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PAR T T H R E E

Obtaining Technology: External Strategy

Chapter

Obtaining
Technology:
Planning

PowerPoint Presentation by Charlie Cook


The University of West Alabama
2007 Thomson/South-Western. All rights reserved.

Overview
Issues addressed in this chapter include:
Reasons to acquire technology
Alliances
Mergers and acquisitions
The importance of goals and due diligence

2007 Thomson/South-Western. All rights reserved.

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Obtaining Technology Externally


Reasons for not relying on internal innovation:
1. The firms product line is quickly falling behind that of

its competitors.
2. A new competitor enters or is about to enter the

market, which will change the dynamics of the


industry.
3. The firm discovers its processes are not as efficient

and/or effective as those of its competitors.


4. The firm believes its current products or processes

are not going to be successful in the future.

2007 Thomson/South-Western. All rights reserved.

63

2 Ways To Acquire Technology


Externally : Alliances, Mergers and
Acquisitions
A strategic alliance is a partnership of two or

A strategic alliance is a partnership of two or


more corporations or business units to achieve
strategically significant objectives that are
mutually beneficial.

2007 Thomson/South-Western. All rights reserved.

64

Alliances
Level
Levelof
ofFormality
Formality

Duration
Duration

Dimensions
Dimensions
of
ofAlliances
Alliances

Location
Location

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Level of Formality
Formal versus Informal - the degree of formality
often determines the costs and risks involved
with an alliance.

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Duration
The more formal the relationship, the greater should
be the detail in the alliance agreement. The
duration of the alliance should be specified in the
documents.
The negotiations to develop these agreements often
involve long and arduous effortsso duration
should be long enough to recover costs.
The less formal the agreement, the easier it is to
abandon if the environment changes or if
transaction costs are unexpectedly high.

2007 Thomson/South-Western. All rights reserved.

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Location
Domestic versus Internationalthe international alliance
like the domestic alliance must be based on mutual
strategic fit, participant risk and reward, and potential
synergy. Additional challenges include language and
culture differences. Opportunities new product
development and markets.
E.g Embryonic stem-cell research in US - researchers
build R&D facilities or joint ventures with Great Britain,
many countries seeks access to innovation centers in
Silicon Valley to gain cutting-edge technology,
alliances in Japan for appliances technology, US
technological companies form alliances with India to
lower costs.
2007 Thomson/South-Western. All rights reserved.

68

Location: Domestic versus


International Alliances
Regional
RegionalMarket
Market

National
NationalMarket
Market
Licensing
Licensingand
and
Joint
Ventures
Joint Ventures
International
InternationalMergers
Mergers or
or
Acquisitions
Acquisitions

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69

FIGURE 6.1

Alliances for Technology Acquisition

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610

Joint Ventures
2 or more firms combine equity and form 3 rd
entity. Can be very small or large multimillion
dollar investments. Detailed agreement covering
what each party is to provide, what each can
expect, and how each is to operate in the joint
venture.
e.g Kodak and Sanyo Electric to from SK
Display Corporation manufacturing organic light
emitting diode (OLED). Kodak - $125 million,
guarantee up to $100 million on venture's debt
and 34% ownership. Sanyo contribute less
money but more in technical expertise.
2007 Thomson/South-Western. All rights reserved.

611

Franchise Agreement
A contract between a franchisor and the
franchisee to sell a given product or conduct
business under the companys trademark. Time
period and geographical region where business
can be done are clearly specified. Franchisor
details how business is to be operated and set
standards for behaviors. Initial fee and royalty
payment continuous. E.g Expetec Technology
Services provides products and services
including installation and networking, hardware
and software, service maintenance programs,
telecommunication, etc. McDonalds.
2007 Thomson/South-Western. All rights reserved.

612

Consortia

Consortia are at the intermediate level of


formality. They are characterized by several
organizations joining together to share
expertise and funding for developing,
gathering, and distributing new knowledge
e.g. Oklahoma State University Web Handling
Research Centre (Web extremely thin
plastics, paper, textiles, metals and
composites). Knowledge gained reduce
defects in web-manufactured materials and
reduce loss.

