1. 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
aasquer@unica.it
Phone: 070 6753399

2. Business Strategy and Policy
Lecture 8
Partnerships, Strategic Alliances,
Mergers & Acquisitions

3. Introduction
1. Partnerships and Strategic Alliances
2. Pros and cons of strategic alliances
3. A special kind of partnership: the industrial districts
4. Mergers & Acquisitions
5. Pros and cons of M&As
6. Vertical integration or outsourcing?
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7. Summary

4. 1. Partnerships and Strategic Alliances
Partnerships 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

5. 1. Partnerships and Strategic Alliances
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6. 1. Partnerships and Strategic Alliances
plus several other members...

7. 2. Pros and cons of strategic alliances
Motives 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

8. 2. Pros and cons of strategic alliances
Advantages 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

9. 2. Pros and cons of strategic alliances
Requisites 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

10. 2. Pros and cons of strategic alliances
Main 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)

11. 2. Pros and cons of strategic alliances
Limitations 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

12. 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

13. 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

14. 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

15. 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

16. 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.

17. 4. Mergers & Acquisitions
Some examples of M&As in history
$182 billion
$116.7 billion
$81.4 billion

18. 4. Mergers & Acquisitions
Some examples of M&As in history
$182 billion
2000
2002, $99 billion losses
$116.7 billion
$81.4 billion

19. 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)

20. 4. Mergers & Acquisitions
M&A operations often tend to concentrate within periods of higher
activity (merger waves)

21. 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.

22. 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.

23. 5. Pros and cons of M&As
Motives 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)

24. 5. Pros and cons of M&As
Some 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”)

25. 5. Pros and cons of M&As
Some “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

26. 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.

27. 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

28. 7. Summary
Main points
Strategic alliances or partnerships are medium-long term cooperative
interactions between two or more firms where each firm benefits from
the mutual coordination of strategies
Industrial districts provide a 'special kind' of strategic alliance, that
consists of several small-medium firms, in a relatively concentrated
geographical area, with intense division of labour and collaborative ties
based on mutual trust
M&As are important operations that relate to companies' growth and
strategic “manoeuvring”.
A special class of M&A operations are those directed towards vertical
integration of firms' activities. Rather than integrating, however, firms
may also outsource their activities.