Competitive Advantage And Core Competencies


Published on

Topic related to Mergers and Acquisitions..

Competitive Advantage And Core Competencies

  1. 1. Lesson - 7 Competitive Advantage and Core Competencies Companies should strive to develop unique resources in order to gain a lasting competitive advantage. Competitive advantage, whatever is source, can ultimately be attributed to the ownership of valuable resources that enable the company to perform activities efficiently at comparatively lower costs than its competitors. Superior performance will therefore be based on developing a competitively distinct set of resources and deploying them in a well-conceived strategy. Companies should abandon the areas of operations and dispense with activities where they do not possess a competitive advantage and concentrate their resources where they could attain competitive strength, so as to focus on improving productivity and increased efficiency. The concept of ‘core competency’ is central to the resource-based perspective on corporate strategy. The resource-based view of strategy is that sustainable competitive advantage arises out of a company’s possessing some special skills, knowledge, resources or competencies that distinguish it form its competitors. Core competency is a bundle of a specific knowledge; skills, technologies, capabilities and organization which enables it to create value in a market those other competitors cannot do in the short term. The resources could be, for example, manufacturing flexibility, responsiveness to market trend and reliable service. The main concept about core competencies was developed by C.K.Prahalad and G.Hamel in 1990. The idea is that, over time, companies may develop key areas of expertise, which are distinctive to that company and crucial to the company’s long term development. These areas of expertise may be in any area but are mot likely to develop in the critical, central areas of the company where most value is added to its products. While in the case of a manufacturer this could be in the routine and processes at the heart of the production process, for a software company the key skills may be in the initial conceptualization process or alternatively in the high quality of code writing they have achieved. Core competencies are not fixed and codified but flexible and evolving over time and changing in response to changes in the company’s environment. As the company evolves and adapts a new circumstances and opportunities, so its core competencies will also adapt and change. In this way the company will be able to make the most of its given resources and apply them to new opportunities. Prahalad and Hamel suggest three factors to help identify core competencies in a company. (i) Core competence provides potential access to a wide variety of markets. (ii) Core competence should make a significant contribution to the perceived customer benefits of the end product. (iii) core competence should be difficult for competitors to imitate.
  2. 2. Companies can use their core competencies to expand into other markets and add to the customer benefits. Strategy Formulation and Execution One of the purposes of corporate restructuring is to have an optimum business portfolio, by deciding whether to retain, divest or diversify the business. Business portfolio restructuring can be done in a variety of ways like amalgamations, merger, demerger, slump sale, takeover, disinvestment, joint venture, foreign franchises, strategic alliance, etc. The ultimate choice of strategy by the organization would depend upon its growth objectives, attitude towards risk, the present nature of business and technology in use, resources at its command, its own internal strengths and weaknesses, Government policy, etc. Amalgamation In amalgamation, two or more existing companies merger together or form a new company keeping in view their long term business interest. The transferor companies lose their existence and their shareholders become the shareholders of the new company. Thus, amalgamation is a legal process by which two or more companies are joined together to form a new entity or one or more companies are to be absorbed or blended with another and as a consequence the amalgamating company loses its existence and its shareholders become the shareholders of the new or amalgamated company. Merger A merger has been defined as ‘the fusion or absorption of one thing or right into another’. A merger has also been defined as an arrangement whereby the assets of two (or more) companies become vested in, or under the control of one company (which may or may not be one of the original two companies), which has as its shareholders, all or substantially all, the shareholders of the two companies. In merger, one of the two existing companies merges its identify into another existing company or one of more existing companies may forma a new company and merge their identities into the new company by transferring their business and undertakings including all other assets and liabilities to the new company (hereinafter referred to as the merged company). The shareholders of the company whose identity has been merged (i.e. merging company) get substantial shareholding in the merged company. They are allotted shares in the merged company in exchange for the shares held by them in the merging company according to the shares exchange ratio incorporated in the scheme of merger as approved by all or prescribed majority of the shareholders of the merging companies and the merged companies in their separate general meetings and sanctioned by the Court as per the agreed exchange ratio. Demerger Demerger in relation to companies, the demerged company sells and transfers one or more of its undertakings to the resulting company for an agreed consideration. The resulting company issues its shares at the agreed exchange ratio to
