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MBA Strategic Management | Corporate Strategy | ArticlesArticle #1 When to Ally and When to Acquire *
Authors Dyer, J.H., Kale, P., Singh, H.,
Research Q. Under what circumstances should firms choose strategic alliances over acquisitions, and vice versa,
when pursuing growth and competitive advantages in the business environment?
Problem The problem revolves around determining when it is more advantageous for a firm to form strategic
alliances with other organizations and when it is more beneficial to pursue acquisition strategies. The
researchers aim to provide insights into the factors and circumstances that influence these strategic
choices and shed light on the decision criteria that firms should consider when deciding between
alliances and acquisitions.
Summary / Key aspects of the article
As companies find it increasingly tougher to achieve and sustain growth, they have placed their faith in acquisitions
and alliances to boost sales, profits, and, importantly, stock prices. However, research has shown that over the years
most acquisitions and alliances fail. Although their purpose is to add value, acquisitions either destroy or don’t add
shareholder value, and alliances typically create very little added value for shareholders.
As argued by Dyer et al., the main problem may be that acquisitions and alliances are seen as the same instead of
using them as alternative mechanisms by which companies can attain goals. Hence, the problem of the high amount
of failures may be due to the fact that both approaches are not compared with each other to situation in order to see
which one fits best. Consequently, they take over firms that should have been collaborated with or ally with those
they should have bought.
It is strange that firms don’t compare the two as both approaches have different end goals.
- Acquisitions
o Competitive, based on market prices and risky
o Habitually deployed to (possibly not right): increase sale or cut costs
- Alliances
o Cooperative, based on negotiations and not so risky
o Habitually deployed to (possibly not right): enter new markets, customer segments or regions
But how do firms don’t see these differences? There are a few indicators:
1. In the paper it is argued that due to a company’s initial experiences they may develop blinders and a preference
for a certain approach (so biased). For instance, if it pulls of an alliance or two, it will forever insist one entering
into alliances even when the circumstances demand an acquisition.
2. Organizational barriers – most firms operate with separate acquisition and alliance units/functions. As a result,
the separate units work out of different locations and prevent the companies from comparing the advantages
and disadvantages of both strategies.
Besides these problems between the two approaches, there is another reason why acquisitions often fail. A post
acquisition trauma could occur, especially in high-tech firms, which often means that people leave the firm when
bigger companies absorb them. This could have damaging results for the performance of the company in the long
run.
The research offers a framework that will help companies to decide whether they should ally with or acquire
potential partners.
- Executives must analyse three sets of factors before deciding on collaboration options
o Resources and synergies they desire
o The marketplace they compete in
o Competencies at collaborating
,Note: companies must develop the ability to execute both acquisitions and alliances if they want to grow. Besides,
the paper emphasizes that knowing when to use which strategy, rather than executing, may be the biggest
competitive advantage it can obtain.
Resources and synergies
The purpose of acquisitions or alliances is to team up to profit from the synergies they can generate by combining
resources. The resources could consists of human resources (intellectual capital, for instance); intangibles (like brand
names); technological resources (such as patents); physical resources (plants, distribution networks, and so forth);
and, financial resources
Whenever companies have to choose between acquisitions and alliances, they must begin the process by examining
key resource-related issues (types of synergies; nature of resources; extent of redundant resources)
Types of resources
There are three types of synergies by combining and customizing resources differently. Those resource
combinations/interdependencies require different levels of coordination between firms and result in different forms
of collaboration
- Modular synergies – manage resources independently and pool only the results for greater profits
o Best suited are nonequity alliances
F.e. when an airplane and a hotel chain plan a collaboration that will allow hotel guests to
earn frequent flyer miles, they wish to club the consumer’s choice for airline and hotel –
both benefit
- Sequential synergies – one company completes its tasks and passes on the results to a partner to do its bit
o Resources are sequentially independent
o Only if partners sign rigid contracts that they monitor very carefully, or better, enter into equity-
based alliances.
F.e. when a biotech firm that specializes in discovering new drugs wishes to work with a
pharmaceutical giant that is more familiar with FDA approval process – both companies are
seeking sequential synergies.
- Reciprocal synergies – working closely together and executing tasks through an iterative knowledge-sharing
process
o Combine resources and customize them a great deal to make them reciprocally interdependent.
o Acquisitions are better than alliances
F.e. Exxon and Mobil realized that they would have to become more efficient in almost every
part of the value chain in order to remain competitive. This could only be done by combining
all assets and functions – merged rather than pursuing an alliance.
Nature of resources
Before settling on a strategy, companies should check if they must create the synergies they desire by combining hard
resources, like manufacturing plants, or soft resources, such as people.
- When the synergy-generating resources are hard = acquisition is better, because hard assets are easy to
value, and companies can generate synergies from them relatively quickly
- Generate synergy by combining human resources (soft) = acquisition is better to avoid, because people
become unproductive or quit their job (disinclined to work for -hostile- takeover firm) and also because of
unforeseen integration issues like cultural and compensation differences
(research shows that acquires of companies that had largely soft assets lost more value over a three-year
period than did buyers of businesses with mostly hard assets)
Note: equity alliances may be a better bet than acquisitions in collaborations that involve people.
