Value Based Knowledge Strategies

Introduction

Value is not created by accident. Sustained growth does not come out of the blue and it is not the outcome of market forces. Value Creation is “a conscious, constant process”. ^[1] Unfortunately, not all companies are aware of their ability and their power to influence the value of their organisations. The drivers for value are the company’s assets - all their assets. Although not all of them appear on the company’s balance sheet, tangible as well as intangible assets drive business success. Especially “the assets hidden below the surface of financial statements drive stock prices” ^[2] in the New Economy. In addition to that, “in today’s competitive environment it is essential that a firm focuses its resources on those activities which drive value creation for shareowners.” ^[3]

I.1. Intangible Assets drive Stock Prices

Andersen (formerly known as Arthur Andersen) observed that the book value of a company “declined from 95 percent of market value to 28 percent” ^[4] between 1978 and 1998. This observation shows that physical and financial assets of a company lost their priority to investors when valuing companies. Traditional yardsticks such as earnings per share (EPS) or size through tangible assets become inappropriate in order to analyse the intangible value of a company. AOL’s book value, for example, was 3.3 percent of its total market capitalisation. Or in other words, 96.7 percent of AOL’s value was not to be found on the balance sheet at the end of the third quarter of 1999.^[5] Coca-Cola’s book value was at 7.9 percent of its total market value and PepsiCo’s was at 15.5 percent.^[6] Therefore, the value of the company cannot be found to its full extent on the balance sheet of the company. The intangible assets play an increasing role in creating value for the companies which can be observed in the financial markets. The problem is how to measure them. How can, for example, the knowledge base of a company be assessed?

I.2. Knowledge as a Source for Competitive Advantage

Various companies, financial institutions and consulting as well as advisory firms are facing tremendous challenges to understand and find solutions to the problem of auditing intangible value. Paul A. Allaire, chairman and CEO of Xerox company, stated: “Building and sharing knowledge may well be the most important source of competitive advantage as we approach the dawn of 21st century”. ^[7] Xerox received some 1,046 patents in 1998.^[8] The statement was the initial idea of this thesis to take a closer look at the role of explicit knowledge in the value creation process. The thesis will mainly focus on knowledge based on the assumption that it is the key intangible asset. The aim is to evaluate strategies in order to gain economic value from the knowledge which is embedded in the company.

I.3. Defining Knowledge

Throughout the thesis, knowledge is referred to as the sum of know how and skills which is used by professionals to solve problems.^[9] This covers theoretical recognition as well as routine processes and practical guidelines for action.^[10] Knowledge is based on data and information which is linked to people.^[11] It is built individually and represents the individuals’ expectations of the correlation between cause and effect.^[12] Companies have to develop and implement value based knowledge strategies to gain economic benefit from such a resource. An organisational knowledge base comprises individual and collective knowledge which can be used by a company to develop solutions to achieve their goals.^[13] Due to the fact that knowledge is organic and undergoes numerous change processes, a company has to ensure organisational learning to continuously build firm-wide settlements of reference and empower problem-solving capabilities and competence for action.^[14]

I.4. Initial Hypothesis of the Thesis

The basic assumption of the thesis can be summarised in the following formula^[15]: K = (I + P)s. The formula cannot be seen as a mathematical method to assess or calculate knowledge, but it expresses the idea that knowledge (K) is the combination of information (I) with professionals (P) through a knowledge base (+) which creates economic benefit when it is shared (s) firm-wide. The problem is to implement the formula into business reality. The initial hypothesis is that explicit knowledge creates corporate value. A company is able to generate value by converting knowledge which is embedded in the organisation, processes, and professionals, into a form which makes it possible to share knowledge within the entire organisation. The major problem for companies is to convert tacit into explicit knowledge. The aim of the thesis is to provide strategies to implement such a conversion successfully.

I.5. Structure of the Thesis

The thesis is divided into three parts (see Illustration I.1):

- Literature review
- Field research
- Synthesis

illustration not visible in this excerpt

Part I will clarify the context of knowledge through a literature review. The key question to this part is to evaluate the contribution and role of knowledge to create corporate value. This includes the examination of how companies create value and in what way the success of a firm in creating value can be assessed. In addition to that, the relevance of knowledge for increasing economic value will be evaluated. The problem numerous companies are facing is that knowledge is intangible. As a matter of fact, companies often are not able to quantify its value and contribution in the value creation process. Knowledge becomes a competitive weapon when it is transformed into a manageable form (i.e. intellectual property).

