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Strategic Development
 

Strategic Development

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    Strategic Development Strategic Development Presentation Transcript

    • Strategic Development: Directions and Mechanisms Chapter 11
    • Learning Objectives
      • Describe the general directions of business growth
      • Define and know the difference between external and internal growth
      • Understand mergers and acquisitions
      • Understand strategic alliances
    • Review: Strategic Growth Options
      • Market penetration
      • Market development
      • Product development
      • Diversification (related and unrelated)
    • Ansoff Growth Matrix Existing New Markets Existing New Products Diversification Market Development Product Development Market Penetration
    • Unrelated vs. Related Development
      • Unrelated development – entering a different, or new industry
      • Related development – growth within the organization’s existing industry (i.e., competitive environment)
    • Unrelated development
      • Concentric – existing competences can be exploited in the new industry
      • Conglomerated – existing competences cannot be leveraged in the new industry
    • Related Development
      • Vertical growth – growth within the supply chain (either backwards or forwards)
      • Horizontal growth – growth in the same stage of the supply chain
    • Mechanisms for Growth
      • Internal (Organic) growth
      • External growth
    • Internal Growth External Growth
      • Based on merger, takeover or acquisition
      • Riskier than internal growth
      • Less control
      • Faster than internal growth
      • Based on reinvestment
      • of profits or loan capital
      • Lower risk than external growth
      • More control
      • Slower than external growth
    • Mergers & Acquisitions: Introduction
      • Mergers & Acquisitions are common ways companies try to grow quickly
      • Unfortunately, more than 50% of mergers fail
        • Example: Daimler-Chrysler; AOL-Time-Warner
      • Mergers & Acquisitions need to be part of an overall strategy, otherwise they will likely fail
    • Mergers & Acquisitions Merger A B = AB Acquisition/Takeover A B = A
    • Strategic Tactics in M&A
      • Grow market share quickly (market penetration)
      • Improve the use of cash on-hand
      • Provide additional products for existing customers (product development)
      • Recruit hard to find personnel
      • Expand into new markets (market development/diversification)
      • Gain control of brands
      • Access to distribution channels
      • Widen the organization’s product range
      • Gain access to new technology
      • Economies of scale
    • Reasons for Growth: Combinations of Foreign and Domestic Chinese Companies
      • The sales force of local Chinese companies can be helpful in enlarging Asian language related-growth
      • May provide a cost-effective operation center
      • Price paid is relatively lower than other countries
    • M&A Goal: Synergy
      • Synergy – whole is greater than the parts
      • Concept is easily understood by the formula 2+2=5
      • Greater efficiency of the combined organization than the two organizations would have separately = synergy
      • Value added = distinctive capability is exploited more effectively
    • Reasons for failure
      • Lack of research
      • Cultural incompatibility
      • Lack of communication
      • Loss of key personnel
      • Paying too much
      • Assuming growth in the target company will always continue
    • Tools for M&A Evaluation
      • Comparison Matrix
      • Porter’s M&A Criteria
    • Sample Comparison Matrix Requirement Company A Company B Company C Company strategy is to become the industry leader in GPS mapping software: $158 million $72 million $210 million Estimated purchase price of less than $250 million Not a participant in this market Commands 24% of this market Not a participant in this market Expand into commercial aircraft GPS Has 25 support engineers Outsources this function. Contracts may be transferable. Has 12 programmers; some may be ok to move to customer service Acquire 15 new engineers for customer service Commands 18% Commands 3% Commands 12% Grow share to 51 percent in our current market
    • Porter: 3 Criteria for Success in M&A
      • Attractiveness – related to the likelihood of making above average profits
      • Cost of entry – cost of the merger or acquisition, including all fees
      • Competitive advantage – relates to whether synergies will be achieved between the two companies
    • Examples: M&A
      • Example Acquisition:
