ILLUSTRATION CAPSULE 6.3

Bristol-Myers Squibb’s “String-of-Pearls” Horizontal Acquisition Strategy

Discussion Question: How did Bristol-Meyer Squibb use a horizontalacquisition strategy to gain competitiveadvantage in the pharmaceutical industry?

Answer: Inexamining their competitive position in 2007, the firm realized that several key pharmaceutical patents were about to expire and they did not have new patented drugs in their development pipeline Realizing the time involved in new product development and approval, the company undertook a strategy of horizontal acquisitions and purchased several small companies that with pre-identified drugs well into the development and approval phase, dramatically shortening the time to market for Bristol-Meyer Squib and preserving their revenue stream.

6. Why Mergers andAcquisitions Sometimes Fail to ProduceAnticipated Results - Many mergers and acquisitions do not always produce the hoped for outcomes, reasons include: a. Cost savings may prove smaller than expected. b. Gains in competitive capabilities may take substantially longer to realize or, worse, may never materialize at all. c. Efforts to mesh the corporate cultures can stall due to formidable resistance from organization members. c. Key employees at the acquired company can quickly become disenchanted and leave. d. The morale of company personnel who remain can drop to disturbingly low levels because they disagree with newly instituted changes. e. Differencesin management styles and operating procedures can prove hard to resolve.

VI. Vertical Integration Strategies ACTIVITY

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1. Vertical integration extends a firm’s competitive and operating scope within the same industry. It involves expanding the firm’s range of activities backward into sources of supply and/or forward toward end users.

2. Vertical integration strategies can aim at full integration or partial integration.

A. TheAdvantages of a Vertical Integration Strategy

1. The two best reasons for investing company resources in vertical integration are to strengthen the firm’s competitive position and/or boost its profitability,

Core Concept

A vertically integrated firm is one that performs value chain activities along more than one stage of an industry’s value chain system

2. Integrating Backward toAchieve Greater Competitiveness: For backward integration to be a viable and profitablestrategy, a company must be able to: a. Achieve the same scale economies as outside suppliers. b. Match or beat suppliers production efficiency with no drop-offin quality

Core Concept

Backward integration involves performing industry value chain activities previously performed by suppliers or other enterprises engaged in earlier stages of the industry value chain; forward integration involves performing industry value chain activities closer to the end user

3. Backward integration is most likely to reduce costs when: a. The firmcan achieve the same scale economies as outside suppliers. b. The firmcan match or beat suppliers’production efficiency with no drop-offin quality

4. Backward vertical integration can produce a differentiation-based competitive advantage when a company,byperformingactivitiesin-housethatwerepreviouslyoutsourced,endsupwithabetterquality offering, improves the caliber of its customer service, or in other ways enhances the performance of its finalproduct.

5. Integrating Forward to Enhance Competitiveness: The strategic impetus for forward integration is to gain better access to end-users and better market visibility a. Forward integration can lower costs by increasing efficiency and bargaining power In addition, it can allow manufacturers to gain better access to end users. b. Forward integration canimprove marketvisibility and include the end user’s purchasing experience as a differentiatingfeature.

B. The Disadvantages of a Vertical Integration Strategy

1. Vertical integration has some substantial drawbacks beyond the potential for channel conflict: a. It raises a firm’scapital investment in the industry, increasing business risk b. Vertically integrated companies are often slow to embrace technological advances c. It can result in less flexibilityin accommodating shifting buyer preferences. d. It may not be able to achieve economies of scale e. It poses all kinds of capacity-matching problems f. It often calls for developing new types of resources and capabilities.

C. Weighing the Pros and Cons of Vertical Integration

1. A strategy of vertical integration can have both important strengths and weaknesses. The tip of the scales depends on: a. Whether vertical integration can enhance the performance of strategy-critical activities in ways that lower cost, build expertise, or increase differentiation b. The impact of vertical integration on investments costs, flexibility and response time, and administrative costs of coordinating operations across more value chain activities c. The administrative costs of coordinating operations across more vertical chain activities. d. How difficultit will be for the company to acquire the set of skills and capabilities needed

2. Illustration Capsule 6.4 Kaiser Permanente’s Vertical Integration Strategy illustrates how the firm made vertical integration a central part of its corporate strategy

ILLUSTRATION CAPSULE 6.4

Kaiser Permanente’s Vertical Integration

Strategy

Discussion Question: In what way has Kaiser Permanente used vertical integration to gain competitiveadvantage in the healthcare industry?

Answer: Kaiser Permanente has implemented a two part strategy Operationally, its physicians and healthcare providers are paid a salary in contrast with the industry standard of ‘per-procedure or service’ pay This removes the incentives to be procedure and service focused, and increases the focus on preventative healthcare The end result here is better overall health and lower healthcare costs. Through vertical integration, the company has taken on the role of Health Insurance Provider, and as the Insurance Provider, they are able to benefit from the cost savings provided by their innovative operational model.

