Question 1

When deciding whether to build, borrow, or buy as a means of growth, firms no longer need to consider the need for physical closeness to their resource partners.

Accepted Answer

Physical closeness is still an issue when considering external resource partners. Many times, firms are able to obtain the required resources to fill the strategic gap through more integrated strategic alliances such as equity alliances or joint ventures (see Exhibit 8.4) rather than through outright acquisition. Mergers and acquisitions are the most costly, complex, and difficult to reverse strategic option. This implies that only if extreme closeness to the resource partner is necessary to understand and obtain its underlying knowledge should M&A be considered the buy option. Regardless, the firm should always first consider borrowing the necessary resources through integrated strategic alliances before looking at M&A.

Question 2

Disney became the world's leading media company to a large extent by pursuing a corporate strategy of

Accepted Answer

Disney became the world's leading media company to a large extent by pursuing a corporate strategy of related-linked diversification. This is because some, but not all, of Disney's business activities share some common resources, capabilities, and competencies.

Question 3

Even if a merger may not increase shareholder value as planned, it is often a wise idea to champion it so that managers will have the greater opportunities of working at an expanding company.

Accepted Answer

Managers, as agents, are supposed to act in the best interest of the principals, the shareholders.

Question 4

Juno LLC is a small, new pharmaceutical company that is developing a valuable new drug. Which of these strategies would it be wise for Juno's owners or managers to take?

Accepted Answer

New firms are in need of complementary assets to complete the value chain from upstream innovation to downstream commercialization. This implies that a new venture that has a core competency in R&D, for example, will need to access distribution channels and marketing expertise to complete the value chain. Building downstream complementary assets such as marketing and regulatory expertise or a sales force is often prohibitively expensive and time-consuming, and thus frequently not an option for new ventures. Strategic alliances allow firms to match complementary skills and resources to complete the value chain. Moreover, licensing agreements of this sort allow the partners to benefit from a division of labor, allowing each to efficiently focus on its core competency.

Question 5

Showstopper Inc. dominates the ladies' wig market and wants to expand into men's toupees. How can Showstopper's managers determine whether the company should develop a toupee division internally, ally with a toupee maker, or acquire a toupee-making firm?

Accepted Answer

If the firm's internal resources are highly relevant to closing the identified gap, then the firm should itself build the new resources needed through internal development. Firms evaluate the relevance of internal resources in two ways: they test whether resources are (1) similar to those the firm needs to develop and (2) superior to those of competitors in the targeted area. If both conditions are met, then the firm's internal resources are relevant and the firm should pursue internal development.

Question 6

A drawback involved in using cross-border strategic alliances to enter new foreign markets is that

Accepted Answer

Cross-border strategic alliances have both benefits and risks. While the foreign firm can benefit from local expertise and contacts, it is exposed to the risk that some of its proprietary know-how may be appropriated by the foreign partner.

Question 7

In terms of the build-borrow-or-buy framework, a firm's internal resources are considered to be relevant when they are

Accepted Answer

A firm's internal resources are relevant if they are: (1) similar to those that need to be developed, and (2) superior to those of competitors in the targeted area. If both conditions are met, then the firm's internal resources are relevant and the strategist should pursue internal development.

Question 8

Managers who are eager to forge business alliances often forget that the expected benefits of the partnership must represent only a small percentage of its monetary and time-related costs.

Accepted Answer

When making the business case for an alliance, the expected benefits of the alliance must exceed its cost.

Question 9

In recent years strategic alliances have declined because of increasing government regulation.

Accepted Answer

The use of strategic alliances to implement corporate strategy has exploded in the past few decades, with thousands forming each year. As the speed of technological change and innovation has increased, firms have responded by entering more alliances. Globalization has also contributed to an increase in cross-border strategic alliances.

Question 10

A voluntary arrangement between firms that involves the sharing of knowledge, resources, and capabilities with the intent of developing processes, products, or services is best described as a

Accepted Answer

Strategic alliances are voluntary arrangements between firms that involve the sharing of knowledge, resources, and capabilities with the intent of developing processes, products, or services.

Question 11

Braintree Inc., a manufacturer of smartphones, has entered into a 15-year partnership with a software company to develop sophisticated operating systems and innovative mobile applications for its phones. This would mean that both the companies will have to mutually share their resources, knowledge, and capabilities to develop a superior product. What is the relationship between Braintree and the software company best referred to as in this scenario?

Accepted Answer

The relationship between Braintree and the software company is best referred to as a strategic alliance. Strategic alliances are voluntary arrangements between firms that involve the sharing of knowledge, resources, and capabilities with the intent of developing processes, products, or services.

