1. What are international alliances and
acquisitions? How do institutions and resources affect alliances and
acquisitions?
Strategic
alliances are voluntary agreements of cooperation between firms. Alliances
are degrees of compromise between pure market transactions and acquisitions.
Contractual
(non-equity- based) alliances are associations between firms that are based
on contracts and do not involve the sharing of ownership. They include
co-marketing, re- search and development (R&D) contracts, turnkey projects,
strategic suppliers, strategic distributors, and licensing/franchising.
Equity-based alliances, on the other
hand, are based on ownership or financial interest between the firms. They
include strategic investment (one partner invests in another) and cross-
shareholding (each partner invests in the other). Equity-based alliances also
include joint ventures (JVs), which involve the establishment of a new legally
independent entity (in other words, a new firm) whose equity is provided by two
or more partners.
An
acquisition is a transfer of the control of operations and management from
one firm (target) to another (acquirer), the former becoming a unit of the
latter.
The institution-based and resource-based
views shed considerable light on these important questions .
The institution-based view suggests that,
as rules of the game, institutions affect how a firm chooses between alliances
and acquisitions in terms of its strategy. However, rules are not made just for
one firm. The resource-based view argues that, although a number of firms may
be governed by the same set of rules, some firms excel more than others because
of the differences in firm-specific capabilities that make alliances and
acquisitions work.
Formal
Institutions: Alliances and
acquisitions function within formal legal and regulatory frameworks.
The
impact of these formal institutions can be found along two dimensions:
(1) antitrust concerns and
(2)
entry mode requirements.
Informal
Institutions. The first set of informal institutions centers on collective
norms, supported by a normative pillar. One core idea of the institution-based
view is that because firms act to enhance or protect their legitimacy, copying
other reputable organizations—even without knowing the direct performance
benefits of doing so—may be a low-cost way to gain legitimacy. Therefore, when
competitors have a variety of alliances, jumping on the alliance “bandwagon”
may be perceived as a cool way to join the norm as opposed to ignoring industry
trends.
A
second set of informal institutions stresses the cognitive pillar, which
centers on the internalized taken-for-granted values and beliefs that guide
firm behavior
Value.
Alliances must create value. They must identify whether alliances will be able
for value creation in terms of how advantages outweigh disadvantages. First, alliances
may reduce costs, risks, and uncertainties.
Since acquisitions are not only costly but
also very likely to fail, alliances permit firms to sequentially increase their
investment should they decide to pursue acquisitions. On the other hand, after
working together as partners, if firms find that acquisitions are not a good
idea, there is no obligation to pursue them. Finally, alliances, especially
those between rivals, can be dangerous, because they may help competitors. By
opening “doors” to outsiders, alliances make it easier to observe and imitate
firm-specific capabilities. In alliances between competitors, there is a
potential “learning race” in which partners aim to outrun each other by
learning the “tricks” from the other side as fast as possible.
Rarity.
The abilities to successfully manage inter firm relationships—often called
relational (or collaborative) capabilities—may be rare. Managers involved in
alliances require relationship skills rarely covered in the traditional
business school curriculum that emphasizes competition as opposed to
collaboration. To truly derive benefits from alliances, managers need to foster
trust with partners, while at the same time being on guard against opportunism.
Imitablility.
The issue of imitability pertains to two levels: (1) the firm level and
(2) the alliance level. First, as noted earlier, one firm’s resources and
capabilities may be imitated by partners. Another imitability issue refers to
the trust and under- standing among partners in successful alliances. Firms without
such “chemistry” may have a hard time imitating such activities.
Organization.
Some successful alliance relationships are organized in a way that makes it
difficult for others to replicate. it is not surprising that firms in
unsuccessful alliances (for whatever reason) often find it exceedingly
challenging, if not impossible, to organize and manage their interfirm
relationships better.
Resources and Acquisitions
Value.
Do acquisitions create value? On average, the performance of acquiring firms does
not improve after acquisitions. Target firms, after being acquired and becoming
internal units, often perform worse than when they were independent,
stand-alone firms. Unfortunately, many M&As destroy value.
Rarity.
For acquisitions to add value, one or all of the firms involved must have rare
and unique skills that enhance the overall strategy.
Imitability.
While many firms undertake acquisitions, a much smaller number of them have
mastered the art of post-acquisition integration. Consequently, firms that
excel in integration possess hard-to-imitate capabilities that are advantages
in acquisitions
Organization.
Fundamentally, whether acquisitions add value boils down to how merged firms
are organized to take advantage of the benefits while minimizing the costs.
Pre-acquisition analysis often focuses on strategic fit, which is the effective
matching of complementary strategic capabilities. Yet, many firms do not pay
adequate attention to organizational fit, which is the similarity in cultures,
systems, and structures
2. Describe the advantages and disadvantages
of forming international alliances or acquisitions. What can a firm do to make
global alliances and acquisitions successful?
A strategic alliance in business is a business relationship
between two or more businesses that enables each to achieve certain strategic
objectives neither would be able to achieve on their own. The strategic
partners maintain their status as independent and separate entities, share the
benefits and control over the partnership, and continue to make contributions
to the alliance until it is terminated. Strategic alliances are often formed in
the global marketplace between businesses that are based in different regions
of the world.
Alliance
Organizational
advantages: When there is formation of
strategic alliance one get chance to learn necessary skills and capabilities
from the strategic partner. The alliance can hence increase the productive
capacity which helps in enhancing the product or service features. Similarly,
if one is new to the market then a partner who is well-known can be an
advantage for them.
Economic
advantages: When alliances increase the overall organizational efficiency,
it also helps to reduce costs and risks at the same time. Production volume increases
and the cost per unit decreases. Therefore, alliances can prove to be
beneficial for both the parties in reducing their cost and increasing
efficiency.
