1. business and industrial
2. company
3. joint venture

CHAPTER
9
Corporate Strategy:
Acquisitions, Alliances,
and Networks
McGraw-Hill/Irwin
Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.
Part 2 Strategy Formulation
9–2
LO 9-1 Differentiate between mergers and acquisitions, and explain why
firms would use either as a vehicle for corporate strategy.
LO 9-2 Define horizontal integration and evaluate the advantages and
disadvantages of this corporate level strategy.
LO 9-3 Evaluate whether mergers and acquisitions lead to competitive advantage.
LO 9-4 Define strategic alliances, and explain why they are important corporate
strategy vehicles and why firms enter into them.
LO 9-5 Describe three alliance governance mechanisms and evaluate their pros
and cons.
LO 9-6 Describe the three phases of alliance management, and explain how an
alliance management capability can lead to a competitive advantage.
LO 9-7 Define strategic networks and evaluate the advantages and disadvantages
of different network positions.
9–3
Chapter Case 9
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
EXHIBIT 9.1
Global Users of Facebook and MySpace
Facebook passes MySpace on number of users
in 2008 and continues exponential growth
9–5
Integrating Companies: Mergers and Acquisitions
• Merger: combining two companies
 Friendly approach

Ex: Disney & Pixar
 Generally similar in size
• Acquisition: purchase or takeover a company
 Can be friendly or unfriendly
 Hostile takeover

Ex: Vodafone buys Mannesmann
Dell Makeover Video
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
9–7
EXHIBIT 9.2
Source of Value Creation and Costs
in Horizontal Integration
Benefits
Drawbacks
9–8
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 & Staples merger
9–9
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
9–10
STRATEGY HIGHLIGHT 9.1
Food Fight: Kraft 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
• The acquisition forces Hershey and other
competitors to rethink their strategies
 Hershey 90% revenues from U.S. market
1–11
9–11
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
– Ex: Kraft buys Cadbury
• New distribution in emerging markets & domestically
LO 9-1 Differentiate between mergers and acquisitions, and explain why firms would
use either as a vehicle for corporate strategy.
LO 9-2 Define horizontal integration and evaluate the advantages and disadvantages
of this corporate level strategy.
LO 9-3 Evaluate whether mergers and acquisitions lead to competitive
advantage.
LO 9-4 Define strategic alliances, and explain why they are important corporate
strategy vehicles and why firms enter into them.
LO 9-5 Describe three alliance governance mechanisms and evaluate their pros and
cons.
LO 9-6 Describe the three phases of alliance management, and explain how an
alliance management capability can lead to a competitive advantage.
LO 9-7 Define strategic networks and evaluate the advantages and disadvantages of
different network positions.
9–13
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?
1. Overcome competitive disadvantage
2. Superior acquisition and integration capability
3. Principal–agent problems
9–14
EXHIBIT 9.3
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
9–15
Mergers and Acquisitions
• 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
• 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

LO 9-1 Differentiate between mergers and acquisitions, and explain why firms
would use either as a vehicle for corporate strategy.
LO 9-2 Define horizontal integration and evaluate the advantages and
disadvantages of this corporate level strategy.
LO 9-3 Evaluate whether mergers and acquisitions lead to competitive advantage.
LO 9-4 Define strategic alliances, and explain why they are important
corporate strategy vehicles and why firms enter into them.
LO 9-5 Describe three alliance governance mechanisms and evaluate their
pros and cons.
LO 9-6 Describe the three phases of alliance management, and explain how an
alliance management capability can lead to a competitive advantage.
LO 9-7 Define strategic networks and evaluate the advantages and disadvantages
of different network positions.
9–18
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 from Chapter 4)
• HP’s alliance with DreamWorks SKG
 Resulted in Halo Collaboration conferencing
EXHIBIT 9.4
Number of R&D Alliances
Explosive growth since the 1980s yields faster
products at lower costs and aids globalization.
9-20
STRATEGY HIGHLIGHT 9.2
Strategic Alliances to
Challenge Amazon
• Amazon’s Kindle
 E-reader selling content below cost
 Content providers do not want fixed price for e-books ($9.99)
 Similar strategy Amazon used for printed books earlier
• Apple’s iPad
 Allied with major publishers
 Let publishers set the prices directly
 Apple worked with publishers to increase the bargaining power
over customers
1–21
9–21
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 in1984
9–22
STRATEGY HIGHLIGHT 9.3
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,
Pixar Video
Iron Man, The Incredible Hulk…etc.
1–23
9–23
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
9–24
Non-Equity Alliances
• Most common forms of contracts
 Supply agreements
 Distribution agreements
 Licensing agreements
• Vertical strategic alliances
 Firms tend to share explicit knowledge that are codified
 Licensing agreements, partners exchange codified
knowledge regularly

Ex: Genentech & Eli Lilly
• Genentech R&D focused
• Eli Lilly manufacturing & FDA approvals
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
9–26
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
9–27
EXHIBIT 9.5
Key Characteristics of Different Alliance Types
LO 9-1
Differentiate between mergers and acquisitions, and explain why firms
would use either as a vehicle for corporate strategy.
LO 9-2
Define horizontal integration and evaluate the advantages and
disadvantages of this corporate level strategy.
LO 9-3
Evaluate whether mergers and acquisitions lead to competitive advantage.
LO 9-4
Define strategic alliances, and explain why they are important corporate
strategy vehicles and why firms enter into them.
LO 9-5
Describe three alliance governance mechanisms and evaluate their pros
and cons.
LO 9-6
Describe the three phases of alliance management, and explain how
an alliance management capability can lead to a competitive
advantage.
LO 9-7
Define strategic networks and evaluate the advantages and
disadvantages of different network positions.
9–29
EXHIBIT 9.6
Alliance Management Capability
9–30
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
9–31
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
9–32
EXHIBIT 9.7
How to Make Alliances Work
9–33
LO 9-1
Differentiate between mergers and acquisitions, and explain why firms
would use either as a vehicle for corporate strategy.
LO 9-2
Define horizontal integration and evaluate the advantages and
disadvantages of this corporate level strategy.
LO 9-3
Evaluate whether mergers and acquisitions lead to competitive advantage.
LO 9-4
Define strategic alliances, and explain why they are important corporate
strategy vehicles and why firms enter into them.
LO 9-5
Describe three alliance governance mechanisms and evaluate their pros
and cons.
LO 9-6
Describe the three phases of alliance management, and explain how an
alliance management capability can lead to a competitive advantage.
LO 9-7
Define strategic networks and evaluate the advantages and
disadvantages of different network positions.
9–34
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

9–35
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
9–36
EXHIBIT 9.8
Firms Embedded in Strategic Networks
A hypothetical strategic network.
Firm B is in a key position - knowledge broker
9–37
STRATEGY HIGHLIGHT 9.4
When Strategic Networks
Become Dysfunctional
• Deregulation of EU telecoms, competitive intensity rises
 Swedish Telia and Dutch KPN form a JV called Unisource
• Unisource became a global strategic network
 25 telecom companies in 11 countries
• The flexibility and autonomy of smaller firms in the network
has been severely restricted by large partners
 Large firms such as AT&T could dominate the network
• Members exited the network and it collapsed
1–38
9–38