VII. Outsourcing Strategies: Narrowing the Scope of Operations ACTIVITY

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Core Concept

Outsourcing involves farming out certain value chain activities to outside vendors

1. When Outsourcing Value ChainActivities Makes Sense: a. An activity can be performed better or more cheaply by outside specialist b. An activity is not crucial to the firm’s ability to achieve sustainable competitive advantage and will not hollow out its core competencies. c. It improves organizational flexibilityand speeds time to market. d. It reduces the company’s risk exposure to changing technology and/or changing buyer preferences e. It allows a company to concentrate on its core business, leverage its key resources, and do even better what it already does.

2. The Risk of Outsourcing Value ChainActivities

a. The biggest danger of outsourcing is that a company will farm out too many or the wrong types of activities and thereby hollow out its own capabilities.

b. Another risk of outsourcing comes from the lack of direct control. It may be difficult to monitor, control, and coordinate the activities of outside parties via contracts and arm’s-length transactions alone.

VIII. StrategicAlliances and Partnerships ACTIVITY

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1. Strategic alliances and cooperative partnerships provide one way to gain some of the benefits offered by vertical integration, outsourcing, and horizontal mergers and acquisitions while minimizing the associated problems.

2. Cooperative strategies are an alternative to vertical integration or horizontal mergers and acquisitions. Companies are increasingly employing strategic alliances and partnerships to extend their scope of operations via international expansion and diversificationstrategies

3. Strategic alliances and cooperative arrangements are now a common means of narrowing a company’s scope of operations as well, serving as a useful way to manage outsourcing

4. A strategic alliance is a formal agreement between two or more separate companies in which they agree to work collaboratively toward some strategically relevant objective.

Core Concept

Astrategic alliance is a formal agreement between two or more separate companiesin which they agree to work cooperatively toward some common objective

Core Concept

Ajoint venture is a type of strategic alliance in which the partners set up an independent corporate entity that they own and control jointly, sharing in its revenues and expenses.

4. An alliance becomes “strategic,” as opposed to just a convenient business arrangement, when it serves any of the following purposes: a. It facilitates achievement of an important business objective (like lowering costs or delivering more value to customers in the form of better quality, added features, and greater durability). b. It helps build, sustain, or enhance a core competence or competitive advantage. c. It helps remedy an important resource deficiencyor competitive weakness. d. It helps defend against competitive threat, or mitigates a significantrisk to a company’s business e. It increases the bargaining power over suppliers or buyers. f. It helps open up important new market opportunities. g. It speed the development of new technologies and/or product innovations.

2. Capturing the Benefits of StrategicAlliances The extent to which companies benefit from entering into alliances and collaborative partnerships seem to be a function of six factors: a. Picking a good partner b. Being sensitive to cultural differences c. Recognizing that the alliance must benefitboth sides d. Ensuring that both parties live up to their commitments e. Structuring the decision-making process so that actions can be taken swiftly when needed f. Managing the learning process and then adjusting the alliance agreement over time to fit new circumstance

3. Alliances are more likely to be long lasting when: a. They involve collaboration with partners that do not compete. b. Atrusting relationship has been established. c. Both parties conclude that continued collaboration is in their mutual interest.

4. The Drawbacks of StrategicAlliances and Partnerships a. Anticipated gains may fail to materialize due to an overly optimistic view of the synergies or a poor fitin terms of the combination of resources and capabilities. b. The greatest danger is that a partner will gain access to a company’s proprietary knowledge base, technologies, or trade secrets, enabling the partner to match the company’s core strengths and costing the company its hard-won competitive advantage.

5. Theprincipleadvantagesofstrategicalliancesoververticalintegrationorhorizontalmergers/acquisitions are threefold: a. They lower investment costs and risks for each partner. b. They are more flexibleorganizational forms and allow for faster market response. c. They are faster to deploy

6. They key advantages to using strategic alliances are: a. The increased ability to exercise control over the partner’s activities b. Agreater willingness for the partners to make relationship specificinvestments

7. How to Make Strategic Alliances Work The success of an alliance depends on how well the partners work together, their capacity to respond and adapt to changing internal and external conditions, and their willingness to renegotiate the bargain if circumstances so warrant.

8. Companies that have greater success in managing their strategic alliances and partnerships often credit the following factors: a. They create a system for managing their alliances. b. They build relationships with their partners and establish trust. c. They protect themselves from the threat of opportunism by setting up safeguards. d. They make commitments to their partners and see that their partners do the same. e. They make learning a routine part of the management process.

9. Managers mustrealize thatalliance managementis an organizationalcapability and develop itover time to become another source of competitive advantage.

Activity

Use the Question Bank to build a quiz for the chapter to measure and reinforce learning. Consider using the questions you select to build a comprehensive mid-term and final exam for the course The assignment can be graded and posted automatically