Part II will expose the impact and issues of building and sharing explicit knowledge through field research. The key question to this part is to identify the challenges and the benefit of implementing knowledge management in a firm. To find possible answers, numerous executives and managers of global companies were contacted via eMail. The results of this practical part is to have a profound overview of key aspects and drivers when building and sharing knowledge in terms of what issues have to be taken into account to gain economic benefit through knowledge.

Part III will provide a synthesis of Part I and II in order to develop a concept of how to build and share explicit knowledge. It is important to stress that the thesis will not concentrate on the technical implementation of knowledge bases but rather on how to create an organisation which provides a breeding ground to leverage knowledge more effectively and efficiently. Various excellent concepts of developing a knowledge base exist, but the majority of companies fail to capitalise on the desired benefit due to human constraints such as mindset or culture. In addition to that, numerous companies undertake knowledge management for its own sake and provide a structure which promotes silo-thinking. Part III will focus on how to manage the “human factor” in the process of implementing knowledge management. Value based knowledge strategies have to incorporate human behaviours and attitudes in their strategies. Part III will provide various solutions to those challenges.

Executive Summary

Executive Summary

Value Based Knowledge Strategies

Aim

The aim of the thesis is to develop a concept which helps companies to create value through explicit knowledge. The thesis is divided into three parts: literature review, field research and synthesis to evaluate possible strategies.

Focus Areas

The thesis focuses on three key aspects:

- Part I: Clarifying the context of knowledge;
- Part II: Exposing the impact and issues of explicit knowledge; and
- Part III: Building and sharing explicit knowledge.

Clarifying the Context of Knowledge

Value Creation is the increase of value derived from investments in a portfolio of tangible and intangible assets. Companies have to manage their assets effectively and efficiently to generate economic benefit. The firm’s assets (tangibles, knowledge, people, reputation, relationships) have to be converted and linked together to create corporate value. Knowledge has to be converted into explicit knowledge (i.e. intellectual property) such as patents which can be used as a competitive weapon. Explicit knowledge has three roles:

- It creates value;
- It creates competencies; and
- It underpins the development of capabilities to become a shaper.

Exposing the Impact and Issues of Explicit Knowledge

Executives and managers of top global companies have been contacted in order to gain insights about their experiences and know how of the value and problems of building and sharing explicit knowledge. The participants had to answer a questionnaire comprising five questions. The results can be summarised as follows:

- Building competitive advantage around a company’s core competencies requires spreading and sharing knowledge. Knowledge sharing promotes change, innovation, time compression, and continuous improvement. In addition to that, sharing knowledge enables a company to develop differentiating competencies to underpin critical capabilities.
- Explicit knowledge is a key success factor for value creation because it converts the company’s intangible assets into intangible capital. Implicit knowledge can be converted into explicit knowledge because the exchange of know how makes relevant knowledge visible to other people who can incorporate that knowledge into their activities.

Building and Sharing Explicit Knowledge

Value based strategies focus on the increase of economic value for maximising shareholder wealth. Such strategies usually involve heavy use of economic incentives, drastic layoffs, downsizing, and restructuring. Knowledge strategies emphasise organisational change to increase profitability and productivity which determines the value of a company. Such an emphasis is geared towards building a corporate culture: employee behaviours, attitudes, capabilities, and commitment. The challenge is to develop and implement strategies which contain both the “hard” and “soft” approaches. The results of Part I and II provide the necessary insights to concentrate on three aspects when implementing a knowledge strategy to create corporate value:

1) Building a superior knowledge base through building a source for competitive advantage by gathering firm-wide Best Practices, understanding customers & markets, and ensuring consistency through global standard.
2) Gaining collective advantage through developing a knowledge-creating firm by providing clear incentives, ensuring economic transparency, and formalising cross-unit interactions.
3) Ensuring a boundaryless organisation through introducing a management that fosters sharing across units and is committed to overall unit performance (not only on their individual unit performance) and counterbalances internal obstacles.