Question 12

Organizations seeking strategic alliances often pursue non-equity alliances because they are the easiest to create and to sever. However, the short duration of these alliances often means there is little trust or commitment on either side.

Accepted Answer

Because of their contractual nature, non-equity alliances are flexible and easy to initiate and terminate. However, because they can be temporary in nature, they also sometimes produce weak ties between the alliance partners, which can result in a lack of trust and commitment.

Question 13

A microchip company wants a computer company to produce more powerful tablets and therefore use more of its chips. That same computer company wants the microchip maker to create chips with faster processing power. What approach could these companies take so that both can serve stockholders well?

Accepted Answer

One reason why firms enter strategic alliances is because they are motivated by the desire to learn new capabilities from their partners.

Question 14

Fabulous Jewelry Inc. is considering a takeover of its competitor, Cranberry Dream Jewelry LLC. In general, Fabulous should go ahead with the acquisition as long as Cranberry is more valuable as a continued standalone company than it would be inside Fabulous.

Accepted Answer

As a rule of thumb, firms should go ahead with horizontal integration (i.e., acquiring a competitor) if the target firm is more valuable inside the acquiring firm than as a continued standalone company. This implies that the net value creation of a horizontal acquisition must be positive to aid in gaining and sustaining a competitive advantage.

Question 15

Ayesha is a strategist for the firm Optiks Inc., which produces high-quality HD movie cameras. This company needs a specific material for a new camera they are developing, which is manufactured in large quantities by a competitor called Expert Technology Inc. However, this material is difficult to trade. Because of this, which of the following is most likely the best strategy for Ayesha to suggest?

Accepted Answer

Optiks should acquire Expert Technology. If the resource in question is not easily tradable, then the strategist needs to consider an outright acquisition.

Question 16

If two large movie-theater chains decide to merge, the result is likely a horizontal integration that creates a more favorable industry structure by decreasing competition.

Accepted Answer

In contrast to vertical integration, which concerns the number of activities a firm participates in up and down the industry value chain (as discussed in Chapter 8), horizontal integration is the process of merging with a competitor at the same stage of the industry value chain. Horizontal integration is a type of corporate strategy that can improve a firm's strategic position in a single industry. Competitors in the same industry frequently merge to change the underlying industry structure in their favor. Horizontal integration changes the underlying industry structure in favor of the surviving firms. Excess capacity is taken out of the market, and competition tends to decrease as a consequence of horizontal integration, assuming no new entrants. As a whole, the industry structure becomes more consolidated and potentially more profitable.

Question 17

In general, it is shortsighted to acquire companies as a defensive move to prevent rival organizations from gaining access to certain patents, technology, or customer bases.

Accepted Answer

Sometimes firms may acquire promising startups not only to gain access to a new capability or competency, but also to preempt rivals from doing so. For example, Google bought Motorola's cell phone unit for $12.5 billion in 2011. This was done to gain access to Motorola's valuable patent holdings in mobile technology. Google later sold the cell phone unit to Lenovo, while retaining Motorola's patents.

Question 18

Although Disney acquired Pixar through a hostile takeover, the merger has proven extremely profitable for both entities.

Accepted Answer

A merger describes the joining of two independent companies to form a combined entity. Mergers tend to be friendly; in mergers, the two firms agree to join in order to create a combined entity. An acquisition describes the purchase or takeover of one company by another. Acquisitions can be friendly or unfriendly. Disney's acquisition of Pixar, for example, was a friendly one, in which both management teams believed that joining the two companies was a good idea. When a target firm does not want to be acquired, the acquisition is considered a hostile takeover.

Question 19

How did the strategic alliance between HP and DreamWorks Animation SKG affect HP?

Accepted Answer

HP's alliance with DreamWorks Animation SKG enabled HP to compete head on with Cisco's high-end videoconferencing solution, TelePresence.

Question 20

A company that wants to enter a new geographic market within China or Saudi Arabia should avoid joint ventures with companies that are based in that country. Partnering with a foreign entity props up that entity's business rather than weakening it through competition.

Accepted Answer

When foreign firms enter new geographic markets, some governments, such as Saudi Arabia or China, require that these firms have a local joint venture partner before doing business in their countries. While the foreign firm can benefit from local expertise and contacts, it is exposed to the risk that some of its proprietary know-how may be appropriated by the foreign partner.

Quiz 9: Corporate Strategy: Strategic Alliances, Mergers, and Acquisitions