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Strategic Alliances and Collaborative Partnerships Companies sometimes use strategic alliances or collaborative partnerships to complement their own

strategic initiatives and strengthen their competitiveness. Such cooperative strategies go beyond normal company-tocompany dealings but fall short of merger or full joint venture partnership.

Alliances Can Enhance a Firms Competitiveness

Alliances and partnerships can help companies cope with two demanding competitive challenges
Racing against rivals to build a market presence in many different national markets Racing against rivals to seize opportunities on the frontiers of advancing technology

Collaborative arrangements can help a company lower its costs and/or gain access to needed expertise and capabilities

Capturing the Full Potential of a Strategic Alliance

Capacity of partners to defuse organizational frictions Ability to collaborate effectively over time and work through challenges related to: Technological and competitive surprises New market developments Changes in their own priorities and competitive circumstances Collaborative partnerships nearly always entail an evolving relationship whose competitive value depends on Mutual learning Cooperation Adaptation to changing industry conditions Competitive advantage emerges when a company acquires valuable capabilities via alliances it could not obtain on its own

Why Are Strategic Alliances Formed?

To collaborate on technology development or new product development To fill gaps in technical or manufacturing expertise To acquire new competencies To improve supply chain efficiency To gain economies of scale in production and/or marketing To acquire or improve market access via joint marketing agreements

Ability of an alliance to endure depends on

How well partners work together Success of partners in responding and adapting to changing conditions Willingness of partners to renegotiate the bargain

Why Alliances Fail

Reasons for alliance failure

Diverging objectives and priorities of partners Inability of partners to work well together Changing conditions rendering purpose of alliance obsolete Emergence of more attractive technological paths Marketplace rivalry between one or more allies

Merger and Acquisition Strategies

Merger Combination and pooling of equals, with newly created firm often taking on a new name Acquisition One firm, the acquirer, purchases and absorbs operations of another, the acquired Merger-acquisition
Much-used strategic option Especially suited for situations where alliances do not provide a firm with needed capabilities or cost-reducing opportunities Ownership allows for tightly integrated operations, creating more control and autonomy than alliances

Objectives of Mergers and Acquisitions

To pave way for acquiring firm to gain more market share and create a more efficient operation To expand a firms geographic coverage To extend a firms business into new product categories or international markets To gain quick access to new technologies To invent a new industry and lead the convergence of industries whose boundaries are blurred by changing technologies and new market opportunities

Pitfalls of Mergers and Acquisitions

Combining operations may result in
Resistance from rank-and-file employees Hard-to-resolve conflicts in management styles and corporate cultures Tough problems of integration Greater-than-anticipated difficulties in
Achieving expected cost-savings Sharing of expertise Achieving enhanced competitive capabilities

Vertical Integration Strategies

Extend a firms competitive scope within same industry
Backward into sources of supply Forward toward end-users of final product

Can aim at either full or partial integration

Strategic Advantages of Backward Integration

Generates cost savings only if volume needed is big enough to capture efficiencies of suppliers Potential to reduce costs exists when
Suppliers have sizable profit margins Item supplied is a major cost component Resource requirements are easily met

Can produce a differentiation-based competitive advantage when it results in a better quality part Reduces risk of depending on suppliers of crucial raw materials / parts / components

Strategic Advantages of Forward Integration

To gain better access to end users and better market visibility To compensate for undependable distribution channels which undermine steady operations To offset the lack of a broad product line, a firm may sell directly to end users To bypass regular distribution channels in favor of direct sales and Internet retailing which may
Lower distribution costs Produce a relative cost advantage over rivals Enable lower selling prices to end users

Strategic Disadvantages of Vertical Integration

Boosts resource requirements Locks firm deeper into same industry Results in fixed sources of supply and less flexibility in accommodating buyer demands for product variety Poses all types of capacity-matching problems May require radically different skills / capabilities Reduces flexibility to make changes in component parts which may lengthen design time and ability to introduce new products

Pros and Cons of Integration vs. De-Integration

Whether vertical integration is a viable strategic option depends on its
Ability to lower cost, build expertise, increase differentiation, or enhance performance of strategy-critical activities Impact on investment cost, flexibility, and administrative overhead Contribution to enhancing a finding that Many companies are firms competitiveness value chain activities is a de-integrating more flexible, economic strategic option!

