Strategy Flashcards
Organic development
where a strategy is pursued by building on and developing an organizaitons own capabilities
Methods of growth
- Organic growth
- Mergers & acquisition
- Horizontal acquisition
- Vertical acquisition
- conglomorate acquisition
- asset acquisition - strategic alliance
- non-equity alliance (franchising, licensing)
- equity alliance
- joint venture
Resources
the assets that the organization have - ‘what we have’
Capabilities
the way the assets are used or deployed - ‘what we do well’
Core competencies (3 requirements)
- Deliver customer value
- Differentiate a business from its competitors
Potentially, can be extended and developed, as markets change or new opportunities arise
Where do valuable resources and capabilities reside?
The value chain
How to identify strategic capabilities and potential to create competitive advantage?
VRIO
value, rarity, inimitability, organisational support
Advantages organic growth
- can enhance organizational knowledge and learning
- allows the spreading of investment over time (can be more financially sustainable than the outlay required for acquisition or rapid expansion)
- fewer availability constraints
- strategic independence
- culture management
Disadvantages organic growth
- reliance on internal capabilities can be slow, expensive and risky
- additional resources and capabilities may have limited availability
- hard to deploy existing capabilities, to leaps of innovation, diversification and internationalization
The suitability of the organic growth differs according to circumstances:
- urgency: organic growth is the slowest option, everything needs to be made from scratch
- uncertainty: risks of high financial losses entirely on the company
- types of resources or capabilities: soft (intangible assets of the company -> brand reputaiton, company culture, customer relationship) vs hard (physical things that a company owns, such as factories, machinery, financial capital)
Why certain organic growth strategies fail
- FOcus on existing, most loyal customers, but little room to grow within existing customer segments
- Unable to combine capabilities to create new products or services
- Competitors pursue a faster growth path, gaining significant first-mover advantage
Types of strategic alliances:
- Equity alliance:
An Equity strategic is created when one company purchases a certain equity percentage of the other company, partial ownership.
E.g. Company A buying 40% of the shares of Company B, an equity strategic alliance if formed. - Non-Equity Alliance
A non-equity alliance is created when two or more companies sign a contractual relationship to pool their resources and capabilities together - Joint venture
A joint venture (JV) is established when the parent companies establish a new child company. For example, Company A and Company B (parent companies) can form a JV by creating Company C (child
company). BTR link: company C is the equivalent to a special purpose vehicle (SPV) in finance
Majority owned venture
if Company A and Company B each own 50% of the child company, it is defined as a 50-50 Joint Venture. If Company A owns 70% and Company B owns 30%, the joint venture is classified as a Majority-owned Venture.
Motives for alliances
Sharing resources or activities
Entering new markets
Gaining knowledge
Reducing risk
Lower costs, more bargaining power and sharing risks.
To increase market power. Might be kept secret to evade competition regulations.
Partners provide needed access (e.g.distribution outlets or licenses to brands)
Brings together complementary strengths to offset the other partner’s weaknesses.
Gain market share
Gain access to a restricted market
Maintain market stability (setting product standards)
Try to push out other companies
Pool resources for large capital projects
Gain access to complementary resources
Establish economies of scale
Motives for alliances (4 + drawing)
Scale alliance: Alliances formed to achieve economies of scale, by combining certain aspects of their operations, companies can reduce costs and increase efficiency.
Access Alliance: This type is formed when a company wants to gain access to new markets or resources that are otherwise difficult to access. E.g. Enter a foreign market.
Collusive Alliance: This is a more informal (often illegal) agreement where companies might cooperate in ways that distort the market or restrict competition. E.g. Price fixing
Complementary Alliance: Such alliances are formed when companies with complementary products, services or markets come together to create synergy.
