Strategic Alliances

What is a strategic alliance

When two or more businesses form a partnership

Can be for a singular project, business venture or long-term to create a new business

For mutual benefit and should bring in new income for partners

Advantages of Strategic alliances

Quick access to new markets

Larger market share

Reduction of competition by forming with competitors

Gaining expertise and technology

Increased sales

Disadvantages

Businesses take on the weaknesses of partners

less efficient communication

Increased conflict over business decisions

Takes time and energy away from the core business

Loss of control over aspects of the business

The types of strategic alliance (5)

Outsourcing

Acquisition

Mergers

Joint venture

Franchising

What is outsourcing

Using an overseas company to perform business functions

Why would people outsource

Overseas companies may specialise in performing these tasks, have well-trained staff and efficient operations

Is typically cheaper than the business doing it itself

Australian companies can gain local knowledge by outsourcing to target countries

Stable ad reliable communication provides access to locations around the world

Impacts of strategic alliances

Decreased employment in Australia

New jobs are created overseas

Reduction in operating costs and extra capital for further expansion and growth

What is acquisition as a strategic alliance

When a company buys another pre-existing company

Why would businesses acquire other companies

Provides a quicker start inside a new market

Creates synergy, combining the skills and expertise of the companies

Commonly done by buying a majority of another company’s shares

A growth strategy because it makes the business bigger, and more competitive

What are the two types of Acquisition

Friendly and Hostile

What is a Hostile Acquisition

When the acquisition is made without approval from the owners and directors

Often done by buying directly from shareholders or using their voting power to place in management who would approve of the acquisition

What might the purchasing company do

Use a tender offer

• Offer to buy shares from holders at a fixed (above market) price

Buy shares on the open market

• Buy enough shares on the stock exchange to own the company

Use a proxy fight

• Persuading shareholders to place in management who would approve

What is the bear hug method

A hostile takeover approach

Making an offer to a company’s board to take over without approaching shareholders

The proposed purchase and offered share price is then made public with the aim to “squeeze“ and pressure the board of directors to accept

They may not like it, but are pressured through shareholders and public scrutiny

Friendly acquisition

An acquisition of shares through a negotiated process with consent from the board of directors and full disclosure to shareholders

It is more likely shareholders will accept if the acquisition is friendly

Risks of acquisition

The money expended isn’t outweighed by the benefits received

The company purchasing must ensure that the other company discloses their financial position, ensuring that there aren’t any surprises after the acquisition

What are mergers

When 2 companies merge together to form a new, merged company

What might need to be done when merging

This process may include the creation or change of slogans, logos, etc

How could this change the workforce and business assets

Many jobs and assets would become duplicated and may lead to lay offs and selling of spare assets

What are the 3 main types of mergers

Horizontal

Conglomerate

Vertical

What is a horizontal merge

When two or more companies within the same industry combine

What is a vertical merge and its impact

When a business merges with one of its suppliers

This can reduce operating costs and provide a competitive advantage, limiting a competitors access to supply

Conglomerate merger

When businesses buy a company in a completely different field

Common entry strategy to break into new markets

Buying existing companies has a lower risk of failure, and being in multiple fields provides income throughout the year

Advantages of mergers

Cheaper to buy existing businesses, then to expand

Reduced competition

Reduced operating costs

Ownership of IP

Increased market share

Joint venture

An alliance where businesses involved start an independent company by pooling resources

Why might businesses choose to use a joint venture

Venture partners typically form a new company to ensure they retain focus on their core business

What is recommended for a joint venture

Forming a joint venture with local businesses in target country is recommended for local knowledge and business networks

Why can joint ventures fail

Resistance to change and poor communication are the leading reasons

Employees must be committed to making the arrangement work, understanding the difficulties but also the benefits

Sharing information is vital, not seeing partners as competition and potential threat

Having a well established working relation, formally and informally

What is franchising

A continuing relationship where a franchisor provides a licensed privilege to do business and assistance in organising, training, merchandising and management in return for consideration from franchisee

What does this enable the franchisor to do

This means the franchisor can easily expand globally without using its own capital

What does this enable the franchisee to do

The franchisee gets to use a proven business model and existing brand awareness, reducing the risk of a failing venture

What is a master franchisee

Master franchisee’s act on behalf of the franchisor to set up and fund new franchise

Why would businesses need a Master Franchisee

Because it is increasingly difficult to manage franchisees internationally and ensure standards are being maintained

Master franchisees are located within the target country and are more successful then the parent company trying to manage internationally

Starting a strategic alliance

The alliance is worthwhile if all partners benefit

Each partner must be able to identify how they benefit

They need to consider:

• What is the benefit to the business

• Are staff able to work with other companies

• Will customers be accepting

• Is the management of partners committed

Issues that need to be resolved

Clear goals for the alliance

Document the resources provided by each partner

Identify KPIs

Detail the type of alliance

List opperating issues

Consider the need for IP protection before

Who will own the IP created in the venture