        • A recent report in a Chinese newspaper rumored that Facebook is looking to acquire social networking site Zhanzhuo.com
        • It would allow Facebook to enter the Chinese market in a large way, with lower risks than if Facebook developed its own local Chinese site
    • Examples: M&A
      • Example Merger:
      • In 2005, Yahoo! China and Alibaba combined in a deal in which Yahoo! contributed its assets in exchange for 40% of the voting stock of Alibaba
      • The deal gives Alibaba access to Yahoo!’s search technology, while giving Yahoo! access to e-commerce platform
    • Strategic Alliances
      • Strategic alliance = cooperation between two or more companies (example, Joint Venture)
      • Types of strategic alliances:
        • Focused and complex alliances
        • Consortia
    • Focused and Complex Alliances
      • Focused alliance – cooperation on one or two stages of the value chain
      • Complex alliance – cooperation over a wide range of value chain activities
    • Example: Strategic Alliance
      • NEW DELHI (Reuters) -- Wal-Mart Stores Inc., the world's biggest retailer, is entering India's sprawling retail market through a tie up with Bharti Enterprises Ltd., beating off a challenge from Britain's Tesco Plc.
      • The joint venture will start opening stores in Asia's fourth-largest economy from 2007, and Bharti Enterprise Chairman Sunil Mittal said he expected it will have several hundred stores across the country in the next 4 to 5 years.
      • Bharti did not immediately disclose financial terms of the deal, but the Financial Express daily said earlier this month that the two firms would initially invest $100 million, going up to $1.46 billion, citing industry sources.
      • The Indian retail industry is estimated at about $300 billion, and is forecast to grow to $427 billion in 2010 and $637 billion in 2015, according to consultancy Technopak Advisors. But small local stores account for 97 percent of the market.
      • "This joint venture is a winning combination. Wal-Mart's logistics skill and Bharti's execution capability will create a potent force in the Indian market," Gajendra Nagpal, director at Unicorn Investments.
      • "Bharti already has a retail network and is a household name in telecoms, and this deal will prove its capabilities as a company with strong execution capability."
      • "The joint venture with equal stakes will operate in areas where the government allows foreign investment in retail like cash-and-carry and logistics," Sunil Mittal said.
    • Consortia
      • Consortium – cooperation between 2 or more organizations, usually for a specific project
      • Example: In 2006, a six-institute consortium led by Citigroup Inc. and China Life Insurance Group acquired 86.5% of the shares of Guangdong Development Bank for 24.3 billion yuan
    • CSF’s for Successful Alliances (Brouthers)
      • Complementary skills
      • Compatible goals
      • Cooperative cultures
    • Disposals
      • “Spin-off” – breaking a part of the organization off into a separate company
      • Sale of part of the organization to another organization
    • Reasons for Disposals
      • Believe that the remaining organization will perform better without the disposed of part
      • Belief that shareholder value will increase for both parts
      • Allows an organization to get rid of an underperforming business
      • Allows an organization to focus on its core business
      • Allows an organization to raise funds
    • Example: Spin-off
      • NEW YORK (Money) -- First Data Corp. hoped to enhance the value of its financial services businesses by spinning off Western Union
      • Western Union's chief business is person-to-person money transfers. By separating this consumer service from commercial businesses, First Data hoped to improve both its balance sheet and its long-term growth prospects.
      • Western Union has taken on $3.5 billion of debt, leaving First Data with only $2.1 billion. That should give First Data the financial flexibility to make strategic acquisitions that enhance its services for commercial customers.
      • The impact of the split on earnings growth for both companies is more complex. Longer-term, Western Union is aiming for at least 12 percent annual growth in earnings per share. But the company projects only single-digit gains for the next couple of years.
    • Regulation of M&A
      • EU Treaties
        • EU has the power to investigate M&A involving companies located in the EU, and prohibit those that they believe will negatively affect markets and customers
      • UK law
        • Office of Fair Trading
        • The Competition Commission
    • Homework
      • Read Chapter 11, Strategic Development: Directions and Mechanisms , pp. 210-230