University of Cagliari, Faculty of Economics, a.a. 2012-13 Business Strategy and Policy A course within the II level degree in Managerial Economics year II, semester I, 6 credits Lecturer: Dr Alberto Asquer firstname.lastname@example.org Phone: 070 6753399
Business Strategy and Policy Lecture 8Partnerships, Strategic Alliances, Mergers & Acquisitions
Introduction1. Partnerships and Strategic Alliances2. Pros and cons of strategic alliances3. A special kind of partnership: the industrial districts4. Mergers & Acquisitions5. Pros and cons of M&As6. Vertical integration or outsourcing?-------------7. Summary
1. Partnerships and Strategic AlliancesPartnerships are forms of strategic behaviour of firms that relate to collaboration – rather than competition – with other firms.Strategic alliances Formally, are a contractual relationship between two or more firms that provides the terms for joint control of shared resources, allocation of tasks, reciprocal obligations and sanctions Substantively, are a medium-long term cooperative interaction between two or more firms where each firm benefits from the mutual coordination of strategies
1. Partnerships and Strategic Alliances plus several other members...
2. Pros and cons of strategic alliancesMotives for strategic alliances Organizational rationales: Learning new skills and competences Economic rationales: Obtaining economies of scale Cost sharing Risk reduction Strategic rationales: Access to new markets Access to new technology Diversification into new businesses Pre-emptying competition Industry trends Political rationales: Overcoming regulatory barriers Developing technological standards
2. Pros and cons of strategic alliancesAdvantages of strategic alliances Fast entry into foreign markets Acquiring knowledge of markets and cultures Acquiring knowledge and skills Acquiring technologies and intellectual property rights Generating new strategic options through the combination of resources and skills
2. Pros and cons of strategic alliancesRequisites for an effective strategic alliance Choose adequate partners Beware of cultural differences Look at mutual benefits Establish commitments and guarantees Agree on joint decision making rules Review and assess the performance of the alliance, and make adjustments over time, if needed
2. Pros and cons of strategic alliancesMain issues related to strategic alliances: Contract (in)completeness (future contingencies are unspecified) Asymmetric information (and related monitoring problem) Threat of opportunistic behaviour (i.e., free riding problem) Risks associated to the return to investments in relationship-specific assets (i.e., holdup problem)
2. Pros and cons of strategic alliancesLimitations of strategic alliances Issues of control and dependency Issues of unequal gains (how to “split the pie”) Differences in cultural values Role ambiguity Relationships between the alliance and competitors Antitrust charges
3. A special kind of partnership: the industrial districts Industrial districts are a special kind of partnership: They are characterised by the presence of several firms, that are generally small or medium-small that operate along all the industry value chain that are typically specialised in one or a few segments of the chain that are geographically concentrated in a relatively small area that are often coordinated and directed by one leading firm
3. A special kind of partnership: the industrial districts Examples of industrial districts (about 200 in Italy) Glasses, Belluno Jewelry, Valenza Ceramics, Sassuolo Textiles, Prato
3. A special kind of partnership: the industrial districts Examples of industrial districts (4 in Sardinian legislation) Cork, Calangianus Granite, Gallura Tempio Pausania Carpets, Samugheo Marble, Orosei
3. A special kind of partnership: the industrial districts Main features of the “networked economy” of industrial districts Intensive division of labour Cooperation and trust between firms Continuous improvements and innovation Active forms of collective representation (business associations) Involvement of local public authorities Cultural and historical ties within the local industrial community
4. Mergers & Acquisitions M&As are operations that result in joint ownership and control of previously independent firms. Mergers lead to the inclusion of previously independent firms within one only organisational hierarchy. Acquisitions lead to the control of other firms by exercising the right to appoint and remove top managers.
4. Mergers & Acquisitions Some examples of M&As in history $182 billion $116.7 billion $81.4 billion
4. Mergers & Acquisitions Some examples of M&As in history $182 billion 2000 2002, $99 billion losses $116.7 billion $81.4 billion
4. Mergers & Acquisitions Different types of M&As: 1) Consensual or conflictual (hostile takeovers) 2) Horizontal or vertical 3) Within the same or different industries (conglomerates)
4. Mergers & Acquisitions M&A operations often tend to concentrate within periods of higher activity (merger waves)
4. Mergers & Acquisitions M&A operations mostly take place within the same country (domestic M&As, about ¾ total), but occasionally are conducted between different countries (international or cross-border M&As, about ¼ total) Example: Flows of cross-border M&As in banking sector, 2006-2009.
4. Mergers & Acquisitions Most M&A operations take place within the US and other industrialised countries. Example: Number of domestic M&As in banking sector, 2006-2009.
5. Pros and cons of M&AsMotives for which M&As take place: Increasing total turnover (i.e., size and market share) Expansion of geographical reach (i.e., expanding market channels) Extension of product range (i.e., diversification) Quick access to new technologies, resources, and competences More cost efficiency (by optimising joint production and marketing, by increasing scale, by exploiting synergies)
5. Pros and cons of M&AsSome context and contingent rationales for M&As: Advantageous tax provisions Privatisation or forced sales of company assets Deregulation Dismal business prospects (i.e., trying to become “too big to fail”)
5. Pros and cons of M&AsSome “unconfessed” rationales for M&As: Managers aim to “build empires” and get higher remuneration Diversifying development options in face of strategic uncertainties Employing free cash flow rather than paying it out to shareholders Protecting national interest on the basis of geo-political and other reasons
6. Vertical integration or outsourcing? Vertical integrations are M&A operations directed towards suppliers (upwards) or clients (downwards) Upwards integration: It is especially valuable to gain control of production inputs, in particular rare resources. Upwards integration allows the firm to be less strategically dependent upon suppliers bargaining power. Downwards integration: It is especially valuable to gain control of distribution channels, in particular when clients are accessed through intermediaries. Downwards integration allows the firm to be less dependent upon clients bargaining power.
6. Vertical integration or outsourcing? Rather than integrating other firms operations, firms may outsource part of their value chain. Outsourcing is driven by the advantages (1) to let other firms carry out the activities that they excel to perform and (2) to focus firms scarce resources on the activities that they excel to perform. Strategic rationales for outsourcing: Cost efficiency when outside firms perform activities at lower cost Focus on activities that are not related to distinctive competences Avoiding committing on technologies and product features Maintaining flexibility and facilitating innovation Acquiring knowledge from other sources
7. SummaryMain pointsStrategic alliances or partnerships are medium-long term cooperativeinteractions between two or more firms where each firm benefits fromthe mutual coordination of strategiesIndustrial districts provide a special kind of strategic alliance, thatconsists of several small-medium firms, in a relatively concentratedgeographical area, with intense division of labour and collaborative tiesbased on mutual trustM&As are important operations that relate to companies growth andstrategic “manoeuvring”.A special class of M&A operations are those directed towards verticalintegration of firms activities. Rather than integrating, however, firmsmay also outsource their activities.