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

Market Penetration

Product Development

Market Development

Diversification

Existin

g N

ewM

arkets

Existing NewProducts

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

-Based on reinvestment of profits or loan capital-Lower risk than external growth-More control-Slower than external growth

-Based on merger, takeover or acquisition-Riskier than internal growth-Less control-Faster than internal growth

Internal Growth 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 & AcquisitionsMerger

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

Grow share to 51 percent in our current market

Commands 12% Commands 3% Commands 18%

Acquire 15 new engineers for customerservice

Has 12 programmers; some may be ok to move to customer service

Outsources this function. Contracts may be transferable.

Has 25 support engineers

Expand into commercial aircraft GPS

Not a participant in this market

Commands 24% of this market

Not a participant in this market

Estimated purchase price of less than $250 million

$210 million $72 million $158 million

Requirement Company A Company B Company C

Company strategy is to become the industry leader in GPS mapping software:

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