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Strategic Development
Strategic Development
Strategic Development
Strategic Development
Strategic Development
Strategic Development
Strategic Development
Strategic Development
Strategic Development
Strategic Development
Strategic Development
Strategic Development
Strategic Development
Strategic Development
Strategic Development
Strategic Development
Strategic Development
Strategic Development
Strategic Development
Strategic Development
Strategic Development
Strategic Development
Strategic Development
Strategic Development
Strategic Development
Strategic Development
Strategic Development
Strategic Development
Strategic Development
Strategic Development
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Strategic Development

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  • 1. Strategic Development: Directions and Mechanisms Chapter 11
  • 2. Learning Objectives <ul><li>Describe the general directions of business growth </li></ul><ul><li>Define and know the difference between external and internal growth </li></ul><ul><li>Understand mergers and acquisitions </li></ul><ul><li>Understand strategic alliances </li></ul>
  • 3. Review: Strategic Growth Options <ul><li>Market penetration </li></ul><ul><li>Market development </li></ul><ul><li>Product development </li></ul><ul><li>Diversification (related and unrelated) </li></ul>
  • 4. Ansoff Growth Matrix Existing New Markets Existing New Products Diversification Market Development Product Development Market Penetration
  • 5. Unrelated vs. Related Development <ul><li>Unrelated development – entering a different, or new industry </li></ul><ul><li>Related development – growth within the organization’s existing industry (i.e., competitive environment) </li></ul>
  • 6. Unrelated development <ul><li>Concentric – existing competences can be exploited in the new industry </li></ul><ul><li>Conglomerated – existing competences cannot be leveraged in the new industry </li></ul>
  • 7. Related Development <ul><li>Vertical growth – growth within the supply chain (either backwards or forwards) </li></ul><ul><li>Horizontal growth – growth in the same stage of the supply chain </li></ul>
  • 8. Mechanisms for Growth <ul><li>Internal (Organic) growth </li></ul><ul><li>External growth </li></ul>
  • 9. Internal Growth External Growth <ul><li>Based on merger, takeover or acquisition </li></ul><ul><li>Riskier than internal growth </li></ul><ul><li>Less control </li></ul><ul><li>Faster than internal growth </li></ul><ul><li>Based on reinvestment </li></ul><ul><li>of profits or loan capital </li></ul><ul><li>Lower risk than external growth </li></ul><ul><li>More control </li></ul><ul><li>Slower than external growth </li></ul>
  • 10. Mergers &amp; Acquisitions: Introduction <ul><li>Mergers &amp; Acquisitions are common ways companies try to grow quickly </li></ul><ul><li>Unfortunately, more than 50% of mergers fail </li></ul><ul><ul><li>Example: Daimler-Chrysler; AOL-Time-Warner </li></ul></ul><ul><li>Mergers &amp; Acquisitions need to be part of an overall strategy, otherwise they will likely fail </li></ul>
  • 11. Mergers &amp; Acquisitions Merger A B = AB Acquisition/Takeover A B = A
  • 12. Strategic Tactics in M&amp;A <ul><li>Grow market share quickly (market penetration) </li></ul><ul><li>Improve the use of cash on-hand </li></ul><ul><li>Provide additional products for existing customers (product development) </li></ul><ul><li>Recruit hard to find personnel </li></ul><ul><li>Expand into new markets (market development/diversification) </li></ul><ul><li>Gain control of brands </li></ul><ul><li>Access to distribution channels </li></ul><ul><li>Widen the organization’s product range </li></ul><ul><li>Gain access to new technology </li></ul><ul><li>Economies of scale </li></ul>
  • 13. Reasons for Growth: Combinations of Foreign and Domestic Chinese Companies <ul><li>The sales force of local Chinese companies can be helpful in enlarging Asian language related-growth </li></ul><ul><li>May provide a cost-effective operation center </li></ul><ul><li>Price paid is relatively lower than other countries </li></ul>
  • 14. M&amp;A Goal: Synergy <ul><li>Synergy – whole is greater than the parts </li></ul><ul><li>Concept is easily understood by the formula 2+2=5 </li></ul><ul><li>Greater efficiency of the combined organization than the two organizations would have separately = synergy </li></ul><ul><li>Value added = distinctive capability is exploited more effectively </li></ul>
  • 15. Reasons for failure <ul><li>Lack of research </li></ul><ul><li>Cultural incompatibility </li></ul><ul><li>Lack of communication </li></ul><ul><li>Loss of key personnel </li></ul><ul><li>Paying too much </li></ul><ul><li>Assuming growth in the target company will always continue </li></ul>