  3. 3. the shareholders of the demerged company. Demerger is a relatively new phenomenon in the Indian corporate sector. Slump Sale In a slump sale, a company sells or disposes of the whole or substantially the whole of its undertaking for a lump sum predetermined consideration. In a slump sale, an acquiring company may not be interested in buying the whole company, but only one of its divisions or a running undertaking on a going concern basis. The sale is made for a lump sum price, without values being assigned to the individual assets and liabilities transferred. The business to be hived-off is transferred form the transferor company to an existing or a new company. A “Business Transfer Agreement” (Agreement) is drafted containing the terms and conditions of transfer. The agreement provides for transfer by the seller company to the buyer company, its business as a going concern with all immovable and movable properties, at the agreed consideration, called “slump price”. Take Over Takeover is a strategy of acquiring control over the management of another company – either directly by acquiring shares or indirectly by participating in the management. The objective is to consolidate and acquire large share of the market. The regulatory framework of take over listed companies is governed by the Securities and Exchange Board of India SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 1997. Disinvestment The Disinvestment Policy of the Government of India in the area of privatizing the public sector undertakings, refers to transfer of assets or service delivery from the government to the private sector. For this purpose, the Disinvestment Commission was established on 23rd August 1996 as an independent non-statutory, advisory body to make its recommendations on the public sector enterprises referred to it. The concept of disinvestment takes different forms – from minimum government involvement to partnership with private sector where the government is the majority shareholder. The salient features of the procedure evolved by the Department of Disinvestment include (i) proposals in accordance with the prescribed policy to be placed before the Cabinet Committee on Disinvestment (CCD); (ii) selection of advise after clearance of proposal; (iii) issue of advertisement in leading newspapers inviting Expression of Interest (EOI); (iv) short-listing of bidders on the basis of laid down criteria; (v) drafting of Share Purchase Agreement and Shareholders’ Agreement; (vi) finalization of Share Purchase Agreement and Shareholders’ Agreement after negotiations; (vii) Inter-Ministerial Group (IMG) meeting to approve the proposal and agreements and (viii) evaluation by the Comptroller and Auditor General (CAG) of India after the transaction is completed. Joint Venture
  4. 4. Joint venture means a foreign equity formed, registered or incorporated in accordance with the laws and regulations of the host country in which the Indian party makes direct investment. It is a strategic business policy whereby a business enterprise for profit is formed in which two or more parties share responsibilities in an agreed manner, by providing risk capital, technology, patent/trade mark/brand names and access to market. Joint ventures with multinational companies contribute to the expansion of production capacity, transfer of technology and penetration into the global market. In joint ventures, assets are managed jointly. Skills and knowledge flow both ways. If it is a joint venture between foreign and domestic firm, the respective combinations usually are for example domestic firm provides labour and foreign firm provides technology. Franchising Franchising aims primarily at distributing goods and services that have a high reputation in the market and involves servicing the customers and end users. Franchisers support, train and to an extent control franchisees in selling goods and rendering services. The most popular form of franchising is the product distribution franchise it becomes more complicated when the franchisee has to market the product that has to be prepared, treated, assembled, processed or serviced in a specified way, the franchiser being very reputed and associated with that style of servicing. Franchising may be defined as a contract, either expressed or implied, written or oral, between two persons or parties by which franchisee is granted the right to engage in the business of offering, selling, distributing goods and services prescribed in substantial part by franchiser. Operation of franchisee’s business is substantially associated with franchiser’s trademark, service mark or logo or advertisement or commercial symbol. Franchisee pays directly or indirectly the fees to the franchiser. The franchising may cover the entire system or a specified territory or a specified retail outlet. Usually franchisers have standard agreements for all their franchisees because uniformity and conformity is considered very important. Strategic Alliances Any arrangement or agreement under which two or more firms cooperate in order to achieve certain commercial objectives is called a strategic alliance. Strategic alliances are often motivated by considerations such as reduction in cost, technology sharing, product development, market access to capital. Strategic alliances facilitate a market entry strategy, which maximizes the potential for high return while mitigating economic risks and other exposures. Strategic alliance is gaining importance in infrastructure sectors, more particularly in areas of power, oil and gas. The basic idea is to pool resources and facilitate innovative ideas and techniques while implementing large projects, with the common objective of reduction of cost and time, and sharing the resultant benefits, in proportion to the contribution made by each party in achieving the targets. For detail regarding strategic alliances students may refer Study XI ‘Alliances’. Strategy formulation is thus a sequential process which consists of strategic situation analysis and strategic choice analyses. Strategic situation analysis