2007 Thomson/South-Western. All rights reserved.

613

Licensing Agreements.
Occur when a firm agrees to pay for the right to
either manufacture or sell a product. Licensor
cannot control pricing or marketing of products,
when produced or how product is marketed.
E.g JVC licensed VHS tape technology to
Matsushita, Hitachi and Mutsibishi to promote
the technology. Betamax by Sony was
introduced before therefore first mover but did
not license its Betamax technology but JVC did
better.
2007 Thomson/South-Western. All rights reserved.

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Subcontracting
Intermediate in formality
May or may not be high value adding activities
to business
E.g. American Express subcontracting
computer networks and related support systems
to IBM

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Informal Alliances least


documentation

Linux (operating system copying form and


function of UNIX system but did not get the
license) by Linus Torvalds of Finland. Source
code is free, enabling computer savvies to alter
and amend the system, utilities and specialist
drivers available on the internet. Thus, informal
alliance of individuals and firms committed to its
use and improvement has been developed.

2007 Thomson/South-Western. All rights reserved.

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Reasons for International Alliances


Organizational
Organizational
Learning
Learning

Cost
Cost
Savings
Savings

Reasons
Reasonsfor
for
Alliances
Alliances

Strategic
Strategic
Behavior
Behavior

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3 Reasons For International Alliances


1. Organizational learning- to gain knowledge
about products, processes or markets from
alliance partners.
Learning depends on 3 factors: a) intent to
learns, b). Receptivity to new information c)
the transparency of partnering firms.
The more complex the technology (product or
process) the more difficult it is to learn in an
international alliance. Therefore firms may
subcontract or acquire (buy) the technology.
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2. Cost Saving
Each firm have unique sets of competencies,
corporate cultures, and different management
styles therefore best to retain best practices than
competing with each other depending on the
type of learning desired. E.g IT costs are cut up
to 70% when US outsourced it to India.
3. Strategic reasons new knowledge and
technologies may be developed because firms
have more access to each others strengths.

2007 Thomson/South-Western. All rights reserved.

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Four stage process to move to


international alliances

New technology with regional success


National market position
Partial international integration through licensing or joint
ventures
Global concentration

2007 Thomson/South-Western. All rights reserved.

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Concerns in Alliances
Finding the proper partner
Dealing with the ambiguities of the relationship
Discovering that the partnering firms lack a
shared vision
Getting the timing right
Communicating effectively and efficiently
between the alliance partners
Protecting intellectual property
Measuring real costs and profits from the
alliance
2007 Thomson/South-Western. All rights reserved.

621

Concerns in Alliances
Finding the proper partner
Dealing with the ambiguities of the
relationship
Discovering that the partnering firms lack
a shared vision
Getting the timing right
Communicating effectively and efficiently
between the alliance partners
Protecting intellectual property
Measuring real costs and profits from the
alliance
2007 Thomson/South-Western. All rights reserved.

622

Critical questions in Forming an


Alliance
1. Do we have clear goals and expectations?
2. What is each member of the alliance responsible for,
and what does each bring to the alliance?
3. Will each member of the alliance promise to develop
solutions that will solve the problems and needs of the
members?
4. Will members promise to meet the goals of the
alliance?
5. Who will be responsible if the solutions fail? What
compensation will be offered?
6. What are the conditions for dissolution of the alliance?
7. How will disputes be resolved?
2007 Thomson/South-Western. All rights reserved.

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Mergers And Acquisitions


Merger
A transaction involving two or more corporations

combining as relative equals yet only one permanent


corporation survives.

Acquisition
The outright purchase of a company or part of a

company that is completely absorbed as a subsidiary


or division of the acquiring firm.
The purchasing firm typically remains the dominant
force in the newly combined business.
Difficult to differentiate the two therefore mergers and
acquisition are used together.
2007 Thomson/South-Western. All rights reserved.