Diversification and Corporate Strategy

A company is diversified when it is in two or more lines of business that operate in diverse market environments Strategy-making in a diversified company is a bigger picture exercise than crafting a strategy for a single lineof-business
A diversified company needs a multi-industry, multi-business strategy A strategic action plan must be developed for several different businesses competing in diverse industry environments

Four Main Tasks in Crafting Diversification Strategy

Pick new industries to enter and decide on means of entry Initiate actions to boost combined performance of businesses Pursue opportunities to leverage cross-business value chain relationships and strategic fits into competitive advantage Establish investment priorities, steering resources into most attractive business units

Competitive Strengths of a Single-Business Strategy

Less ambiguity about
Who we are What we do Where we are headed

Resources can be focused on

Improving competitiveness Expanding into new geographic markets Responding to changing market conditions Responding to evolving customer preferences

Risks of a Single Business Strategy

Putting all the eggs in one industry basket If market becomes unattractive, a firms prospects can quickly dim Unforeseen changes can undermine a single business firms prospects
Technological innovation New products Changing customer needs New substitutes

When Should a Firm Diversify?

It is faced with diminishing growth prospects in present business It has opportunities to expand into industries whose technologies and products complement its present business It can leverage existing competencies and capabilities by expanding into businesses where these resource strengths are key success factors It can reduce costs by diversifying into closely related businesses It has a powerful brand name it can transfer to products of other businesses to increase sales and profits of these businesses

Why Diversify?
To build shareholder value! Diversification is capable of building shareholder value if it passes three tests:
1. Industry Attractiveness Testthe industry presents good long-term profit opportunities 1. Cost of Entry Testthe cost of entering is not so high as to spoil the profit opportunities 2. Better-Off Testthe companys different businesses should perform better together than as stand-alone enterprises, such that company As diversification into business B produces a 1 + 1 = 3 effect for shareholders

Related vs. Unrelated Diversification

Related Diversification
Involves diversifying into businesses whose value chains possess competitively valuable strategic fits with value chain(s) of firms present business(es)

Unrelated Diversification
Involves diversifying into businesses with no competitively valuable value chain match-ups or strategic fits with firms present business(es)

Strategy Alternatives for a Company Looking to Diversify

What Is Related Diversification?

Involves diversifying into businesses whose value chains possess competitively valuable strategic fits with the value chain(s) of the present business(es) Capturing the strategic fits makes related diversification a 1 + 1 = 3 phenomenon

Core Concept: Strategic Fit

Exists whenever one or more activities in the value chains of different businesses are sufficiently similar to present opportunities for
Transferring competitively valuable expertise or technological know-how from one business to another Combining performance of common value chain activities to achieve lower costs Exploiting use of a well-known brand name Cross-business collaboration to create competitively valuable resource strengths and capabilities

Strategic Appeal of Related Diversification

Reap competitive advantage benefits of Skills transfer Lower costs Common brand name usage Stronger competitive capabilities Spread investor risks over a broader base Preserves strategic unity in its business activities Achieve consolidated performance greater than the sum of what individual businesses can earn operating independently

Core Concept: Economies of Scope

Stem from cross-business opportunities to reduce costs
Arise when costs can be cut by operating two or more businesses under same corporate umbrella Cost saving opportunities can stem from interrelationships anywhere along the value chains of different businesses

Potential Pitfalls of Related Diversification

Failing the cost-of-entry test may occur if a company overpaid for acquired companies Problems associated with passing the better-off test Cost savings of combining related value chain activities and capturing economies of scope may be overestimated Transferring resources from one business to another may be fraught with unforeseen obstacles that diminish strategic-fit benefits actually captured

What Is Unrelated Diversification?

Involves diversifying into businesses with
No strategic fit No meaningful value chain relationships No unifying strategic theme

Basic approach Diversify into any industry where potential exists to realize good financial results While industry attractiveness and cost-of-entry tests are important, better-off test is secondary

Appeal of Unrelated Diversification

Business risk scattered over different industries Financial resources can be directed to those industries offering best profit prospects If bargain-priced firms with big profit potential are bought, shareholder wealth can be enhanced Stability of profits Hard times in one industry may be offset by good times in another industry

Key Drawbacks of Unrelated Diversification

Demanding Managerial Requirements Limited Competitive Advantage Potential

Unrelated Diversification Has Demanding Managerial Requirements

The greater the number and diversity of businesses, the harder it is for managers to
Discern good acquisitions from bad ones Select capable managers to manage the diverse requirements of each business Judge soundness of strategic proposals of business-unit managers Know what to do if a business subsidiary stumbles

Unrelated Diversification Offers Limited Competitive Advantage Potential

Lack of cross-business strategic fits means that unrelated diversification offers no competitive advantage potential beyond what each business can generate on its own
Consolidated performance of unrelated businesses tends to be no better than sum of individual businesses on their own (and it may be worse) Promise of greater sales-profit stability over business cycles is seldom realized

A Note of Caution: Why Diversification Efforts Can Fail

Trying to replicate a firms success in one business and hitting a second home run in a new business is easier said than done Transferring resource capabilities to new businesses can be far more arduous and expensive than expected Management can misjudge difficulty of overcoming resource strengths of rivals it will face in a new business

Fig. 9.8: Strategy Options for a Company Already Diversified