CUNEF External Growth Methods PDF

Topic 4. External Growth Methods Corporate strategy Pág. 1 Agenda 4.1 4.2 4.3 4.4 The strategic The management of Mergers and Mergers, alliances...

Topic 4. External Growth Methods Corporate strategy Pág. 1 Agenda 4.1 4.2 4.3 4.4 The strategic The management of Mergers and Mergers, alliances the strategic acquisitions acquisitions and alliances competitive advantage Bibliography: Grant, R. (2022):Chapter Navas and Guerras (2022). Chapters 11 and 12 Rothaermel (2024):Chapter9 Topic 4. External Growth Methods Pág. 2  CORPORATE STRATEGY 4.0 Preamble Directions of Growth/Development growth/development Methods Backwards INTERNAL VERTICAL GROWTH INTEGRATION Forward EXTERNAL GROWTH DIVERSIFICATION Related Mergers and Not related acquisitions Of product Geographic Globalization Strategic alliances Restructuring of the business portfolio RESTRUCTURING Divestment in geographic Topic 4. External Growth Methods markets Pág. 3 4.0 Preamble Introduction Two important questions in the context of corporate strategies: 1. Why do companies grow? In what direction do they grow?:Topics 2 and 3(reasons to grow, IV and diversification) and Topic 5(globalization) 2. How do companies grow? What growth methods do they employ? Topic 5 Three great methods of growth: 1. Organic or internal growth (develop) 2. External growth through strategic alliances (borrowing) 3. External growth through mergers and acquisitions (buy) Topic 4. External Growth Methods Pág. 4 4.0 Preamble Introduction The develop-borrow-buy framework helps companies decide what growth method may be best in each case. The first thing to do is identify the resource and capability gap Once this gap has been identified, four questions must be answered: 1. How relevant are the company's internal resources to closing this gap? 2. Are the resources/capabilities that our company needs to acquire for growth marketable 3. How close should we be to the partner that would provide us with the resources/capabilities we need? 4. Could that partner be integrated into the company? Topic 4. External Growth Methods Pág. 5 4.0 Preamble Figure. Develop-borrow-buy framework Low No Yeah Level of Can the Can the Should you relevance of necessary partner be be close to internal resources be integrated your resources? purchased? into the partner? company? High Yes No Yes Growth or Strategic alliances internal Contracts Acquisition Capital alliances development Licenses Joint ventures Preferred Preferred Preferred option: option:Borrow option:Buy Develop Topic 4. External Growth Methods Pág. 6 4.0 Preamble Introduction 1. Relevance of internal resources can be evaluated in two ways:: Check the similarity between what you have and what is needed to enter the target market (whether product or geographic). Example: traditional newspaper seeking to expand into the digital press business. Assess whether the resources/capabilities you have are superior to those of companies already operating in the target market (usefulness of the VRIO framework). 2. Marketability level of necessary resources. Contracts may allow us to access resources or capabilities available in another company. Example: licensing agreements in the pharmaceutical industry. Topic 4. External Growth Methods Pág. 7 4.0 Preamble Introduction 3. Necessary proximity to the partner who provides the resources. Only if it is necessary to be very close to the partner in order to access the resources/capabilities we need with maximum guarantees, should we consider mergers or acquisitions. First, evaluate the different options for strategic alliances 4. Possibility of partner integration. Mergers or acquisitions should only be pursued when there is a certain level of confidence that full and effective integration with the partner is possible. There is a long list of failures in merger and acquisition operations between companies.Examples: Daimler and Chrysler merger in 1998; eBay's acquisition of Skype; Google-Motorola... Topic 4. External Growth Methods Pág. 8 4.1 Strategic alliances Pág. 9 4.1 Strategic alliances What are strategic alliances? The strategic alliances are voluntary agreements between companies that involve sharing resources, capabilities and/or knowledge to enter new geographic markets or develop new processes, products or services. Only those alliances that have the potential to affect the ability to generate or maintain competitive advantages can be considered 'strategic'. They allow companies to expand their limits, extending their resources and capabilities: A survey of executives from Fortune 1000 companies revealed that 80% believed that over 25% of their income was derived from strategic alliances. In many cases, the origin of competitive advantages is not found within the company but in its relationships with other companies. Topic 4. External Growth Methods Pág. 10 4.1 Strategic alliances Source: The Economist (May, 2023) Source: Forbes (March, 2023) Topic 4. External Growth Methods Pág. 11 4.1 Strategic alliances Why do companies form strategic alliances? There are several reasons, including the following: 1. Entering new markets Strategic alliances facilitate entry into new product markets and may be essential for expansion into certain territories (China, Saudi Arabia, etc.) Example: joint venture between Example: alliance between Volkswagen and SAIC. Movistar and Disney + Topic 4. External Growth Methods Pág. 12 4.1 Strategic alliances Why do companies form strategic alliances? 