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-to-
company dealings but fall short of merger or
full joint venture partnership.
 Alliances Can Enhance a
Firm’s 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
– 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
 Why Alliances Fail
• 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
• 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 firm’s geographic coverage
• To extend a firm’s 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 firm’s 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
Many companies areafinding
firm’s that
competitiveness
de-integrating value chain activities is a
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
line-of-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
firm’s prospects can quickly dim
• Unforeseen changes can undermine
a single business firm’s 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 Test—the industry presents good
long-term profit opportunities
2. Cost of Entry Test—the cost of entering is not so high as to
spoil the profit opportunities
3. Better-Off Test—the company’s different businesses should
perform better together than as stand-alone enterprises, such
that company A’s diversification into business B produces a
1 + 1 = 3 effect for shareholders
 Related vs. Unrelated
Diversification

Related Diversification Unrelated Diversification

Involves diversifying into Involves diversifying into
businesses whose value businesses with no
chains possess competitively valuable
competitively valuable value chain match-ups or
“strategic fits” with value strategic fits with firm’s
chain(s) of firm’s present present business(es)
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 firm’s 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