Part I Literature Review

Clarifying the

Context of Knowledge

1. Shaping Industry Structures

The principle purpose of management of stock-listed companies is the enhancement of shareholder value. This means “maximising the returns generated to those people who have an ownership stake in the business”.^[16] Shareholder value is another term for “market capitalisation” (hereafter market cap) which is the “total value of the equity of a firm”.^[17] The value of a firm is identified mainly by the level of sustainable growth in profitability and the anticipated strength of the firm’s cash flow.^[18] In addition to that, earnings per share (EPS) is usually used to value a firm. Those indicators determine stock price, but they cannot be viewed as appropriate measurement tools to value creation.

Korean chaebols (i.e. Korean family-owned conglomerates) such as Hyundai or Daewoo were “active in countless industries in their pursuit of unparalleled growth”.^[19] Their revenues grew constantly, but Daewoo, for example, saw its market cap falling from US$ 2 billion in 1994 to less than US$ 500 million in 1998.^[20] In 1999, the chaebol was broken up as a result of a “spiralling debt-equity ratio”, when creditors forced the chaebol to sell their vast holdings.^[21] This example illustrates that, “neither growth for growth’s sake nor a pure profit focus offers the optimal path to superior shareholder value”^[22] and that firms have to focus on “those activities which really drive value creation”.^[23]

The movement of the stock reflects whether the management of a firm was able to create value or not. Due to the fact that capital markets have become highly transparent and sophisticated, various analysts are able to examine how effectively the firm is delivering shareholder value. If the value of a firm’s stock falls below a level which has been defined as appropriate by those analysts, the company becomes a target for management change.^[24] If that change is implemented too slowly, the firm will probably become a target for takeover.^[25] Hence, the aim of the management is to ensure that stock price does not fall below an acceptable level defined by the markets through maximising return to shareholders.^[26]

Concentrating only on shareholder value embroils problems: Shareholder expectations are usually short-term focused which can drive companies into a vicious circle: “The temptation of downsizing and cost-cutting measures can lull even the most astute managers into a profit trap that may generate respectable shareholder returns in the short run, but fail to exploit the company’s potential to generate long-term shareholder value.”^[27] However, superior market cap is the company’s “only form of protection” and at the same time, the firm’s “ultimate offensive weapon”.^[28] Such interaction reflects the “market capitalisation imperative”.^[29]

1.1. Competitive Advantage through Market Capitalisation

Companies who are not able to “get high performance from their assets are likely to lose control of those assets to others that can make better use of them”.^[30] Companies with superior market cap are able to “acquire the assets, structure the alliances, and attract the talents” they need to “capture market opportunities”.^[31]

Market cap and Market-to-Book-Ratio are indicators to analyse the competitive position of a company because market cap reflects the size of a company and Market-to-Book-Ratio indicates the success of a company to create corporate value. A company is likely to gain competitive advantage when it is able to demonstrate outstanding success in creating superior market cap and generating a high Market-to-Book ratio.

Market cap (i.e. market value) is calculated by multiplying total shares outstanding with the stock price of a share at a specific date. It illustrates how the company was able to reduce the risk of being vulnerable to acquisition by rivals. Or in other words, the size of a company determines the strength to acquire assets of other “smaller” companies or rivals. Therefore, superior market cap increases the ability of a firm to control the industry through its size.

Market-to-Book-Ratio is calculated by market cap divided by book equity. Book equity (i.e. tangible assets or book value) is the total shareholders’ equity which is calculated through total assets minus total liabilities. The ratio displays how the company was able to “get the most market value from the company’s tangible assets (Book Equity) with the market value above book value attributed to tangibles”.^[32] A high Market-to-Book-Ratio demonstrates how efficient the company was in leveraging its assets. Hence, the ratio indicates to what extent the company controls the market through performance.

1.2. Measuring Corporate Value

The “Value Control Map”^[33] (see Illustration 1.1) is a model to illustrate how well a company performed in generating a high market cap and Market-to-Book-Ratio in comparison with its rivals in the same industry. It helps to analyse how the company was able to leverage its tangible and intangible assets relative to its competitors. In addition to that, the model enables a company to define its competitive position and to set its goals to achieve a desired position. A superior position demonstrates that the company is in complete control of the industry.

The vertical axis reflects the size of a company by listing the market cap of each industry participant. It also provides an industry ranking which allows a company or analysts to identify the firm’s vulnerability of being acquired or taken over by rivals. Calculating an industry average divides the industry into two quadrants.