2. Reduce the uncertainty associated with expansion into a new market.Strategic alliances with companies operating in the new market provide knowledge about that market and some assurance about potential profit. Example: alliances between large pharmaceutical companies and biotechnological start-ups Topic 4. External Growth Methods Pág. 13 4.1 Strategic alliances Why do companies form strategic alliances? 3. Access additional resources. Strategic alliances also help in gaining access to certain complementary resources that are necessary to operate in a new market (distribution channels, after-sales services, etc.).Example: strategic alliance between Telefónica and El Corte Inglés; between Telefónica and Vodafone; or between Mercedes and Tesla (in 2008. Topic 4. External Growth Methods Pág. 14 4.1 Strategic alliances Why do companies form strategic alliances? 4. Strengthening the competitive position. Strategic alliances with other companies allow the involved firms to reinforce their competitive position and jointly address a common threat.Example: alliance between Google, Intel, and TAG Heuer. Topic 4. External Growth Methods Pág. 15 4.1 Strategic alliances Why do companies form strategic alliances? 4. Strengthening the competitive position. In cases where strategic alliances are formed with competitors, the position of the involved companies can be reinforced by increasing the market size. Example: alliance between Daimler and Tesla. Topic 4. External Growth Methods Pág. 16 4.1 Strategic alliances Why do companies form strategic alliances? 4. Strengthening the competitive position. In cases where strategic alliances are formed with competitors, the position of the involved companies can be reinforced by increasing the market size. Example: alliance between Daimler and Tesla. This collaboration between competitors is called coopetition Important: differentiate between strategic alliances with competitors and collusive agreements. While alliances are permitted, collusive agreements are illegal. These agreements can be: Explicit: rivals agree on quantity and price Implicit: Companies' decisions gradually align as they observe the competitive behavior of their rivals and become aware of the highly competitive interdependencies. Remember the consequences of multimarket contact. Topic 4. External Growth Methods Pág. 17 4.1 Strategic alliances Why do companies form strategic alliances? 5. Learning from the capabilities and competencies of partners.Learning from the capabilities and competencies of partners. In the case of strategic alliances with competitors, the opposing interests of collaborating and competing can lead to 'learning races,' where the partner that learns faster gains the most advantage. Example: strategic alliance between Toyota and GM. Topic 4. External Growth Methods Pág. 18 4.1 Strategic alliances GM's international network of strategic alliances Source: Grant (2018) Topic 4. External Growth Methods Pág. 19 4.1 Strategic alliances What strategic alliances can companies form? There are 3 main types of strategic alliances: 1. Alliances without capital. They do not involve participation in the capital of the strategic partner 2. Alliances with capital. There is participation of at least one company in the capital of the strategic partner. There may also be cross-shareholdings. A specific type is the corporate venture capital. 3. Joint-ventures The companies involved in the alliance form a new entity, of which they are all owners (in equal or different percentages). Topic 4. External Growth Methods Pág. 20 4.1 Strategic alliances What strategic alliances can companies form? Board. Main characteristics of the different types of alliances Source:Rothaermel(2024) Topic 4. External Growth Methods Pág. 21 5.1 Strategic alliances What strategic alliances can companies form? Board. Main characteristics of the different types of alliances Type of alliance Advantages Disadvantages Examples 1. Flexible Microsoft-IBM for MS-DOS 1. Weaker ties 2. Fast (license) Without capital 2. Lack of trust and commitment 3. Easy to start and finish Genentech-Lilly for Humulina(license) Renault-Nissan Alliance- 1. Less flexible 1. Stronger Union Mitsubishi 2. Slower to implement With capital 2. Trust and commitment AllianceCoca-colaand Monster 3. They may involve significant 3. Possibility of 'real options'' Mercedes-Tesla Alliance investments (2008) 1. Stronger ties 1. Longer negotiations Hulu: created by Disney (67%) 2. More confidence and 2. Possibility of significant and Comcast (33%) Joint venture commitment investments SAIC Volkswagen: Volkswagen 3. They can be required at an 3. Long-term results (50%) and SAIC Motor (50%) institutional level 4. Possible management conflicts Source:Rothaermel(2024) Topic 4. External Growth Methods Pág. 22 4.2 Managing strategic alliances Pág. 23 4.2 Management of strategic alliances What strategic alliances can companies form? Between 30 and 70% of strategic alliances are considered a failure by at least one of the parties involved What are the main risks associated with strategic alliances? 