Strategic Development
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Strategic Development Presentation Transcript

  • 1. Strategic Development: Directions and Mechanisms Chapter 11
  • 2. 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
  • 3. Review: Strategic Growth Options
    • Market penetration
    • Market development
    • Product development
    • Diversification (related and unrelated)
  • 4. Ansoff Growth Matrix Existing New Markets Existing New Products Diversification Market Development Product Development Market Penetration
  • 5. 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)
  • 6. Unrelated development
    • Concentric – existing competences can be exploited in the new industry
    • Conglomerated – existing competences cannot be leveraged in the new industry
  • 7. Related Development
    • Vertical growth – growth within the supply chain (either backwards or forwards)
    • Horizontal growth – growth in the same stage of the supply chain
  • 8. Mechanisms for Growth
    • Internal (Organic) growth
    • External growth
  • 9. 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
  • 10. 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
  • 11. Mergers & Acquisitions Merger A B = AB Acquisition/Takeover A B = A
  • 12. 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
  • 13. 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
  • 14. 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
  • 15. 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
  • 16. Tools for M&A Evaluation
    • Comparison Matrix
    • Porter’s M&A Criteria
  • 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&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
  • 19. 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
  • 20. 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
  • 21. Strategic Alliances
    • Strategic alliance = cooperation between two or more companies (example, Joint Venture)
    • Types of strategic alliances:
      • Focused and complex alliances
      • Consortia
  • 22. 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
  • 23. 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.
  • 24. 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
  • 25. CSF’s for Successful Alliances (Brouthers)
    • Complementary skills
    • Compatible goals
    • Cooperative cultures
  • 26. Disposals
    • “Spin-off” – breaking a part of the organization off into a separate company
    • Sale of part of the organization to another organization
  • 27. 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
  • 28. 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.
  • 29. 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
  • 30. Homework
    • Read Chapter 11, Strategic Development: Directions and Mechanisms , pp. 210-230