The horizontal axis reflects the firm’s performance of a company in leveraging its assets to make the most market value out of its book value. Calculating an industry average divides the industry into two quadrants. Therefore, the industry is divided into four quadrants. Each quadrant illustrates one type of industry participant. The four industry categories can be defined as follows: Underperformers, Value Creators, Growers and Shapers. The aim is to become an industry shaper.

illustration not visible in this excerpt

Underperformers illustrate performance under industry average which makes them vulnerable to acquisitions. Growers focus their efforts and strategies on growing, for example, through M&As without generating superior synergy effects that result in superior market value. Value Creators demonstrate strong capabilities in increasing their value through deploying their intangible assets, but their size does not allow them to control the market. Shapers are in complete control of the industry.

1.3. Becoming a Shaper

Shapers are companies that create new industry structures on the basis of their capabilities built on their unique assets and competencies. Those companies are in complete control of the industry by generating high returns on capital as well as their ability to grow earnings rapidly and constantly. They prosper due to their focus on securing and stretching their core competencies by “sticking to their knitting”.^[34] In addition to that, they avoid wide-scale diversification which does not imply that they rely on one product or niche products.^[35] Shapers “build ranges of products and services that rely both on breakthrough innovations and incremental improvements” because they are “aware that innovation and product improvements are essential to future growth”.^[36] Moreover, due to geographic expansion, such companies are able to capture and realise opportunities offered by globalisation and define, redefine, or extend markets in which others merely participate.^[37]

Shapers “create unique, enduring roles that others cannot easily imitate”^[38] through continuously introducing new slivers. A “sliver is a specialised product or service that is economically viable at the global level”^[39] , but a company should not rely on one successful sliver. In the process of constantly creating value, “companies must tailor and re-tailor their offerings - always balancing customer needs with the scale effects - to suit the ever-changing conditions of the environment”.^[40] Shapers have the “capacity to deploy significant amounts of capital while also obtaining high returns on that capital”.^[41] In order to become a shaper, a company has to identify its industry position and analyse what capability is missing to achieve competitive advantage. Shapers create value through their capabilities and their unique way to manage and combine all their assets - tangible as well as intangible assets.

2. Assets Matter

Value Creation is the “increase of value derived from investments in a portfolio of tangible and intangible assets”.^[42] Companies are using “previously unrecognised assets to create unprecedented value” in order to develop “the most attractive value propositions”.^[43] As world-wide operating companies lose their “privileged access to customers, labour, capital, technology, and techniques of production, many cost and value advantages disappear. In their place come intangibles such as talent, intellectual property, brands, and networks”.^[44]

Assets alone contain value but they do not actively create value “unless deployed into activities and organised into routines and systems which ensure that products or services are produced which are valued by the final consumer/user”.^[45] Therefore, the variety of assets deployed creates competencies.

Companies need to create and “be acutely aware of the special competencies of the organisation, how these might be developed to give competitive advantage and the need to search for opportunities on the basis of these”.^[46] Once developed and established, the company can upgrade its competencies which will make it difficult for competitors to imitate. Thus, privileged access to unique assets enables the company to create distinctive competencies. Both elements are crucial because together they underpin differentiating capabilities.

A corporate capability is defined as a set of business processes to serve customer needs.^[47] Successful strategies are dependent on capabilities because it is the result of the combination of assets available to the company and how they are “deployed to create competencies in the organisation’s separate activities, and the processes of linking these activities together to sustain excellent performance”.^[48]

The difference between core competencies and capabilities is that core competencies “emphasises technological and production expertise at specific points along the value chain”, whereas ”capabilities are more broadly based, encompassing the entire value chain”.^[49] Hence, capabilities are “visible to the customer in a way that core competencies rarely are”.^[50] The company’s value is determined by its ability to build unique assets, to create competencies on the basis of these, and to transform their assets and competencies into differentiating capabilities to gain competitive advantage in the capabilities-based competition. Five fundamental capabilities can be identified which determines capabilities-based competition:

1. “Acuity: The ability to see the competitive environment clearly and thus to anticipate and respond to customers’ evolving needs and wants.
2. Innovation: The ability to generate new ideas and to combine existing elements to create new sources of value.
3. Speed: The ability to respond quickly to customer or market demands and to incorporate new ideas and technologies quickly into products.
4. Agility: The ability to adapt simultaneously to many different business environments.
5. Consistency: The ability to produce a product that unfailingly satisfies customers’ expectations.”^[51]

Capabilities-based competitors “identify their key business processes, manage them centrally, and invest in them heavily looking for a long-term payback”.^[52] The company’s objective is to ensure that the assets and competencies of the company fit to the environment and that the company has the capability to leverage its unique assets and core competencies to stretch new opportunities which make it difficult for rivals to match or catch up.^[53]

An asset-based view of the firm (inside-out perspective) helps the company to identify which assets are available to the company which assets may be unique in the sense of being robust to imitation, and which assets need to be enhanced to become unique. In order to identify the company’s competencies, a “Value Chain Analysis” helps a company to evaluate “activities within and around an organisation and relating them to an assessment of the competitive strength of an organisation (or its ability to provide value-for-money products or services)”.^[54] Those assets and competencies have to be market-driven (outside-in approach) in order to recover new opportunities and to attain an advantageous market position (see Appendix “Inside-out vs. Outside-in”, p. 75, for a short description).

A company has achieved competitive advantage when the company is in complete control of the industry through its capabilities. Therefore, a company is able to gain complete control of the market in the long-term, when the company is driven by the market and supported by the firm’s assets.

2.1. Sources of Value

There are two types of assets available to the company: tangible and intangible assets. The combination of the various assets determines the economic success of a business because “the interaction of a company’s assets - its economic DNA - creates or destroys value”.^[55] It is important that the company realises all its assets “as potential sources of future economic benefit that have the capacity to contribute to a company’s overall value”.^[56]

Thus, assets have to be treated as “strategic units” because they are sources of value. Moreover, assets allow companies to access competencies which is the most critical driver for growth. New business models are required to help companies to manage their portfolio of assets to leverage them more effectively and efficiently.

2.2. Creating Value through Assets

Companies should focus on how to develop a framework to create value by linking together tangible with intangible capital which is the conversion of intangible assets knowledge, people, relationships, and reputation into intangible capital explicit knowledge, talents, networks, and brands. Each intangible asset requires a specific strategy and method to convert them into intangible capital. The Value Creation Framework^[57] (see Illustration 1.2) is a framework which helps companies to assess their portfolio of assets.

illustration not visible in this excerpt

The aim of the framework is to define the right combination of assets to create capabilities which creates corporate value and meets industry and market requirements. Three types of frameworks have to be develop which reflects:

1) An analysis of the current state of the portfolio of assets;
2) A definition of the future state of assets portfolio; and
3) A combination of a required portfolio of assets for each market.

The analysis of the current state of assets comprises four dimensions^[58]: What are the historical investments in corporate assets? Where do the assets reside in the company? How are they currently managed? To what extent have they created value? The analysis especially should concentrate on those assets which are hidden and are not explicitly stated in the balance sheet.

The definition of the future state is dependent on the company’s vision and the predominant market conditions. Both provide essential directions to develop required assets to achieve the vision through capabilities. The gap between the current state and the future state of assets provides a basis in the decision-making process which actions and investments need to be implemented in order to support and underpin the development of the five capabilities: acuity, innovation, speed, agility, and consistency.

But, not all markets require all assets or capabilities. In each market the predominant environment makes it necessary to a company to compete on one or more capabilities. In order to achieve the vision, each market requires a different asset portfolio depending on the maturity of the market, the national/local conditions, and the objectives of the subsidiaries/affiliates in the various markets. Specific assets have to be built, developed, created, enhanced, connected, and converted in each market fitting to the specific market environment and stretching opportunities in the markets. The sum of the asset portfolio of each subsidiary should underpin the overall vision.

In general, if a market is determined by high mobility barriers, companies should consider market positions, “since these are more difficult to obtain than the necessary resources”.^[59] Mobility barriers are, for example, governmental actions to protect incumbent firms in terms of import quotas and duties, restrictive licensing systems or fiscal regulations or high customer loyalty or barriers imposed by powerful groups/families.^[60] In addition to that, if economies are “populated by companies using relatively simple and abundant resources”^[61], it is more important to gain an advantageous market position. If a market is determined by a dynamic environment or a national economy is “composed of industries using complex bundles of resources, requiring many years of painstaking development”^[62], companies should emphasise resources over market positions. Therefore, the asset portfolio of a company should fit into market requirements and support corporate strategy to achieve the vision.