1. Opportunistic behaviors. Acquiring all the necessary resources/capabilities in a short time without providing all the promised resources/capabilities. They are more common when contracts fail to foresee them and/or incorporate mechanisms that discourage them. 2. A company discovers that the partner has overestimated its capacity to collaborate in the alliance. More frequent when intangible resources have been promised and in alliances without capital. Example: licensing agreements between pharmaceutical companies and laboratories Topic 4. External Growth Methods Pág. 24 4.2 Management of strategic alliances What strategic alliances can companies form? What are the main risks associated with strategic alliances? 3. A company fails to provide its resources/capabilitiesThey are usually more frequent in alliances between companies from different countries. 4. One company must make an investment that is specific to the formation of the alliance and the other company must not make one.The risk assumed by each partner is different. Example: a non-capital alliance between a company that carries out R&D&I activities and another company that will carry out activities related to the manufacturing and marketing of that new product Topic 4. External Growth Methods Pág. 25 4.2 Management of strategic alliances What strategic alliances can companies form? Companies with greater alliance management capabilities will be the ones that gain and maintain competitive advantages. A company has this capacity when it is able to correctly carry out three activities associated with the formation of strategic alliances: 1. Selecting the strategic partner To do this, it is advisable to ensure two things: (1) compatibility with the partner and (2) the partner's commitment. 2. Designing the conditions of the alliance: type of alliance and conditions that will regulate it (formal and informal control mechanisms) 3. Managing the alliance. In order to create value, the costs of forming and managing the alliance must not exceed the benefits obtained. It is important to manage alliances at a corporate level and not at a business level. Example:joint-venture between Danone and Hangzhou Wahaha Group Topic 4. External Growth Methods Pág. 26 4.3 Mergers and acquisitions Pág. 27 4.3 Mergers and acquisitions Mergers and acquisitions Mergers and acquisitions are two different movements included within the company's corporate strategy. A merger is the union of two or more independent companies that become part of a new joint entity. They usually occur between companies of a similar size. Example: merger between PSA and FCA in 2021, which resulted in the group Stellantis Topic 4. External Growth Methods Pág. 28 4.3 Mergers and acquisitions Mergers and acquisitions An acquisition is a purchase or absorption of a company by another. It can be total or partial. In addition, acquisitions can be: 1. Friendly: both companies (acquiring and acquired) agree to the acquisition. Example: Disney's acquisition of Pixar in 2006 2. Hostiles: the acquired company (or target) does not agree with the absorption. Example: attempted acquisition of Endesa by Gas Natural (2004); hostile takeover of JetBlue by Spirit(2022) Topic 4. External Growth Methods Pág. 29 4.3 Mergers and acquisitions Why do companies merge with competitors? If the merger is with a company located at another stage of the industry's value chain: remember the advantages of vertical integration (Topic 2). If the company merges with a competitor, the operation would represent a horizontal integration move. Advantages of this type of integration include: 1. Reconfiguring the industry structure, reducing competitive intensity. In some industries, such as banking, mobile telecommunications, or the airline sector, these mergers have been common in the past decade due to oversupply in these sectors. Example: PSA and PCA merger. Topic 4. External Growth Methods Pág. 30 4.3 Mergers and acquisitions Why do companies merge with competitors? Graphic. World ranking of the main car manufacturers (by units sold in 2020) Fountain: Statista (2021) Topic 4. External Growth Methods Pág. 31 4.3 Mergers and acquisitions Why do companies merge with competitors? Graphic. World ranking of the main car manufacturers (by units sold in 2022) Fountain: Statista (2023) Topic 4. External Growth Methods Pág. 32 4.3 Mergers and acquisitions Why do companies merge with competitors? 2010 2010 2012 2013 2021 Topic 4. External Growth Methods Pág. 33 4.3 Mergers and acquisitions Why do companies merge with competitors? What is the effect of a merger or acquisition between competitors on Porter's five competitive forces? Topic 4. External Growth Methods Pág. 34 4.3 Mergers and acquisitions Why do companies merge with competitors? 