Session 04 / 09

Modifying Firm Scope:

Strategic Alliances

reading
Sasanka Sekhar Chanda
2016
Strategic Management - II

Functions of the Corporate Office

BOARD OF GOVERNORS
HEADQUARTERS
Functional Heads: FINANCE AND ACCOUNTS , IT, HR, OPERATIONS , R&D
Division Heads: SBU Leaders, COUNTRY Heads
Horizontal functions: Legal, Public Relations, Corporate Social Responsibility

SBU1

SBU2
SBU3
COUNTRY 1

SBU1A

SBU3B

COUNTRY 2

Strategic Business Unit (SBU) Functions

Analyze Product Market conditions, Respond to competitor moves and
technology changes by management of product life cycle, seek to deliver
higher value
Corporate Functions
Strategic Decision Making, Strategy Formulation, Guiding Strategy Implementation,
Diversification, Mergers and Acquisitions, Strategic Alliances, Internationalization,
Corporate Venturing, Knowledge Management
Control Function (TMT & Board of Directors) Leadership, Corporate Governance

Dyer, J. H., Kale, P., & Singh, H. (2004)

When to ally and when to acquire

Harvard Business Review, 82(7/8), 109-115

Nature of Acquisition / Alliance deal

Acquisitions (one company acquiring another)
Competitive, based on market prices, risky
Used by companies to increase scale or to cut costs

Alliances (separate entities exist, a group or

separate company is created as joint venture)
Cooperative, negotiated and not so risky
Used by companies to enter new markets,
customer segments or regions

Study Facts
1996 to 2001
US firms made 74000 acquisitions and 57000 alliances

2002/2003
7795/8385 acquisitions, 5048/5789 alliances

Cisco- 1993-2003

Successful absorbed 36 firms in 10 years prior to 2004

Entered into 100 alliances in the same period
Sales grew 36%, market capitalization grew 44%
Cisco looks internally first; if they cannot find a capability they
consider an alliance or an acquisition
Avoids deals that require employees to relocate- rarely buys
companies not located in its general neighborhood
25% of eventual acquisitions start as small equity investments

Study Facts contd.

Assertion: for a shareholder of an acquiring firm
Acquisitions either destroy or dont add value
Companies share prices fell 0.34% to 1% in 10 days
after they announce acquisitions. Target firm shares
rise 30%

Wealth loss of 10% in 5-yr period post acquisition

Alliances create very little wealth

40-55% break down prematurely

Terminology
Modular synergy
Companies manage resources independently and pool
only the results for greater profits
Tie between airline and hotel chain

Sequential synergy
Output of one company is input to the next
Biotech firm (develops molecules) & Pharma Co. (gets
FDA approvals & markets drugs)

Reciprocal synergy
Working closely together and executing tasks through
iterative knowledge-sharing
Exon & Mobil authors dont say what is reciprocal to what

Terminology contd.
Resources
Hard: manufacturing plant
Soft: knowledge workers
Redundant resources can be either type

And the prescription is

Want Reciprocal Synergy OR have large
quantities of redundant resources?
Acquisition
Layoff people, close plants, enrich shareholders

Sequential Synergy AND mostly soft resources

Equity Alliance
Either partner has some skin in the game (losses and
gains are shared) promotes cooperation

Modular synergy AND mostly hard resources

Non-equity alliance (or contractual alliance)
Free to disengage at short notice, low upfront cost

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Prescription contd.
Uncertainty exists when it is not possible to assess future
payoffs
Technology or product uncertainty
Uncertainty with regard to whether consumers will actually
use a product & time taken to obtain desired level of
acceptance

High or moderate uncertainty

Non-equity or equity alliance (p. 7)

Low / medium uncertainty

Acquisition (p. 6)

Authors do not specify how moderate and medium

are similar or different
An acquisition may be made to preempt competition

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CRITIQUE
Underlying Advocacy: Think alliance
if acquisition will lead to exit of
necessary human resources OR
in order to buy time till uncertainty is
dispelled

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Class questions
What reasons can prompt firm A to consider
acquiring firm B, other than increasing As
profits/ As share price?
What reasons can prompt a firm A to think
about allying with a firm B, other than
increasing As profits/ As share price ?
What is the rationale for assessing value of an
acquisition decision by observing the change in
stock price within a +/- 3/7/10 day period of
announcement?