2.3. Converting Assets

The aim is to link and convert the firm’s assets into value creating assets so that a company can alter or dispose an asset’s function to increase profits. Five assets have to be converted:

- Tangibles into Light Tangibles
- People into Talent
- Relationships into Networks
- Reputation into Brands
- Tacit Knowledge into Explicit Knowledge

2.3.1. Tangibles into Light Tangibles

Physical assets are land, buildings, equipment, and inventory. Financial assets are cash, receivables, debt, investments, and equity. In the New Economy, those tangible assets are declining in value relative to intangible assets. A research states that between 1978 and 1998, the book value declined from 95 percent of market value to 28 percent.^[63] In other words, “intangible assets play an increasing role in creating value for companies”.^[64] Hence, the company should avoid increasing tangible assets and concentrate on managing them more effectively and efficiently in terms of reducing ownership of them without weakening the company’s core competencies.

Dell Computer Corporation, for example, was able to create value out of its inventory by eliminating as much of it as possible. Michael S. Dell mentioned: “Assets collect risks. Inventory carries risk. If the cost of materials goes down 50 percent a year, and you have two or three months of inventory versus 11 days, you’ve got a big disadvantage … If our business, if you don’t move fast, you’re out of the game”.^[65] Dell’s inventory velocity stood at 7 days in 1997 with a total inventory at 13 days. Competitors were struggling at 75 to 100 days. In 1998, Dell decreased inventory velocity down to 3 days with a total inventory at 7 days. Competitors were still struggling at 80 or more days.^[66]

2.3.2. People into Talent

Employees are the backbone of any business. Hiring people is not a matter of filling vacancies or the replacement of retiring or fired people. Hiring people is about identifying people who help the firm to become better and more valuable. The value of employees lies in their “skills, knowledge, experience, and attitudes and is enhanced by an organisation’s ability to hire, train, motivate and retain the best people”.^[67] Distinctive talents are a “global pool of high-quality individuals”^[68] and “has to do with the application of individuals with the right qualities, knowledge, and skills to convert specific opportunity into profit stream”.^[69]

In the New Economy, skilled workers are more valuable than ever and especially world-class talents have enormous scale effects (i.e. lowering average unit costs). There are various definitions of world-class talents which range from “individuals with strong intrinsic capabilities to general skills (project finance, marketing, etc.) to something as simple as the ability to get decisions made within a company”.^[70]

Talents become intangible capital when a company is able to develop “high-quality people into world-class performers, through investment and selection, who are able to create and exploit winning global value propositions”.^[71] Karl Erik Sveiby stressed a concept^[72] to quantify the value of an employee: the development of specific key ratios about the employees such as profit, sales, asset or market cap per employee. This allows an analysis and comparison of the quality of the workforce industry-wide. A historical analysis about the last 5 to 10 years could also illustrate how the company was able to develop talent and to make them more valuable to the company.

2.3.3. Relationships into Networks

Relationships are “advantageous link between producers, suppliers and customers”.^[73] A good relationship develops into a network (i.e. intangible capital), when “it becomes a source of privileged access to opportunities or other sources of intangible capital resulting in mutual economic gain”.^[74] Networks provide privileged access to knowledge, assets, skills and they are used to “protect their (the author: the company’s) flanks, extend geographic reach, and start new businesses”.^[75]

There are various types of relationships such as mergers & acquisitions (hereafter M&As), strategic alliances, consortia, joint ventures, subcontracting, licensing, and franchising and so forth. The difference between each type is the degree of control, integration, risks, costs, and distribution of profits. But, not all types create value. Specific relationship skills are required in order to gain higher absolute profits through relationships. 100 percent control results in 100 percent of the return, but it involves 100 percent of the risks.

Companies faced various experiences, for example the Asian turmoil in 1997-98 which forced organisations to reconsider their ownership strategies and led to the following conclusion: “control, not own”.^[76] Owning local assets reduces flexibility and pace of a company to react on market changes and “lower capital investments mean lower risk of stranded assets as policies and market conditions change and as foreign exchange rates fluctuate”.^[77] Through superior intangibles, it is possible to leverage new market opportunities without being tied up in local assets because local incumbents want to partner with the company. The reputation of a company is, therefore, the door opener.