Cons of strategic alliance
- No full control or ownership
- Dependency on others
- Takes time and maintanance
–> When a project is highly uncertain, start with an alliance, buy if proven success
Advantages of alliances
- Can enhance the speed of strategy delivery (by sharing resources and expertise)
- Co-value creation (create additional valye that they could not achieve independently)
- Allows for flexibility, changes collaboration forms and partners over time, explores and extends successes
Key success or fail factors strategic alliance
- strategic fit
- organizational and cultural fit
- valuation (aligned perception of partner contributions and value of their commitment and resources)
Mergers definition
combination of two previously seperate organizations to form a new company
Acquisition definition
is achieved by purchasing most shares in a target company
Explain hostile and friendly acquisition
hostile: where the target management recommend refusing the acquirers offer
friendly: where the targets management recomment accepting the acquirers deal
Main types of M&A
- horizontal acquisition
- vertical acquisition
- conglomerate acquisition
- asset acquisition
Explain horizontal acquisition
(often called ‘horizontal mergers’) When a company buys another company in the same industry, offering similar products or services. It’s like a coffee shop chain buying another chain to increase market presence.
explain vertical acquisition
is an acquisition between two companies that operate at different stages of the supply chain. For example, a car manufacturer might acquire tire company to control more of its supply line and improve operations.
Explain conglomerate acquisition
occurs when a company buys another company in a completely different industry., This of a clothing retailer purchasing a tech startup. It’s a way to diversify business and potentially reduce risks associated with being in just one market.
explain asset acquisition
instead of buying the whole company, a business might just purchase certain parts of another company, like a product line or patents. It’s like a restaurant that doesn’t buy another restaurant, but just its special recipe for a popular dish.
Motives for M&A (3, as well explain)
Strategic motives
* Extension – expanding into new geographical areas, or adding new products or markets
* Consolidation – merging or acquiring companies to increase scale, efficiency or market power
* Capabilities – acquiring companies to enhance technological know-how or other capabilities
Financial motives
* Financial efficiency – company with strong balance sheet (cash rich) merges with/acquires company with weak balance sheet (high debt)
* Tax efficiency – merging companies in a way that reducing combined tax burden
* Asset stripping or unbundling – selling off bits of acquired company to maximise asset values
Managerial motives
* Personal ambitions
- Financial incentives
- Media attention
- Cement personal loyalty
- Bandwagon effect
- After others make first moves
- Shareholder critics
- Fear of becoming the target of hostile bid
In what ways can M&A support growth strategies?
- Accelerate growth: speeding up the companies expansion
- Diversify business: branching out different areas to reducing risk
- Access to new technology; acquiring innovative technologies that the company may not have internally
- Increase market share: gaining a larger share of the market by acquiring competitors or complementary businesses
- Create synergies: combining the strengths of two companies to improve efficiency and reduce costs, which could not be achieved independently
Advantages of M&A
Can enhance the speed of strategy delivery
Can enhance speed of strategy delivery
Can keep ahead of competition & prevent them from acquiring the target
Can give ‘instant’ access to new geographies and/or customers
Synergies can increase efficiency & reduce costs
Disadvantages of M&A
All-or-nothing commitment - no way back
Large upfront investment
Potential culture clash
Negative synergies can arise, due to overlapping customer bases, etc
Management time sink
Top reasons why M&A deals fail
During deal process:
- misvaluation (including synergies)
- negotiation errors
Mistakes related to management & integration process:
* Unclear strategy and objectives
* Unclear governance and decision-making structures
* Poor cultural fit
* Poor integration process
* Lack of trust amongst parties
* Lack of commitment amongst management
Step 1: Acquisition Strategy
Lack of strategy leads to hazardous side effects on
M&A projects!
What problems are you trying to solve with this growth path?
- Gain access to new technology or resources and capabilities
- Acquire talent or new expertise
- Increase or protect market share
- Achieve economies of scale and synergies
- Access new markets
- Diversify the business
- Acquire new product or service
Key missing elements frequently leading to failure:
- Human resources: insufficient resources allocated to the
M&A deal - Financial goals: synergies are overstated
- Risk tolerance
- Timeframe: the deal could take longer than expected
Step 2: Acquisition Criteria
Determine key criteria for identifying potential target companies:
- Size
- Geographic location
- Revenue and earnings growth
- Customer base
- Unique assets: technology, expertise, talents
- Financing constraints
- Assets or shares
- Complete versus partial acquisition
Step 3: Searching for Target
Three main criteria apply:
- Willingness to sell (to us) – is the owner willing to sell their business? Are we the only ones interested?