  • 16. Tools for M&amp;A Evaluation <ul><li>Comparison Matrix </li></ul><ul><li>Porter’s M&amp;A Criteria </li></ul>
  • 17. 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
  • 18. Porter: 3 Criteria for Success in M&amp;A <ul><li>Attractiveness – related to the likelihood of making above average profits </li></ul><ul><li>Cost of entry – cost of the merger or acquisition, including all fees </li></ul><ul><li>Competitive advantage – relates to whether synergies will be achieved between the two companies </li></ul>
  • 19. Examples: M&amp;A <ul><li>Example Acquisition: </li></ul><ul><ul><li>A recent report in a Chinese newspaper rumored that Facebook is looking to acquire social networking site Zhanzhuo.com </li></ul></ul><ul><ul><li>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 </li></ul></ul>
  • 20. Examples: M&amp;A <ul><li>Example Merger: </li></ul><ul><li>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 </li></ul><ul><li>The deal gives Alibaba access to Yahoo!’s search technology, while giving Yahoo! access to e-commerce platform </li></ul>
  • 21. Strategic Alliances <ul><li>Strategic alliance = cooperation between two or more companies (example, Joint Venture) </li></ul><ul><li>Types of strategic alliances: </li></ul><ul><ul><li>Focused and complex alliances </li></ul></ul><ul><ul><li>Consortia </li></ul></ul>
  • 22. Focused and Complex Alliances <ul><li>Focused alliance – cooperation on one or two stages of the value chain </li></ul><ul><li>Complex alliance – cooperation over a wide range of value chain activities </li></ul>
  • 23. Example: Strategic Alliance <ul><li>NEW DELHI (Reuters) -- Wal-Mart Stores Inc., the world&apos;s biggest retailer, is entering India&apos;s sprawling retail market through a tie up with Bharti Enterprises Ltd., beating off a challenge from Britain&apos;s Tesco Plc. </li></ul><ul><li>The joint venture will start opening stores in Asia&apos;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. </li></ul><ul><li>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. </li></ul><ul><li>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. </li></ul><ul><li>&amp;quot;This joint venture is a winning combination. Wal-Mart&apos;s logistics skill and Bharti&apos;s execution capability will create a potent force in the Indian market,&amp;quot; Gajendra Nagpal, director at Unicorn Investments. </li></ul><ul><li>&amp;quot;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.&amp;quot; </li></ul><ul><li>&amp;quot;The joint venture with equal stakes will operate in areas where the government allows foreign investment in retail like cash-and-carry and logistics,&amp;quot; Sunil Mittal said. </li></ul>
  • 24. Consortia <ul><li>Consortium – cooperation between 2 or more organizations, usually for a specific project </li></ul><ul><li>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 </li></ul>
  • 25. CSF’s for Successful Alliances (Brouthers) <ul><li>Complementary skills </li></ul><ul><li>Compatible goals </li></ul><ul><li>Cooperative cultures </li></ul>
  • 26. Disposals <ul><li>“Spin-off” – breaking a part of the organization off into a separate company </li></ul><ul><li>Sale of part of the organization to another organization </li></ul>
  • 27. Reasons for Disposals <ul><li>Believe that the remaining organization will perform better without the disposed of part </li></ul><ul><li>Belief that shareholder value will increase for both parts </li></ul><ul><li>Allows an organization to get rid of an underperforming business </li></ul><ul><li>Allows an organization to focus on its core business </li></ul><ul><li>Allows an organization to raise funds </li></ul>
  • 28. Example: Spin-off <ul><li>NEW YORK (Money) -- First Data Corp. hoped to enhance the value of its financial services businesses by spinning off Western Union </li></ul><ul><li>Western Union&apos;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. </li></ul><ul><li>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. </li></ul><ul><li>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. </li></ul>
  • 29. Regulation of M&amp;A <ul><li>EU Treaties </li></ul><ul><ul><li>EU has the power to investigate M&amp;A involving companies located in the EU, and prohibit those that they believe will negatively affect markets and customers </li></ul></ul><ul><li>UK law </li></ul><ul><ul><li>Office of Fair Trading </li></ul></ul><ul><ul><li>The Competition Commission </li></ul></ul>
  • 30. Homework <ul><li>Read Chapter 11, Strategic Development: Directions and Mechanisms , pp. 210-230 </li></ul>

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