The advantage is that the company is able to develop a required capability: the ability to respond quickly to market changes - “Speed increases, because it is easier to leverage intangibles across the world than to commission, design, build, and launch operations throughout the world”.^[78] Why should a company try to develop in-depth local market knowledge through establishing business operations? It can take years or decades to understand a market and it involves financial risks through capital tied up in assets. Partnering with a local specialist is the more effective and efficient option to leverage the assets (tangible and intangible) of a local partner.

This whole idea of “control, not own” makes M&As an obsolete strategy for companies. Numerous studies and analysis warned that 50 percent^[79] to 75 percent^[80] of all M&As fail and even destroy value. In addition to that, M&As involve exorbitant capital and costs (see Appendix “Top 15 Mega M&As in 1998 and 1999”, p. 76, as a reference).

Through M&As, companies seek to expand their entire business system of a company in order to gain a prospected market share or industry position, to leverage cross-geographic arbitrage, to expand into new markets, and to increase the value of the company for the shareholders. But, M&As fail due to clash of corporate cultures, inadequate due diligence, leadership clashes, operational integration failure, overpayment through cost in post merger integration, deteriorating staff morale and so forth.^[81] In summary, M&As represent not always the best path to meeting tangible objectives and intangible synergy expectations. In addition to that, M&As require integration activities that consumes and involves time, capital, costs and financial risks.

Companies have identified that alliances are the best way to enter new businesses. Alliances entail fewer costs and integration activities are not required to that extent like mergers. Moreover, alliances enable companies to focus on core competencies because companies can outsource other non-core businesses to their alliance partners. Alliances speed time-to-market capability because companies are not tied up in physical assets and, therefore, they can move faster and expand faster than other growth options. In terms of capabilities-based competition, forming alliances enables companies to compete on a more cost efficient, flexible and time-to-market basis.^[82]

[...]

^[1] A.T. Kearney: Value Building Growth, Chicago, 1999, p. 4.

^[2] Boulton, Richard E. S.: Cracking the Value Code, New York, 2000, p. 11.

^[3] Scott, Mark C.: Value Drivers, Chichester, 1998, p. vii.

^[4] Boulton, Richard E. S.: Cracking the Value Code, New York, 2000, p. 15.

^[5] Ibid., p. 13.

^[6] Ibid., p. 13.

^[7] Boulton, Richard E. S.: Cracking the Value Code, New York, 2000, p. 98.

^[8] Ibid., p. 98.

^[9] Probst, Gilbert et al.: Wissen managen, Wiesbaden, 1999, p. 46.

^[10] Ibid., p. 46.

^[11] Ibid., p. 46.

^[12] Ibid., p. 46.

^[13] Ibid., p. 46.

^[14] Ibid., p. 46.

^[15] Probst, Gilbert et al.: Wissen managen, Wiesbaden, 1999, p. 346.

^[16] Scott, Mark C.: Value Drivers, Chichester, 1998, p. 5.

^[17] Ibid., p. 5.

^[18] Ibid., p. 6.

^[19] A.T. Kearney: Value-Building Growth, Chicago, 1999, p. 1.

^[20] Ibid., p. 1.

^[21] Ibid., p. 1.

^[22] Ibid., p. 17.

^[23] Scott, Mark C.: Value Drivers, Chichester, 1998, p. 7.

^[24] Scott, Mark C.: Value Drivers, Chichester, 1998, p. 5.

^[25] Ibid., p. 6.

^[26] Ibid., p. 6.

^[27] A.T. Kearney: Value-Building Growth, Chicago, 1999, p. 1.

^[28] Bryan, Lowell et al.: Race for the World, Boston, 1999, p. 97.

^[29] Ibid., p. 97.

^[30] Ibid., p. 97.

^[31] Ibid., p. 97.

^[32] Bryan, Lowell et al.: Race for the World, Boston, 1999, p. 117.

^[33] Adaptation of McKinsey Strategic Control Map – Bryan, Lowell et al.: Race for the World, Boston, 1999, p. 121 – and A.T. Kearney Growth Matrix – A.T. Kearney: Value Building Growth, Chicago, 1999, p. 3.

