Facebook: From Dorm Room to Dominant Social Network
• Facebook: “most powerful and transformative social change”
 Started by Mark Zuckerberg in 2004
 Overcame the first-mover advantage held by MySpace
 True global strategy: more users first, profits later
 Adding different functions to go after a wide-range of users
 Innovative network marketing approach
 Word of mouth through online social network
• Frequently attacked for insufficient protection of users’ privacy
• Needs a sustainable business model
• Implications for alliances and networks

Global Users of Facebook and MySpace
Facebook passes MySpace on number of users in 2008 and continues exponential growth
9 –3

Integrating Companies: Mergers and Acquisitions
 Friendly approach
 Example: Disney & Pixar
 Generally similar in size
 Can be friendly or unfriendly
 Hostile takeover
 Example: Vodafone buys Mannesmann

• Horizontal integration: process of merging and acquiring competitors
 HP buys Compaq in 2002
 Pfizer buys Wyeth in 2009
 Live Nation buys Ticketmaster in 2010
• Benefits:
 Reduce competitive intensity
 Lower costs
 Boost differentiation
 Access to new markets and distribution channels
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Source of Value Creation and Costs in Horizontal Integration
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• Changes underlying industry structure
 Taking out excessive capacity from rivals
 Increased industry consolidation
 Example: U.S. airlines in recent years
• Increasing bargaining power visà-vis suppliers and buyers
• Stable industry and more profits
• Usually need government’s approval
 Example: FTC rejected Office Depot and Staples merger
9 –7

 Through economies of scale
 Enhancing economic value creation
• Crucial to the industries with high fixed costs
 Example: pharmaceutical industry
 Large sales force = fixed cost
 Need $1billion in drug revenues to cover these costs
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• Increased differentiation
 Strengthen competitive positions
 Differentiation of products and services
– Example: Oracle buys PeopleSoft ($10B in 2005)
• Joined enterprise software with HR management software
• Access to new markets and distribution channel
 Enter new markets by M&A
– Example: Kraft buys Cadbury
• New distribution in emerging markets & domestically

• Many M&As actually destroy shareholder value!
 When there is value, it often goes to the acquiree
 Acquirers tend to pay a premium
• Why still desire M&As?
1.
Overcome competitive disadvantage
2.
Superior acquisition and integration capability
3.
Principal –agent problems
9 –10

Value Destruction in M&A: The Worst Offenders
Shareholder value destroyed based on up to 3 years post-merger analysis compared to overall stock market 9 –11

• Desire to Overcome Competitive Disadvantage
 Adidas acquired Reebok in 2006
 Benefits from economies of scale and scope
 Compete more effectively with #1 Nike
• Superior Acquisition and Integration Capability
• Some firms have superior M&A abilities
 They identify, acquire, and integrate target companies
 Example: Cisco Systems
• Sought complementary assets
• Bought over 130 firms since 2001, including large firms: Linksys, Scientific Atlanta, & WebEx

• Principal –agent problems
 Managers have incentives to diversify through M&As to receive more prestige, power, and pay.
 Not for shareholder value appreciation
 This is principal —agent problem
• Managerial hubris
 Self-delusion
 Beliefs in their own capability despite evidence to the contrary
 “Exception to the rule”
 Example: Quaker Oats purchase of Snapple
 Sony purchase of Columbia Pictures

• Strategic alliances: voluntary arrangements between firms
 Sharing knowledge, resources, and capabilities
 Leading to gaining and sustaining competitive advantage
• Relational view of competitive advantage
 VRI resources are embedded in alliances
 (VRIO framework)
• HP’s alliance with DreamWorks SKG
 Resulted in Halo Collaboration conferencing