- Strategic fit – does the target firm strengthen or complement the acquiring firm’s strategy? (N.B. Potential synergy is often over-estimated, 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?
Step 4: Acquisition Planning
The acquirer makes contact with one or more companies that meet its search criteria and appear to offer good value; the purpose of initial conversations is to get more information and to see how amenable to a merger or acquisition the target company is
Step 5: Valuing & Evaluation
Acquirer asks target company to provide substantial information that will enable the acquirer to further evaluate the target, both as a business on its own and as a suitable acquisition target
Step 6: Negotiation
After producing several valuation models of the target company, the acquirer should have sufficient information to enable it to construct a reasonable offer. Once the initial offer has been presented, the two companies can negotiate terms in more detail
Step 7: DD
Step 8: Purchase & Sales Contract
Step 9: Financing
Step 7: Due Diligence (DD)
DD is an exhaustive process that begins when the offer has been accepted; DD aims to confirm or correct the acquirer’s assessment of the value of the target company by conducting a detailed examination and analysis of every aspect of the target company’s operations
Step 8: Purchase & Sales Contract
Assuming due diligence is completed with no major problems or concerns arising, the next step is executing a final contract for sale; the parties make a final decision on the type of purchase agreement, whether it is to be an asset purchase or share purchase
Step 9: Financing
The acquirer will have explored financing options for the deal earlier in the process, but the details of financing typically come together after the purchase and sale agreement has been signed
Step 10: Integration of the acquisition
The extent of strategic interdependence: this refers to how much the acquiring and acquires companies depend on each other for capabilities and resources. High interdependence means that companies benefit significantly from each others resources, such as technology, brand reputation, customer bases or operational capabilities.
(E.g. a tech company acquires a startup for its onnovative software, the extent of strategic interdependence is high if the acquiring company needs that software to enhance its products offerings. In such cases, closer integration is often required to ensure that the software is seamlessly incorporated into the existing product lineup and that the teams from both companies work closely to support, develop, and market the new integrated offerings.)
The need for organizational autonomy: refers to the independence of the acquires company post-acquisition. Sometimes the acquired company has a unique culture, brand identity or innovative spirit that contributed to its success and could be valuable to maintain.
Balance between strategic interdependence and organizational autonomy is crucial. It determines how the integration process is managed and how the combined entity will operate in the future. The foal is to maximize the value of the acquisition by leveraging the strengths of both companies while avoiding the pitfalls that can come from both over-integration and under-integration.
Life cycle of an M&A deal (all steps)
Step 1: Acquisition strategy
Step 2: Aquisition criteria
Step 3: Searching for target
Step 4: Acquisition planning
Step 5: Valuing and evaluating
Step 6: Negotiation
Step 7: Due diligence
Step 8: purchase and sales contract
Step 9: Financing
Step 10: Implementation
Missing elements in acquisition strategy leading to failure
- HR
- Financial Goals
- Risk tolerance
- Time frame too short
Benefits of M&A
- encourages teamwork
- leads to a bigger market share
- helps with talent recruitment
- expedites company goals
- offers economies of scale
- leads to better performances
Strategic Alliance Evolution (7 steps)
- Courtship, initial phase where potential partners identify the opportunity for alliance and explore the strategic fit and potential benefits of a partnership.
- Negotiation, in this phase the companies discuss the terms of alliance, define the scope of cooperation and agree on the details of resource commitment and management structures.
- Start-up, the phase where the alliance officially begins, and the partners start to integrate their resources and efforts to achieve the alliance its objectives
- Maintenance, during this face, the alliance is in operation and the focus is on managing the partnership effectively, resolving any issues, and ensuring that it performs as intended.
Termination: - Extension, this phase occurs if the alliance is successful and the partners decide to expand the scope of their cooperation, possibly by adding new projects or markets.
- Amicable Separation, the phase where the partners may decide to end the alliance – mutually agreed upon, no conflict
- Sale/divorce, the alliance might end with one partner buying out the others interest or assets, it might dissolve entirely, similar to a corporate divorce, where the entities separate and go their own ways.
Building blocks of a winning business ecosystem strategy
- Define core business
- Identify partners
- Develop relationship strategy
- Create a win-win environment
- Monitor, evaluate, evolve
