0:01
We've been talking about growth through acquisition.
And we've established that acquisitions are often attempted.
This is a very common growth strategy, but
these acquisitions are typically unsuccessful.
On average, most acquisitions destroy value, especially for the acquiring firm.
And these bad mergers are costly.
They're costly in terms of money and resources,
they can be costly in terms of reputation.
So it's worth thinking carefully about what the alternatives are.
What are some viable alternatives to growing through acquisition?
First of all we can attempt to grow through scaling.
What does this mean?
This is essentially just doing more of what we already do.
Can we scale up our existing business operations to sell more units, or
to operate in new markets?
But we're essentially just doing more of what we already know how to do,
and what we're doing successfully.
So for example, in a retail business, this might simply manifest itself as,
we're gonna open new stores in new locations.
Or if we're a fast food chain we're opening new restaurants in new locations,
so that's one way to think about this.
2:13
So, as you can imagine and as with acquisition strategies,
there are some pros and cons.
There are some potential advantages, there are some potential disadvantages.
So, let's talk about what those potential advantages and disadvantages are for
strategic alliances.
So one potential advantage is that a strategic alliance can take many different
forms.
It can be something that's relatively straightforward, like an R&D or
a marketing partnership or some sort of a distribution arrangement,
to something that's much more complex, like a freestanding joint venture.
This could be something where two independent businesses come together and
we actually even form a new legal entity in some cases, and
we say, let's partner together and form a new joint venture,
a strategic alliance to accomplish a certain objective.
So there's lots of ways to approach an alliance, that's one potential advantage.
Another potential advantage is it's potentially less resource intensive
than an acquisition.
We don't have to commit all of those resources up front on
that big transaction, where we've decided to buy this other organization.
This is an alternative that allows us to almost test drive a little bit.
In fact, oftentimes a strategic alliance can even serve as a precursor
to an eventual merger or acquisition.
So this is an opportunity to try things out a little bit and
maybe you'll end up making that acquisition after all but
this is an opportunity to do so in a way that's less resource intensive up front.
3:44
An alliance also allows you,
potentially, to access a strategic partner's complementarities.
What I mean by that is they might offer products or
services that are complementary to the products or services that you offer, and
maybe there's an opportunity to sell and market and deliver those things together
in a way that you might both be able to sell more products or
services than if you were operating completely independently.
So, but here you don't have to develop or gain those product capabilities yourself,
you're able to just access them through this alliance with a strategic partner.
Another potential advantage is that you can potentially utilize
that partner's capabilities.
Again, we don't have to develop those skills and capabilities and
that know how, knowledge, in house, but we can form some sort of alliance
where we can benefit from each other's capabilities and strengths.
So those are some of the advantages,
potentially, of a strategic alliance as opposed to an acquisition.
Now of course, there are some disadvantages.
One disadvantage, potentially,
is that an alliance is more complicated than an arms length contract.
So, while it's not as complicated, it's not as much as a commitment
as an acquisition, a strategic alliance is still more complicated and represents
a little more of a commitment than just a standard vendor agreement, for example.
So if you have a supplier that you've become dissatisfied with,
often times you can just, especially if you've satisfied the terms of
that contract, you can just move to a different supplier.
Well, in a strategic alliance, you've probably made a little bit more of
a commitment than that, and so that can be a potential disadvantage.
Another potential disadvantage is simply the fact that, by virtue of this strategic
alliance, you've agreed with a strategic partner to share the revenue.
So the reason a lot of executives give for
not wanting to form strategic alliance is, gosh,
if we can develop that capability in house or make an acquisition, we get to keep
all of those potential gains instead of sharing them with this alliance partner.
So by definition, an alliance means you're going to share some of those gains with
the partner and that might be a potential disadvantage.
Another potential disadvantage is that you also have to share control.
So the risk here is a risk of goal incompatibility.
So when you first form this alliance, you do all the due diligence you can.
You try to come together and you negotiate the terms of it.
And you've clearly come to some agreement that we think we can do something together
better than we're doing independently.
But over time, sometimes what happens is
our goals that we thought were aligned begin to become incompatible.
Perhaps the strategic partner wants to market the product differently,
or sell it though a different channel and maybe we disagree and
we'd like to see it done another way.
So again, one of the potential disadvantages of a strategic alliance is
we've given up some control.
We aren't the only deciding party here.
Whereas if we make an acquisition, we get to call the shots completely.
So, a strategic alliance is an alternative to making an acquisition,
and there are some pros and there are some cons.
These are all things to think about as you're potentially weighing out whether or
not you ought to make an acquisition or do something else instead.
Michael LenoxSenior Associate Dean and Chief Strategy Officer
Jared HarrisSamuel L. Slover Research Chair in Business Administration
