Chapter 11 Flashcards
Organic development and its advantages
Organic development is where a strategy is pursued by building on, and developing, an organisation’s own capabilities. “Do it yourself” method. There are five principal advantages to relying on organic development:
* Knowledge and learning can be enhanced.
* Spreading investment over time – easier to finance.
* No availability constraints – no need to search for suitable partners or acquisition targets.
* Strategic independence – less need to make compromises or accept strategic constraints.
* Culture management – new activities with less risk of a culture clash.
What is Corporate entrepreneurship?
Corporate entrepreneurship refers to radical change in the organisation’s business, driven principally by the organisation’s own capabilities.
What is an M&A?
Mergers and acquisitions are concerned with the combination of two (or more) organisations.
An acquisition is achieved by purchasing a majority of shares in a target company. A merger is the combination of two previously separate organisations in order to form a new company.
Strategic motives for a m&a
- Extension – of the reach of a firm in terms of geography, products or markets.
- Consolidation – increasing scale, efficiency and market power.
- Resources and Capabilities – enhancing technological know-how (or other capabilities).
Financial motives for a m&a
- Financial efficiency – a company with a strong balance sheet (cash rich) may acquire/merge with a company with a weak balance sheet (high debt).
- Tax efficiency – reducing the combined tax burden.
- Asset stripping or unbundling – selling off bits of the acquired company to maximise asset values.
Managerial motives for a m&a
- Personal ambition – financial incentives tied to short-term growth or share price targets; boosting personal reputations; giving friends and colleagues greater responsibility or better jobs (and thus helping to cement their loyalty).
- Bandwagon effects – managers may be branded as conservative if they don’t follow an M&A trend; shareholder pressure to merge or acquire; the company may itself become a takeover target.
which are the two main criteria for the Target choice in M&A?
Two main criteria for the Target choice in M&A apply:
* Strategic fit – does the target firm strengthen or complement the acquiring firm’s strategy? (N.B. It is easy to overestimate this potential synergy as negative synergies are often neglected.)
* Organisational fit – is there a match between the management practices, cultural practices and staff characteristics of the target firm
and the acquiring firm?
Approaches to integration
- Absorption – strong strategic interdependence and little need for organisational autonomy. Rapid adjustment of the acquired company’s strategies, culture and systems. New CEO of acquired company is often appointed.
- Preservation – little interdependence and a high need for autonomy. Old strategies, cultures and systems can be continued much as before. Acquired company CEO is retained.
- Symbiosis – strong strategic interdependence, but a high need for autonomy. Both the acquired firm and acquiring firm learn and adopt the best qualities from each other. Acquired company CEO often retained to begin with.
- Intensive Care takes place where there is little to be gained by integration. These acquisitions may occur when the acquired company is in poor financial health. Very rapid remedial action is required. Acquired CEO may be replaced if situation is severe.
- Reorientation acquisitions occur when the acquired company is in good health and well run but there is a need to integrate central administration and align marketing and sales functions. Distinctive resources of the acquired company are left alone and few changes to internal operations. New top manager is generally brought in to run the acquired company.
what is Organisational justice?
Organisational justice refers to the perceived fairness of managerial actions, in terms of distribution, procedure and information.
* Distributive justice refers to the distribution of rewards and posts.
* Procedural justice refers to the procedures by which decisions are made.
* Informational justice refers to how information is used and communicated in the integration process.
M&A strategies
- Serial acquirers – make multiple acquisitions (often in parallel). This enables them to build up M&A expertise. Examples include Cisco Systems and IBM.
- Divestment (or divesture) – the process of selling a business that no longer fits the corporate strategy. Unless the parent can provide a ‘parenting advantage’, the business should be sold off.
What is Strategic Alliances
A strategic alliance is where two or more organisations share resources and activities to pursue a common strategy.
What are the two different kinds of strategic alliances?
- Equity alliances involve the creation of a new entity that is owned separately by the partners involved.
- Non-equity alliances are typically looser alliances, without ownership and often based on contracts, for example, franchising,
licensing or subcontracting.
What are the Motives for alliances?
- Scale alliances – lower costs, more bargaining power and sharing risks.
- Access alliances – partners provide needed capabilities (e.g. distribution outlets or licenses to brands).
- Complementary alliances – bringing together complementary strengths to offset the other partner’s weaknesses.
- Collusive alliances – to increase market power. Might be kept secret to evade competition regulations.
What are the Two themes vital to success in alliances?
- Co-evolution – the need for flexibility and change as the environment, competition and strategies of the partners evolve
- Trust – partners need to behave in a trustworthy fashion throughout the alliance.
Key elements in managing M&A and alliances:
- Strategic fit;
- Organisational fit;
- Correct valuation;
- Integration;
- Co-evolution;
- Appropriate exit strategies.
