External Strategic Growth & Option
Evaluation
Aims of the Session
•
•
•
•
•
Consider methods for external strategic growth
Explore Mergers & Acquisitions
Examine Strategic Alliances
Explore the strategic directions open to organisations?
Examine the methods to evaluate strategic options?
External Growth
• What is an external method of strategic development?
– A means of strategic development that utilises the
competencies of an external organisation to achieve the
desired strategic progress
• Included in external methods are:
–
–
–
–
–
Acquisitions (friendly/ agreed; hostile)
Mergers (an agreed takeover?)
Joint Ventures
Partnerships/ Alliances
Networks/ Clans
Mergers
• Tend to be voluntary by a number of parties.
• Usually for synergistic benefits.
• Often the result of market and/or political pressures
(public sector typically).
• Can help with shared resources, knowledge and core
competencies.
• Can help with meeting global customer needs.
• Often driven by financial pressure and the need for
survival.
• Example: Daimler-Chrysler (arguably an acquisition in
disguise and one that did not last).
Acquisition
• Potentially cleaner than Mergers.
• Strategy is to take ownership of another company.
• Growth of activity in the late 1990s, had a period of
slowdown but have been rising in recent years.
• A number of industry sectors have consolidated
around key players e.g. Supermarket industry,
Automotive, Banking.
• Success can depend on retaining the key managers or
resources in the acquired company.
• Provides a fast means of:
• Entering new markets e.g. Asda-WalMart; BA/Iberia?
• Expanding range e.g. Kraft/Cadbury
Motivation for M&A
3 perspectives can be considered to understand M&A
activity:
• Economic
• Economies of scale & scope; bargaining power along
supply chain
• Financial
• Asset stripping; improving shareholder wealth
• Strategic
• Take out competition; improve diversity of
business/corporation; enter industries
Adapted from Angwin 2007
A Successful Strategy?
• Huge investments are involved:
• $23.4 trillion 1996-2005 (Angwin 2007)
• A number of studies suggest that M&A does not
offer a safe bet to strategic development.
• Often the financial results indicate the changes to be
less than positive.
• The human aspect of merging, in particular, are
easily overlooked.
• However, is this the full story?
• For what other reasons could firms enter into M&A?
Drivers of M&A?
• The pattern of M&A activity is shaped by
peaks and troughs.
• Inevitably, therefore activity is influenced by
specific factors:
– Deregulation of industries e.g. Water, Gas, etc.
– Liberalised economies, e.g. Eastern Europe
– Economic slowdown e.g. Banking sector
– Growing economies e.g. China, India
Getting it Right
•
•
•
•
•
Yes
careful targeting of
acquisition
learn from mistakes from
previous acquisitions
avoid too high a price
premium
adopt an appropriate postacquisition structure and
style to ensure full
integration
acquisition must add value
to the corporate whole
•
•
•
•
•
No
synergy potential
overestimated
managerial problems
underestimated
key managers leave postacquisition
hidden weaknesses
spotted too late
too much money paid and
premium cannot be
recovered
Thompson, 2001
Why Popular?
•
•
•
•
•
•
Create and Secure new markets
Reduce cost pressures and create higher economies of scale
Collapse and compress supply chains
Create global organizational integration
Access resources/competences
Availability of common equity shares on publicly traded stock
exchanges
• Relatively open corporate governance of Boards of Directors
(Mische, 2001)
Current Activity
http://www.guardian.co.uk/business/mergers-and-acquisitions
Mergers & Acquisitions
• Porter’s Tests for Acquisition:
– return should exceed cost of capital
– cost of entry should not wipe out future profits
– at least one of the companies should gain
competitive advantage
Funding Methods
• Internal
– cash generation from operations
– from owners’ pockets
– sale of assets
• External
– debt (‘leverage’)
– new partner
– issue new equity
Activity
• Using the Mittal & Jain paper consider:
– What are the different perspectives of M&A
activity?
– How does the Strategy Game Card help
understand M&A?
Strategic Alliances
Strategic Alliance defined
• “A strategic alliance is where two or more
organisations share resources and activities in
order to pursue a strategy”
Johnson, Scholes and Whittington (2011)
– Mutually beneficial
– Helps to cope with the complexities of
globalisation. Top 500 global companies average
over 60 alliances each.
Rationale for Alliances
'For most global businesses, the days of flat-out,
predatory competition are over. The traditional
drive to pit one company against the rest of an
industry, to pit supplier against supplier, distributor
against distributor, on and on through every aspect
of business, no longer guarantees the lowest cost,
best products or services, or highest profits for
winners of this Darwinian game'.
(Collaborating to compete - Bleeke and Ernst 1993 p.1)
Types of Alliances
• Joint Ventures
– A newly created company jointly owned by Parent bodies.
– Can be effective in entering new markets, e.g. China.
• Consortia
– A number of partners focused on specific venture or
project & responsibilities set out in a consortium
agreement.
• Networks
– Organisations work in collaboration without formal
relationships.
• Franchising and subcontracting
– McDonalds, etc. Both parties agree to specific activities.