,Extent of redundant resources
Next to determining the resources, a firm must estimate the amount of redundant resources they’ll be saddled with
if they team up with other organizations.
- Surplus can be used to generate economies of scale or cut costs by eliminating resources
Large amount of redundant resources = opt for acquisitions or mergers
o Complete control over decision making and allows to get rid of redundant resources easily
So, what to choose?
- Want reciprocal synergies or have large quantities of redundant resources (whether hard or soft assets) =
acquisition
- Want sequential synergies with interdependence and are combining mostly soft assets = equity alliances
- Want modular or sequential synergies with mostly hard assets = contractual alliances.
Market Factors
Not only internal factors should be taken into account when picking strategies, also external (i.e., exogenous) factors
have a big influence.
Degree of uncertainty
Risk exists when the company can assess the probability of distribution of future payoffs; the wider the distribution,
the higher the risk . Uncertainty exists when it is not possible to assess future payoffs.
Before entering into an acquisition or alliance, companies should break down the uncertainty that surrounds that
collaboration’s outcome into two components.
- Managers must evaluate the uncertainty associated with the technology or product it is discussing with the
potential partner (will it work?, is it technically superior to rivals?)
- Company should assess if consumers will use the technology, product or service and how much time it will
take to gain widespread acceptance
Based on the answers—or lack thereof—the company can estimate if the degree of uncertainty that clouds the
collaboration’s end result is low, high, or somewhere in between
When a company estimates that a collaboration’s outcome is highly or moderately uncertain, it should enter into a
nonequity or equity alliance rather than acquire the would-be
partner. An alliance will limit the firm’s exposure since it has to
invest less money and time than it would in an acquisition.
Besides, the company can sink more into the partnership if it
starts showing results, and, if necessary, buy the firm eventually. If
the collaboration doesn’t yield results, the company can
withdraw from the alliance. It may lose money and prestige, but
that will be nowhere near the costs of a failed acquisition /// low
to medium: acquisitions /// low: nonequity alliances
Forces of competition
In addition to assessing the level of uncertainty, the company
should assess whether they have rivals for potential partners
before pursuing a deal.
Companies would be wise to check if they have rivals for
potential partners before pursuing a deal. If there are several
suitors, a company may have no choice but to buy a firm in order
to pre-empt the competition. Still, companies should avoid
, taking over other firms when the degree of business uncertainty is very high. Instead, the company should negotiate
an alliance that will let it pick up a majority stake at a future date after some of the uncertainty has receded.
Low: nonequity alliances /// medium: equity alliances /// high: acquisitions
Collaboration capabilities
A company’s experience in managing acquisitions or alliances is bound to influence its choices.
Companies often choose the strategy that they are good at because it does improve the chances of making
collaborations work. However, specialization poses a problem because companies with ‘hammers tend to see
everything as nails’
So, they stick to strategies even if they aren’t appropriate and make poor choices. Smart companies prevent such
mistakes by developing skills to handle both acquisitions and alliances.
Summary *
The main argument presented by Dyer et al. in "When to Ally and When to Acquire" is that firms should carefully
consider their strategic objectives, capabilities, and the specific context in which they operate when deciding
whether to form strategic alliances or pursue acquisitions. The researchers argue that there is no one-size-fits-all
answer to the question of whether to ally or acquire, as the choice depends on various factors.
They suggest that strategic alliances are typically more appropriate when firms seek to access complementary
resources, knowledge, or capabilities that they lack internally. In contrast, acquisitions are better suited when firms
aim to gain control over critical assets, consolidate market power, or integrate operations more deeply. The decision-
making process should involve a comprehensive analysis of the potential benefits, risks, and costs associated with
each option.
Furthermore, the authors emphasize that firms should consider their own strategic capabilities and weaknesses
when making this decision. They propose that firms with strong internal capabilities may be better positioned to
manage alliances effectively, while firms with weaker internal capabilities may find acquisitions more suitable as they
offer greater control.
In summary, Dyer et al. argue that the choice between forming alliances and pursuing acquisitions should be guided
by a nuanced understanding of a firm's strategic goals, capabilities, and the external environment. The decision
should align with the firm's unique circumstances and objectives.
Examples
1. BM's Strategic Alliances: The article discusses IBM's use of strategic alliances as part of its corporate strategy.
IBM formed alliances with companies like Motorola and Siemens to access complementary technologies and
global markets. These alliances allowed IBM to extend its reach without the need for full acquisitions.
2. Daimler's Acquisition of Chrysler: The authors highlight the example of Daimler-Benz's acquisition of
Chrysler Corporation, illustrating how acquisitions can be used to integrate operations and achieve
economies of scale. However, this merger also faced significant challenges due to cultural differences, which
serves as a cautionary tale for acquisition strategies.
3. Boeing's Supplier Alliances: Boeing's use of supplier alliances is discussed as an example of how companies
can form strategic partnerships with suppliers to improve their cost competitiveness and product quality.
These alliances helped Boeing reduce costs and improve its overall aircraft manufacturing process.
4. The Biotechnology Industry: The biotech industry is used as an example to show how firms often rely on
strategic alliances to access critical resources and capabilities, such as specialized research and development
expertise. Many small biotech firms form alliances with larger pharmaceutical companies to jointly develop
and market new drugs.
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