^[34] Peters, T. J. and Waterman, R. H.: In Search of Excellence, New York, 1982, p. 62.

^[35] A.T. Kearney: Value-Building Growth, Chicago, 1999, p. 7.

^[36] Ibid., p. 7.

^[37] Ibid., p. 8.

^[38] Bryan, Lowell et al.: Race for the World, Boston, 1999, p. 81.

^[39] Ibid., p. 208.

^[40] Ibid., p. 208.

^[41] Ibid., p. 120.

^[42] Boulton, Richard E. S.: Cracking the Value Code, New York, 2000, p. 246.

^[43] Bryan, Lowell et al.: Race for the World, Boston, 1999, p. 29.

^[44] Ibid., p. 29.

^[45] Johnson, Gerry and Scholes, Kevan: Exploring Corporate Strategy, Hertfordshire, 1997, p. 146.

^[46] Ibid., p. 25.

^[47] Stern, Carl W. and Stalk, George Jr.: Perspectives on Strategy, New York, 1998, p. 88.

^[48] Johnson, Gerry and Scholes, Kevan: Exploring Corporate Strategy, Hertfordshire, 1997, p. 144.

^[49] Wit, Bob de and Meyer, Ron: Strategy Synthesis, London, 1999, p. 229.

^[50] Ibid., p. 229.

^[51] Stern, Carl W. and Stalk, George Jr.: Perspectives on Strategy, New York, 1998, p. 90.

^[52] Ibid., p. 88.

^[53] Johnson, Gerry and Scholes, Kevan: Exploring Corporate Strategy, Hertfordshire, 1997, p. 137.

^[54] Johnson, Gerry and Scholes, Kevan: Exploring Corporate Strategy, Hertfordshire, 1997, p. 146.

^[55] Boulton, Richard E. S.: Cracking the Value Code, New York, 2000, p. XIX.

^[56] Ibid., p. 31.

^[57] Adapted from Boulton, Richard E. S.: Cracking the Value Code, New York, 2000, p. 30.

^[58] Adapted from Boulton, Richard E. S.: Cracking the Value Code, New York, 2000, p. 15.

^[59] Wit, Bob de and Meyer, Ron: Strategy Synthesis, London, 1999, p. 232.

^[60] Ibid., p. 232.

^[61] Wit, Bob de and Meyer, Ron: Strategy Synthesis, London, 1999, p. 233.

^[62] Ibid., p. 233.

^[63] Boulton, Richard E. S.: Cracking the Value Code, New York, 2000, p. 15.

^[64] Ibid., p. 15.

^[65] Boulton, Richard E. S.: Cracking the Value Code, New York, 2000, p. 76.

^[66] Ibid., p. 76.

^[67] Ibid., p. 98.

^[68] Bryan, Lowell et al.: Race for the World, Boston, 1999, p. 179.

^[69] Stern, Carl W. and Stalk, George Jr.: Perspectives on Strategy, New York, 1998, p. 182.

^[70] Bryan, Lowell et al.: Race for the World, Boston, 1999, p. 182.

^[71] Bryan, Lowell et al.: Race for the World, Boston, 1999, p. 179.

^[72] Sveiby, Karl Erik and Lloyd, Tom: Managing Know How, London, 1987, p. 167.

^[73] Bryan, Lowell et al.: Race for the World, Boston, 1999, p. 179.

^[74] Ibid., p. 185.

^[75] Boulton, Richard E. S.: Cracking the Value Code, New York, 2000, p. 103.

^[76] Bryan, Lowell et al.: Race for the World, Boston, 1999, p. 192.

^[77] Ibid., p. 192.

^[78] Ibid., p. 193.

^[79] Accenture: M&A Trends: Going Ballistic, 01-01-15, www.accenture.com\xd\xd.asp?it=enWeb&xd=services\mergers\ma_tren.xml.

^[80] A.T. Kearney: Corporate Marriage: Blight or Bliss?, Chicago, 1999, p. 2.

^[81] Accenture: Management Challenges, 01-01-15, www.accenture.com\xd\xd.asp?it=enWeb&xd=services\mergers\ma_mang.xml.

^[82] Accenture: The Capability Gap, 2001-01-15, www.accenture.com\xd\xd.asp?it=enWeb&xd=services\mergers\alli_mang.xml.