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Strategic Management > Chapter 7: Methods of development > Flashcards

Chapter 7: Methods of development Flashcards

1
Q

Internal development

A

When a firm invests in its own structure.

  • Increases its size: new facilities, new staff, new machinery…
  • Investment in new production factors that improve output capacity.

Internal development/growth= organic or natural growth:

  • Deploys core competences
  • Focuses them on expansion of current business or in the implementation of other new ones.
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2
Q

External development

A

When one firm purchases/invests in/associates with/controls other firms or the assets of those firms that are already in operation.

  • Increases firms size by adding into its net worth the output capacity from the firm/assets integrated.
  • Like internal, external can also mean expanding the current business or entering new one.

External development means: mergers, acquisitions or strategic alliances.

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3
Q

Reasons for external development:

A
  • Economic performance
  • Market power
  • Other factors
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4
Q

Economic performance

A
  1. Reduction in operating costs (economies of scale, scope, synergies)
  2. Reduction in transaction costs
  3. Obtaining resources and capabilities (learning)
  4. Placement of surplus funds
  5. Replacement of management team (M&A)
  6. Fiscal incentives (M&A)
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5
Q
  • Market power
A
  1. Gateway to an industry or country: overcoming entry barrier into industry/country
  2. Reduction in an industry’s level of competition (because when firms merge, this means an increase in the market power of the resulting firm) or influence/control on future development of industry
  3. Exploiting the advantages of vertical integration (this happens when mergers are vertical) means economic performance and market positioning.
  4. Suitable size for competing in a global market: to become a top-tier international competitor
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6
Q
  • Other factors
A
  1. Managers own objectives (empire building=accomplish their utility function: remuneration, power, lower risk, social recognition, and not the objective of creating value for shareholders) (M&A)
  2. Industry mood: trends or fashion
  3. Combining the advantages of flexibility and specialization (alliances)
  4. Reducing the risk and uncertainty of investments (alliances)
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7
Q

M&A reasons:

A
  • Replacement of the management team
  • Right to tax breaks
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8
Q

Alliance reasons:

  • Firms resort to cooperation as an alternative to an M&A
  • Keeping management teams separate
  • This leads to reduction in risks and uncertainty associated with major investments

External development processes are explains through number of these factors, not just one.

A
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9
Q

Advantages of external development:

A
  • Faster than internal
  • Facilitates processes of unrelated diversification in internationalization
  • Leads to better choice for the right moment in which to enter an industry or a country
  • Easier to enter mature industries.
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10
Q

Drawbacks for M&A only include:

A
  • Do not always lead to the best decisions in the management of the growth process
  • They require a process of information gathering and negotiating from target firm: not always easy
  • Costly cause of duplicate assets, need to restructure… (except on certain occasions: poor management, economic/financial problems, etc…)
  • Problems arise from: integration of the operational, organizational, cultural systems of the merging firms.
  • Constraints by authorities: to preserve free market competition.
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11
Q

TYPES OF EXTERNAL DEVELOPMENT

A
  • Merger=integration of 2 or more firms whereby at least 1 of the original ones disappears
  • Acquisition=operation in which shares are traded between 2 firms, with each one keeping their own legal personality
  • Cooperation or strategic alliances=relation between firms through specific legal arrangements/explicit or tacit agreements, and each firm keeps legal and operational independence.
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12
Q

All types of relationship between firms can be:

A
  • Horizontal= when firms compete with each other and belong to the same industry
  • Vertical= when firms are at different stages of cycle of exploitation of a product
  • Complementary= when firms have no vertical relationship nor have they got direct competitors.
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13
Q

PURE MERGERS

A

when 2 or more firms, generally of similar size, agree to join forces, and incorporate all their resources (assets, property, rights, liabilities). The original firms disappear to be replaced by a new one

A et B -> C

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14
Q

MERGER BY TAKEOVER/ACQUISITION

A

1 firm disappears, equity is transferred to the other company. The B firm is wound up.

