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Strategic Development


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Strategic Development

  1. 1. Strategic Development: Directions and Mechanisms Chapter 11
  2. 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. 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. 4. Ansoff Growth Matrix Existing New Markets Existing New Products Diversification Market Development Product Development Market Penetration
  5. 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. 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. 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. 8. Mechanisms for Growth <ul><li>Internal (Organic) growth </li></ul><ul><li>External growth </li></ul>
  9. 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. 10. Mergers & Acquisitions: Introduction <ul><li>Mergers & 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 & Acquisitions need to be part of an overall strategy, otherwise they will likely fail </li></ul>
  11. 11. Mergers & Acquisitions Merger A B = AB Acquisition/Takeover A B = A
  12. 12. Strategic Tactics in M&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. 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. 14. M&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. 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. 16. Tools for M&A Evaluation <ul><li>Comparison Matrix </li></ul><ul><li>Porter’s M&A Criteria </li></ul>
  17. 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. 18. Porter: 3 Criteria for Success in M&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. 19. Examples: M&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 </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. 20. Examples: M&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. 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. 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. 23. Example: Strategic Alliance <ul><li>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. </li></ul><ul><li>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. </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>&quot;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,&quot; Gajendra Nagpal, director at Unicorn Investments. </li></ul><ul><li>&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.&quot; </li></ul><ul><li>&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,&quot; Sunil Mittal said. </li></ul>
  24. 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. 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. 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. 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. 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'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. 29. Regulation of M&A <ul><li>EU Treaties </li></ul><ul><ul><li>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 </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. 30. Homework <ul><li>Read Chapter 11, Strategic Development: Directions and Mechanisms , pp. 210-230 </li></ul>