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BYU article in Harvard Business Review explores alliances and acquisitions

When Symantec, maker of the Norton antivirus software found on most desktop computers, purchased Orem's PowerQuest in December, it followed its long-standing strategy for growth, which has involved the acquisition of nearly 20 companies.

The company's approach to building its business is highlighted in the August issue of "Harvard Business Review" in an article by Brigham Young University business professor Jeffrey H. Dyer that provides a framework for companies trying to decide to engage in alliances or acquisitions.

Dyer's research suggests that several factors must be considered before companies make the decision to ally themselves with another company or acquire it. His article explores the factors that will keep companies from making the wrong choice and hurting, rather than helping, business growth. Dyer is joined on the paper by Prashand Kale of the University of Michigan Business School and Harbir Singh at the University of Pennsylvania's Wharton School.

"Our objective in writing this paper has been to help companies improve their success rate, which will ultimately increase shareholder value," said Dyer, the Horace Pratt Beesley Professor of Global Strategy at the Marriott School of Management.

From Coca-Cola's lopsided and ill-fated alliance with weak rival Proctor & Gamble to Intel's premature and costly acquisition of wireless chipmaker DSP Communications, some of the world's most respected companies have yet to develop an understanding of when to ally and when to acquire. Making the decision after carefully considering these three sets of factors, Dyer writes, will help companies better know when to use which strategy:

• The nature of both companies' resources and the benefits they desire. Companies team up to profit from the benefits of combining resources -- human, intangible, technological, physical or financial. Companies should examine the types of benefits that will be created, the nature of each company's resources and the extent of redundant resources. Hewlett-Packard and Microsoft have created an alliance that pools their resources to benefit small and big customers. Exxon and Mobil independently realized each company would have to improve efficiency in almost every part of their businesses to remain competitive and could do that only by combining all assets and functions.

• The overall business environment in which they compete. Market uncertainty and competition need to be considered, even if they can't be controlled. One company may have a promising but unproven technology. What are the realistic chances of things panning out? Will consumers adopt the technology in a short amount of time? For instance, Hoffman-La Roche bought Genentech, which had developed a clot-busting drug, but hadn't completed effectiveness studies or sought FDA approval. The drug was effective, but so costly that a competing product of equal effectiveness and lower price made the acquisition of Genentech foolish. Another consideration: does a potential acquisition have several suitors? A company may need to acquire an attractive company before a competitor does to stay ahead of the pack.

• The competencies of each firm at collaborating. A company may have developed a competency in alliances or acquisitions. As mentioned, Symantec has built an acquisition competency, while Hewlett-Packard, Siebel and Eli Lilly have built alliance competencies. Although it's tempting for a company to use a strategy that has worked well in the past, companies with hammers tend to see everything as nails. Don't stick to pet strategies if they aren't appropriate for the situation.

"Of course, companies must develop the ability to execute both acquisitions and alliances if they want to grow. Knowing when to use which strategy may, however, be a greater source of competitive advantage than knowing how to execute them," the authors write in their article, explaining that research shows that companies using both strategies grow faster than rivals do.

A third method for growth that companies can consider involves entering into an alliance that turns into an acquisition, said Dyer. One company that has made a name for itself in this area is networking giant Cisco, which has successfully acquired 36 firms in the past ten years and has entered into more than 100 alliances in the same period.

"By using the alliance as a stepping-stone to an acquisition, companies like Cisco can acquire knowledge about the value of the partner's assets and see how well they collaborate before making the leap to acquisition. Moreover, they are often in a position to pre-empt other bidders when they do decide to acquire," said Dyer. " It's the best of both worlds."

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