success: ~30% acquisitions; ~ 50% alliances Tend to be more successful Acquisitions in core businesses, existing geographies Alliances for related businesses, new geographies Acquisitions between large & small companies [45%] Alliances that evolve beyond initial objectives [79%] JVs with even split of ownership [60%] LBO & corporate buyers [~80%] Source: various including Bleeke and Ernst, McKinsey

5. 6/13/2015Dave Garten - Business Strategy5 Transaction Types Ownership Purchase Order Multiyear Purchase Agreement Outsourcing Purchase Agreement Acquisition Joint Venture Joint Development Licensing Joint Marketing “Strategic” “Transactional” Price Commitment

6. 6/13/2015Dave Garten - Business Strategy6 Acquisition overview Type Vertical (forward or backward) Horizontal (FTC issues)  Related: product or market extension, consolidation  Not related: conglomerate Valuation Premium (P) = NPV (A+B) – NPV (A) – NPV (B) Cash or stock Synergy value -> Integration strategy “Value drivers” the logic behind all deals Bottom line savings and/or top line growth

7. 6/13/2015Dave Garten - Business Strategy7 Joint Venture Clear governance; very focused Share risk Minimize “leakage” Limited learning between companies Used in product or market expansion, or consolidation Company ACompany B Joint Venture A new legal entity

8. 6/13/2015Dave Garten - Business Strategy8 Why Ally (vs. JV/acquire)? X

9. 6/13/2015Dave Garten - Business Strategy9 Vertical vs Horizontal Alliances Joint Ventures (V) Siecor, Ownes-Corning (H) Lockheed-Boeing for missile development Strategic supply (V) Supplier share R&D, profits: B787, A380 (V) Intel-Applied materials for Fab equipment Functional (V) Pharma (distribution – biotech R&D (V) IT outsourcing, manufacturers reps Solutions (“modular”) (H) Intel and Cisco networking gear (H) Airline and hotel frequent flyer R&D collaboration (H) Sematech Trade groups (H) Lysine, OPEC (H/V) WIFI industry group

10. 6/13/2015Dave Garten - Business Strategy10 Corporate Equity Investments Aligns interests Source of Commitment “Investor” Company A “Investee” Company B Capital infusion Get to know partner Limits exit options Try before buy (option) Less $$ vs acquire Gain insight into new developments (option)

11. 6/13/2015Dave Garten - Business Strategy11 Ecosystems (group alliances) Substitution Effect (horizontal) Devalue proprietary advantage Head to head advantage Keystone #1 Keystone #2 Niche Keystone Contenders Keystone Contenders LeadersContenders Keystone Squeeze (vertical) “Coopetition” Increase proprietary advantage Outperform in value chain Aid partner’s competition Keystone-Niche (tug of war) Keystone expansion Niche innovation

12. 6/13/2015Dave Garten - Business Strategy12 Soft Side of Alliances: Mindset TransactionalStrategic Strategy Info sharing Decision-making Communication Attitude Performance Time frame ShorterLonger DiscreetValue chain Arms-lengthCommon Strategy Concept of alliance IQ… X

13. 6/13/2015Dave Garten - Business Strategy13 Value Capture Acquisition integration and alliance execution Not all synergies created equal Eliminating redundancies and purchasing economies generally solid value drivers New products and/or new channels more difficult to attain. Details, details, details Especially the people, bridging cultures.

14. 6/13/2015Dave Garten - Business Strategy14 Corning: Core Competency “An evolving network of wholly owned businesses and joint ventures” – Jaime Houghton, CEO Corning “An evolving network of wholly owned businesses and joint ventures” – Jaime Houghton, CEO Corning Ciba Corning: medical instrumentation Samsung Corning: LCD & CRT glass Siecor: Optical Fiber/Cable

15. 6/13/2015Dave Garten - Business Strategy15 Starbucks: Alliances

16. 6/13/2015Dave Garten - Business Strategy16 Daewoo Case Learnings 1. Daewoo’s growth strategy was driven form opportunities and strengths 2. Daewoo’s domestic experience with the Korea “miracle” became the leverage point for international growth in developing nations. 3. Daewoo’s entrepreneurial culture particularly well suited for developing nation expansion. 4. Alliance success generally requires high level commitment and a long time horizon. X

17. 6/13/2015Dave Garten - Business Strategy17 Closing Thoughts on Collaboration Structure follows strategy – choose your path based on your destination. Requirement for success: treat collaboration as anything but “business as usual” Understand how your own core competencies relate to alliances. Enhance your competency - do not “hollow out”…. Fit is critical. VRIO and culture.