1. Reconfigure the industry structure, reducing competitive intensity. Due to their effect in lowering competitive intensity, mergers and acquisitions are often subject to approval by government authorities. Example: Hutchison's attempt to acquire O2 (Telefónica’s British subsidiary); green light for Microsoft’s acquisition of Activision Blizzard. 2. Reduce costs. Pursuit of economies of scale or scope. Example: the fusion between O2 and Virgin Mobile (the British subsidiary of the Liberty Group). Estimated number of the resulting entity: 46 million customers 3. Increase the company’s degree of differentiation. Horizontal integration allows for the completion of the existing product or service portfolio, increasing the company's differentiation. Additionally, the increase in value is achieved while incurring less risk (and likely cost) than if the company had opted to do so internally. Example: Disney's acquisition of Marvel Topic 4. External Growth Methods Pág. 35 4.3 Mergers and acquisitions Why do companies buy other companies? In addition to the reasons that justify horizontal integration operations, we can mention three other reasons for acquiring another company (not necessarily a competitor): 1. Overcome barriers to entry and gain access to a new market. This reason justifies many of the acquisitions that take place in regulated sectors where a license is required to operate (e.g., mobile telephony) Acquisitions also help to overcome barriers created by the existence of economies of scale or barriers associated with consumer behavior. Topic 4. External Growth Methods Pág. 36 4.3 Mergers and acquisitions Why do companies buy other companies? 2. Acquire new capabilities or distinctive skills.It is important that companies share certain characteristics to better ensure the 'transfer'. Ex.: take over the workers of a local company 3. Strategic anticipation.It aims to reduce competitive intensity by acquiring potential (not current) competitors. In addition, it aims to prevent direct rivals from buying these potential competitors and increasing their market power. Examples: acquisition of Instagram (2012) and WhatsApp(2014) by Meta; acquisition of Waze by Google Topic 4. External Growth Methods Pág. 37 4.4 Mergers, acquisitions and competitive advantage Pág. 38 4.4 Mergers, acquisitions and competitive advantage Do mergers and acquisitions enable us to gain and maintain competitive advantages? Most M&A moves destroy value: Research shows that: Only 20% of mergers and acquisitions can be considered a success Around 60% lead to disappointing results The remaining 20% must be considered an absolute failure. Topic 4. External Growth Methods Pág. 39 4.4 Mergers, acquisitions and competitive advantage Why do mergers and acquisitions destroy value? The main reasons are: 1. Difficulties in integration between companies: problems in uniting different organizational cultures, in creating good working relationships… 2. Failure to achieve expected synergies Example: acquisition of Snapple by Quaker Oats 3. Taking on too much debt. It is usually more present in hostile acquisitions that end in a takeover bidding war. 4. Being too diversified or too large. Management problems related to the increased size of the product or service portfolio or the larger size of the company. Topic 4. External Growth Methods Pág. 40 4.4 Mergers, acquisitions and competitive advantage Why do mergers and acquisitions destroy value? What were the main challenges Musk faced with the acquisition of Twitter? Topic 4. External Growth Methods Pág. 41 4.4 Mergers, acquisitions and competitive advantage Board. Attributes of successful mergers and acquisitions Attributes Observed results The acquired company's resources and Greater likelihood of integration and capabilities are complementary to the synergies between companies. acquiring company's core business. The acquisition is friendly. Faster, easier and better implemented integration. Lower premiums. The acquiring company studies the The target company has more target company in some detail and similarities with the acquirer and avoids ensures its financial situation. paying a price premium and incurring too high a level of debt. Topic 4. External Growth Methods Pág. 42 4.4 Mergers, acquisitions and competitive advantage Board. Attributes of successful mergers and acquisitions (continued) Attributes Observed results The acquiring company has sufficient Possible debts or difficulties of the financial solvency. acquired company are absorbed more easily and less expensively. Following the transaction, the acquiring The competitive advantage gained in company continues to devote its efforts the market is maintained for longer. to R&D&I activities. The acquiring company is not reluctant Inter-company integration is faster, to introduce changes, adapts well to better implemented and maximizes the them, and is flexible. likelihood of synergies. Topic 4. External Growth Methods Pág. 43 Topic 4. External Growth Methods Corporate strategy Pág. 44