624

Strategic Reasons for Mergers or


Acquisitions
Enter
Enteraamarket
market
quickly
quicklyor
or
increase
increasespeed
speedto
to
market
market

Acquire
Acquire
knowledge
knowledgeof
of
technology
technology

Strategic
Strategic
Goals
Goals

Avoid
Avoidcosts
costsand
and
risks
risksof
ofnew
new
product
product
development
development

Gain
Gainmarket
market
power
powerthrough
through
additional
additionalmarket
market
share
share
2007 Thomson/South-Western. All rights reserved.

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Strategic Reasons for Mergers or


Acquisitions

1.

Quick entry into market - Immediate access to


technology, customer, distribution channels to
geographical areas of acquired firms.
First movers may gain customer loyalty and
identification. Second movers can take advantage of
first movers market development while avoiding the
costs also avoid the mistakes first movers make

Avoid the costs and risks of new product development


(R&D, marketing strategies, locality )
Gain market power through size pricing by lead movers.
Acquire knowledge about a particular technology.

2007 Thomson/South-Western. All rights reserved.

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FIGURE 6.2

Types of Mergers and Acquisitions

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Horizontal Mergers and Acquisition


Acquired and acquiring firms are in the same
industry. Competition focus is on the actual
industry the two companies are in.e.g. Conoco
and Philips Petroleum in 2002 two
petrochemical firms in the same industry
combined became one of the biggest oil
companies in the world and saved $750 million
in cost especially in accounting.

2007 Thomson/South-Western. All rights reserved.

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Vertical Merger or Acquisition


When one firm is the supplier or customer of the
other. E.g. ESI Lederle(sells injecetable drugs)
was bought by Baxter Healthcorp (health-related
products manufacturer) for $300 million in 2002.
Reliable, cost-effective quality manufacturing
source of vials and ampules not available in
Baxter.

2007 Thomson/South-Western. All rights reserved.

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Related or Unrelated
Horizontal and Unrelated oil company buys
coal mining company for alternative form of
energy
Vertical and related oil company doing R&D in
coal gasification to ensure ready supply of raw
materials.

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FIGURE 6.3

Planning the Deal and Its Implementation

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Impact Of Choice Of External Acquisition On


Planning.
Goals organizational goals will lead the
decision to obtain technology and innovation
externally. Choice should create value for the
organization.
Due Diligence an evaluation process.
Investigation done on aspects of the potentially
acquired firm to ensure that the target is as the
acquiring firm initially believed and to better
understand how value will be created. An indepth analysis is to be integrated into the
planning process. Decision tree is to be used.
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FIGURE 6.4

Externally Focused Innovation/Technology


Planning

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Major Mistakes to Avoid in Acquisitions


There is not enough study of existing systems.
There is an overemphasis on the needs of the larger,
stronger partner.
The timetables for the blending of the organization are
unreasonable.
Insufficient resources are put into the alliance planning
and implementation processes.
The decision makers get enamored of making the deal
work rather than making the alliance work for the good of
all the stakeholders.
There is an overemphasis on we must be together in all
things.
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FIGURE 6.5

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Decision Tree for


Acquisition
Technology

635

Managerial Guidelines
In planning for acquisitions, managers need to
remember that:
Compatible goals are essential for success.
It is important to match goals to the method.
External efforts to obtain technology require

diplomacy and pragmatism during the early stages.


Planning is much easier than implementation.
Each organization involved will bring its own set of
systems to the table.
There is expertise throughout all of the organizations
involved that must be preserved and tapped into.
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636

Key Terms

acquisition
agency theory
consortia
due diligence
first mover
franchise agreement
horizontal merger or
acquisition
joint venture

2007 Thomson/South-Western. All rights reserved.

licensing agreement
market power
merger
second movers
strategic alliance
transaction costs
vertical merger or
acquisition

637