Explosive growth since the 1980s yields faster products at lower costs and aids globalization .
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• Strengthen competitive position
 Apple vs. Amazon
• Enter new markets
 Local partner for global growth
 Microsoft partners with Yahoo on search
• Hedge against uncertainty
 Real options approach
 Roche invests in Genentech 1990 and buys it in 2009
• Access critical complementary assets
 Pixar partners with Disney
• Learn new capabilities
 GM & Toyota (NUMMI) – formed in1984
9 –16

Pixar and Disney:
From Alliance to Acquisition
• Pixar and Disney
• Early strategic alliance
• Successful products: Toy Story, Monsters, Inc., Finding Nemo, etc .
• In 2005, Disney acquired Pixar for $7.4 billion
• Steve Jobs became the largest shareholder of Disney
• Early alliance serves as a vehicle to match two parties’ complementary assets and eventually led to the acquisition
• Disney later acquired Marvel Entertainment, which made Spiderman,
Iron Man, The Incredible Hulk…etc.
1 –17

• Governing mechanisms
 Contractual agreements for non-equity alliances
 Based on contracts
 Equity alliances
 One firm takes partial ownership in the other
 Joint ventures
 Stand-alone organization owned by 2 or more firms
9 –18

• Most common forms of contracts
 Supply agreements
 Distribution agreements
 Licensing agreements
• Vertical strategic alliances
 Firms tend to share explicit knowledge that is codified
 Licensing agreements, partners exchange codified knowledge regularly
 Ex: Genentech and Eli Lilly
•
Genentech R&D focused
• Eli Lilly manufacturing & FDA approvals

• At least one partner takes partial ownership position
 Stronger commitment toward the relationship
• Allow the sharing of tacit knowledge
 Tacit knowledge concerns the “know how”
• Partners exchange personnel to acquire tacit knowledge
 1984 Toyota + GM = NUMMI
(New United Motor Manufacturing Inc.)
 2010 Toyota + Tesla to use the NUMMI plant
• Corporate venture capital is another equity source
 Established firms invest in new startups
• Tends to produce stronger ties and greater trust
9 –20

• Created and owned by two or more companies
 Hulu owned by NBC, ABC, and Fox
• Long-term commitment
 Exchange both tacit and explicit knowledge
 Frequent interaction of personnel
• Stepping stone toward full integration of the partnership
• “Try before you buy” concept
• Used to enter foreign markets
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Key Characteristics of Different Alliance Types

9 –23

• Partner selection and alliance formation
 Ascertain that expected benefits exceeds costs
 Must select the best possible alliance partner
 Partner compatibility
 Partner commitment
– Willingness to share resources & long-term view
• Alliance design and governance
 Choose and agree upon governance structure
 Non-equity contractual agreement
 Equity alliances
 Joint venture
 Inter-organizational trust is critical
9 –24

• Post-formation alliance management
• To effectively manage the ongoing relationship
 Tips:
 Make relationship-specific investments
 Establish knowledge-sharing routines
 Build interfirm trust
 Example: HP’s dense network of alliances vs. DEC
• Dedicated alliance function
 Coordinate alliance-related tasks – at corporate level
 Knowledge base about how to manage alliance
 Ex: Eli Lilly is a clear leader in alliance management
 Best to develop a relational capability
9 –25

9 –26

• Social structure with multiple organizations
 Network nodes – the organizations
 Network ties – the links between organizations
• Network achieves goals that cannot be done by only one firm
• Example - Star Alliance
 1 st global airline network
 Air Canada, Air China, Continental Airlines,
Lufthansa, Singapore Airlines, United Airlines, etc.
 Seamless travel on 25 international airlines
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• Enable us to understand the benefits and costs of a network
 Quality of the tie: strong or weak ?
• Firm’s position in a network
 Network centrality
 Knowledge broker
 Ex: IDEO design consultancy
 Structural holes
• Small-world phenomenon
 Network in local cluster
 High degree of centrality of each firm
9 –28

Firms Embedded in Strategic Networks
A hypothetical strategic network.
Firm B is in a key position - knowledge broker
9 –29