  5. 5. is self examination of the corporation’s existing strategic posture, whereas strategic choice analysis is forward looking scenario building approach to the firm’s future strategic posture. The strategic choice to be made by a firm will depend on its assessment of its competitive strengths and weaknesses and to match these against the opportunities and threats posed by the market forces. Corporate restructuring strategies Corporate managers face an ever-changing environment. Similarly managers have a variety of strategic options when evaluating the choices to be made in responding to such a situation. We try to discuss here the various forms of possible organizational and financial options available to a corporate managers. The fact that there are a number of options indicates that there are an array of options and as well no one-size-fit all approach exists. Below is presented a general framework for corporate restructuring and reorganization. General framework for corporate restructuring and reorganization. • reorganization of assets and ownership - asset sale - equity carve outs - spin-offs • reorganizing financial claims - debt-equity exchange offer - dual-class recapitalization - leveraged recapitalizations - financial reorganizations - liquidation • other strategies - alliances and joint ventures - ESOP and MLPs - Going-private and leveraged buyouts - Using international markets - Share repurchase programs. Let us try to define each of the above methods, • asset sale: an asset sale is defined as the sale of a division subsidiary product line or other assets directly to another firm. In an asset sale the transferred subsidiary or division is absorbed within the organizational structure of the buying firm. The payment in this form of divestiture is usually cash although the payment in some asset sales is in form of stock of the buying firm. • equity carve-out
  6. 6. it is defined as the offering of a full or partial interest in a subsidiary to the investment public. In effect an equity carve out is an IPO of a corporate subsidiary or a split-off IPO. This mode of restructuring creates a new publicly traded company with partial or complete autonomy from the parent firm. • spin-off a spin-off is defined as a pro rata distribution of shares in a subsidiary. No cash is generated by the parent in this form of divestiture although the debt allocation between the parent and subsidiary has capital structure implications. This form of restructuring creates a new and publicly traded company that is completely separate from the former parent firm. In addition to the above three main forms of restructuring there are variations present in an interrelated form with the main restructuring methods. • split-up: it is defined as the separation of the company into two or more parts. This term is applied where the firm is not merely divesting a piesce of the firm but is instead strategically breaking up the entire corporation body. The break up process is accomplished with one or more equity carve outs or spin-offs. • tracking stock: - it is a separate class of common stock of the parent corporation. The value of the stock is based on the cash flow of the specific division. Tracking stock was first issued in 1984 as part of the acquisition of EDS by general motors. • exchange offer it is defined as a distribution of the ownership of the subsidiary in which shareholders have a choice to retain the parent shares or exchange their existing shares for the new shares in the subsidiary. An exchange offer resembles a spin- off in that shares are issued in a separate, publicly traded company. The difference is that the shares in the new firm are received only by those holders who opt to trade in the shares in the parent. Motives for restructuring Practical experiences sugest that a firm may restructure in many ways. Further the variety of divestiture methods suggest that a firm can restructure in many ways. The variety of divestiture methods also suggest that many motives can exit for corporate restructuring.
  7. 7. Corporate focus often is sited as a prime reason for corporate restructuring. However recent examples suggest that even a focused company periodically reviews strategic alternatives in response to changing conditions in product markets. Research shows that in general firms restructure to remain competitive and to respond to the change forces in the economy. To further analyze the causes and effects of corporate restructuring we may need also to review and analyze, • why might divestitures create wealth • why do divestitures occur. Practice questions 1. briefly explain the motives of restructuring 2. define briefly the various tools of restructuring 3. discuss the various motives for restructuring