A et B -> A’

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15
Q

MERGER WITH A PARTIAL ASSETS TRANSFER

A

same as takeover/acquisition, but only part of 1 firms assets are transferred. And this firm is NOT wound up.

Aa et B -> C

Aa et B -> B

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16
Q

ACQUISITIONS :Can give rise to different degrees of control according to the amount of shareholder capital in acquired:

A
  • Absolute
  • Majority
  • Minority

And depends on the way shares are distributed:

  • Many shares amongst few individuals
  • Not many for a large number of individuals
17
Q

2 ways of buying a company:

A
  • Leveraged Buyout LBO= means financing part of a firm’s sales price through borrowing. When the purchasing party is the target firm’s management team à Management Buyout MBO.
  • A public takeover bid= when a firm makes an offer to buy all or part of the shareholder capital.
18
Q

Firm deconcentration

A 
= absence of growth (instead: splitting the firm’s net worth into several legally independent ones) +reduction 
in size (except if new firms incorporated continue to be part of the business group
  • break up/split
  • spin-off
19
Q

Break-up/split=

A

when firm A gives all net worth to several new or pre-existing firms B and C, and then winds up.

  • Pure demerger= when different parts of the net worth allocated to new companies
  • Demerger/takeover= when recipient companies already exist
  • Most complex case of demerger and merger= when net worth of demerged firm and pre-existing firm are combined to make a new firm

A -> B and C

20
Q

Spin-off/demerger=

A

when part of net worth (a) of an existing company A is broken down to form legally independent firm.
Break-ups and spin-offs arise:
- To reorganise legal structure of firm.
- To restructure strategy through operations involving sale, harvest, winding-up of business.
- When divesting part of firm’s operations in response to authorities’ decisions.

Aa -> A et a

21
Q

MANAGING MERGERS AND ACQUISITIONS

A

A. Choosing the target firm:
- Information gathering: identifying characteristics of the targeted firm
- Price setting
- Financing method
B. Organisational and cultural integration:
- Organisational design: job descriptions, chain of command, units, size of units, etc.
- Administrative processes: standardisation of processes, communication systems, performance
monitoring, etc.
- HR policy
- Organisational culture: values, beliefs, behaviour, rituals, etc.
C. Operations integration:
- Restructuring the resulting firm: synergies, staff, integration of systems, assets doubles? Etc.
- Compatibility of processes
D. Anti-trust laws:
- Spanish legislation
- European legislation

22
Q

Strategic alliance/cooperation between firms=

A

agreement between 2 or more separate firms that by joining or
sharing their resources and/or capabilities, although not merging, introduce a certain degree of interrelation with a view to reinforcing their CAs. (FERNANDEZ SANCHEZ)

23
Q

GARCIA CANAL summarises with these 6 points:

A

No dominance of one firm over the other

  • Coordination of future actions
  • Loss of organizational independence
  • Blurring of the organisations boundaries
  • Interdependence
  • Achieving a goal.

Objective: greater balance between performance and flexibility, because management teams are kept separate

24
Q

Pitfalls:

A

Undermining of a firm’s competitive positioning

  • No delegation of power
  • Loss of independence
  • Costs in time and money
  • Greater organisational complexity
  • May be diverging interests
  • Lack of trust and commitmen
25
Q

MANAGING STRATEGIC ALLIANCES

A

= refers to the issues or factors that need to be considered when implementing an agreement and seeking to ensure its success.

26
Q

Process of managing an alliance:

A

A. Securing/defining an agreement: 3 stages:
o Choice of cooperation as a strategic option
o Choice of partner/s
 Strategic fit
 Cultural fit
o Design and negotiation of the agreement: content, formal &legal aspects, organisation, and
planning
B. Managing the agreement: 2 basic features:
o Attitudes maintained by each partner: trust, commitment, flexibility
o Systems for making it work: objectives &goals, resources &support, personnel policy,
organisational design, disseminating info, conflict resolution, and control systems.
C. Outcomes of the cooperation: difficult to measure.
o Success: agreement objectives, partner satisfaction

Strategic Management (7 decks)

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