Strategic
advantages: Sometimes it is necessary to make
alliances with one of the competitors. In cooperation with competitors one can
produce better goods and services with the pool of competent resources and
skills. It also help them to get access to new technologies and to pursue joint
R&D.
Political
advantages: When one have problem to entry in
the foreign market and other legal barriers to entry then such alliances can
help to rescue. Such alliances can help improve company’s influence and
position as well.
Disadvantage
Lack of Control: When two companies come together for alliances then to some
degree one lose control over the way they carry business. One party will not
have control over how the other party manage their employees and carry out
their day to day business. This sometimes can lead to bad impressions to the
loyal clients.
Unequal
Benefits: The alliances do not assure both
the party that they will be equally benefitted unless there is vetted
contractual agreement. It is possible that alliances will create opportunities
for one party but it doesn’t assure same for other party.
Merged
Reputations: Well, one benefit of forming
alliances between new and reputed firms is that the new firms are going to get
recognition because of well-known firms. But what happens when one gets associated
with the firm with company having bad reputation then they definitely are going
to be judged based upon the actions of other party.
Liability: The actions of one party is going to affect another party.
Both of them becomes liable for each other’s action regarding their business.
Due to some mistake if one party had to face legal action then another one also
becomes liable. This will not only lead to bad reputation of the company but
also heavy compensation.
Acquisition
Advantages &
Disadvantages of an Acquisition
When a company wants to expand, one way it could choose
to facilitate its plan is by acquiring another similar business. While an
acquisition can lead to some rapid growth for the company, it can also
introduce some difficult issues along the way. Before pursuing the acquisition
of another company, it is important to consider the advantages and
disadvantages the business deal will present.
Gain Experience
and Assets: When a company acquires another
company then the assets and goodwill of other business also come along with the
firm. If both of the companies have similar vision then such acquisition can
lead to improved efficiency.
Excite the
Shareholders: Acquisition can excite the
shareholders as people will have positive outlook towards the value of the
company. Most of the times acquisitions increase brand value and it leads to
increase in stock price and equity of the investments of shareholders.
Disadvantages:
Combining
Cultures: There may arise conflict when
combining the cultures of two different businesses. It may take some time to
blend upon the culture of acquiring firms and during that period it can create
conflict between management teams and the employees of the newly acquired
company.
Duplication: There will be two different groups working on the same job.
Such duplication can lead to most of the job cuts and reorganization as the
newly formed enterprise works to maximize efficiencies in human resources and
in its processes. This will lead to decrease in morale of the employees.
3. In this age of globalization, some gurus
argue that all industries are becoming global and that all firms need to adopt
a global standardization strategy. Do you agree? Why or why not?
This is definitely age of globalization
where all the industries are becoming global day by day. But do all firms need
to adopt a global standardization strategy? Probably not. Each and every
company, they are different from each other. They do not produce same kinds of
products or services neither they have ditto formal and informal institutions.
The resources and capabilities they bear also differ from one another. So, how
is it possible for everyone to follow a single strategy called global
standardization strategy. Yes, one can follow this strategy but there is a
question will it be a success? No way.
Home replication strategy should be used
when the firm has developed it’s brand around the global market. Therefore they
can go global by franchising and licensing.
Localization strategy is effective when
differences among national and regional markets are clear, and pressures for
cost reductions are low.Global standardization strategy can be used for
development and distribution of standardized products worldwide in order to
reap the maximum benefits from low-cost advantages.
Transnational strategy endeavors to be
simultaneously cost efficient, locally responsive, and learning- driven around
the world. Therefore firstly we need to understand what kind of strategy will
help our company to be cost effective and efficient at the same time when we
are planning to go global. For that, firms need to do lots of market research
of the market we plan to enter and find out the feasibility of particular
strategy in that market. This certainly helps the company to achieve its goal
in foreign market as well.
4. Explain how institutions and resources
affect multinational strategy, structure, and learning.
MNEs face two sets of the rules of the
game: Formal and informal institutions governing (1) external relationships and
(2) internal relationships.
When
MNEs decide to invest abroad, then to protect domestic employment, government
can manipulate tax rates in order to make them invest at home.
But host-country government will try to
attract the investors or MNEs and tries to lure them using various techniques.
For example: China, Hungary and Singapore : These countries are providing tax
incentives, matching grants and free infrastructure upgrades to the MNEs.
Contrary to that they sometimes coerce MNEs
to invest in their country by threatening of blocking the market access.
Sometimes informal institutions also govern
the relationship between host and home country. The culture, norms, values
considerably plays a vital role and affects the multinational strategy,
structure and learning.
Talking about the formal and informal internal
institutions, each and every organization have their own core norms and values.
This includes the organizational culture, their belief, organizational chart,
all of which differ from one company to another. And definitely when a company
plans to go global, this will surely be affected. For example: It is compulsion
to have Japanese nationals as the head of the foreign subsidiaries but in
Europe they generally appoint host and third country nationals to lead
subsidiaries.
Resource-based
view includes the value, rarity, imitability, and organization (VRIO) framework.
Firstly , the resource- based view evaluate
where adding new structure will add value or not. This may include the value of
innovation. When talking about value, will the new structure be able to
generate profit along with creating other values like branding and positioning.
Next is rarity, will the new strategy and the structure is rare in the market.
It is very difficult to achieve this position as many of the MNEs are implementing
global standardization strategy. This strategy will not make any
differentiation.
Next one is imitability, as we know that it
is difficult for competitors to imitate the informal structures and easy to
copy the formal structures. It is difficult to copy intangible structure,
organizational concept or philosophy.
Lastly, managers should know how the
organization should be organized both formally and informally around the world.
It also includes the management of the organizational culture.
References:
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