Normally less strategic and more operational.
Influences on types of alliance
• Speed of market change:
– Fast change often requires looser, opportunistic
arrangements like networks
• Management of resources:
– If new and dedicated resources are required then a
joint venture may be appropriate
• Expectations and motives of participants:
– This will affect the depth of contractual
arrangements.
Why Alliances?
• They are less permanent than a merger or acquisition & can be set up relatively
quickly to respond to complex environments
• Need for critical mass to allow cost reduction/ improved customer offering
• Share resources and core competencies
• Co-specialisation – allowing each partner to concentrate on activities which
match their capabilities
• Market access (globalisation) e.g. knowledge of a new geographical market in
return for technical expertise
• Share expertise & exploit new technologies
• Control over other parts of the value chain
• Spreads risk and research costs & strengthens position against competitors
How to get it Right
–
–
–
–
–
–
–
–
Alliances need to be managed for a partnership to develop.
Clear strategic purpose
Senior management support
Compatibility across the companies, not just at senior
management.
Delivering & meeting performance expectations including a
willingness to share information
Alliances based on knowledge sharing are often more robust
than those based only on physical product.
Flexibility
Trust; a major reason for failure. The exchange of knowledge
and information, for example, is often central to success.
Types of and Motives for Strategic Alliances
Loose (market)
relationships
Contractual
relationships
Formalised
ownership/
relationships
Formal
integration
Networks
Opportunistic
alliances
Subcontracting
Licences and
franchises
Consortia
Joint ventures
Acquisitions and
mergers
Assets do not need
joint management
Asset management
can be isolated
Assets need to be jointly managed
Asset separability
Assets cannot be
separated
Assets/skills can be separated
Asset
appropriability
High risk of assets being
appropriated
FORMS OF
ALLIANCE
INFLUENCES
Asset management
Low risk of assets being
appropriated
Assets cannot be
separated
High risk of asset
appropriation
Source: ‘Based on A. Gupta and H. Singh,
‘The governance of synergy: Inter-SBU co-ordination versus external strategic alliances’,
Academy of Management Annual Conference, Miami, Fl, 1991
Key Issues
•
•
•
•
•
Commitment & mutual trust
Need for mutual benefits
Flexibility in terms of priorities and objectives
Acceptance of different perspectives and cultures
Learning between partners
(Ohmae, 1989)
Strategic Directions & Option
Evaluation
Overview
Johnson, Scholes & Whittington, 2011
Option Identification
• Identify the organisation's SBUs and their and the corporate competitive position
- SBU identification
- relative position matrices
- strategic group mapping
AUDIT
External
• PEST
- impact/ probability
• Structural Analysis
• Scenario development
Culture
• Cultural Web
• Stakeholder Analysis
Internal
• Resource Audit
• Value Chain Analysis
• Balance Audit
- resources
- portfolio
Factors Influencing Options
• Corporate Purpose & Aspiration
–
–
–
–
ownership
mission and strategic intent
scope and diversity
global dimension
• Bases of SBU Strategy
– competitive advantage: price; differentiation; focus
• Enhancing SBU Strategy: Corporate Parenting
– portfolio management
– financial strategy
– role of corporate parent; parenting mix
Option Identification
Development strategies
What Basis ?
Which Direction ?
Generic Strategies :
Alternative Directions :
• Cost based
• Differentiation
• Focus
How ?
• Do Nothing
• Withdrawal
• Consolidation
• Product Development
• Market penetration
• Market development
• Diversification - related
- unrelated
Alternative Methods :
• Internal
• External
Johnson, Scholes & Whittington, 2011
Ansoff’s Product/Market matrix
Johnson, Scholes & Whittington, 2011
Activity
• Apply the Ansoff Product/Market matrix to
the Airline Industry:
– Identify the ways that companies could develop
their business for future growth
– What questions would they need to ask for each
section of the model?
Evaluating Risk?
• Options implies future opportunity and decisions are based on
selecting the best ones.
• However, for every opportunity the spectre of risk appears
• Inevitably strategic decisions do not share the same degree of
risk.
• Indeed, an important aspect of strategic decision-making is to
evaluate the nature and impact of risk.
– I.e. What are the chances of things going wrong; and if they do what is
the damage?
• An interesting formula can be viewed as:
Impact = Likelihood x Consequence
• It therefore helps to have criteria to work from
Success Criteria
Suitability
Acceptability
Feasibility
Suitability
• Do the options fit with the strategic position
of the organisation?
• Three ways of evaluating:
– Environment
– Resources/Competencies
– Expectations
Some examples of suitability
Johnson, Scholes & Whittington, 2011
How do you assess Suitability?
Methods can be effective in determining the
option to choose.
• Ranking; key factors can be scored.
• Decision Trees; options can be eliminated as
requirements are understood.
• Scenarios; future scenarios can be developed
to identify the way forward.
Unsuitable strategies need to be understood.
Acceptability
Concerned with the expected outcomes of the
options.
Return:
Profitability; Cost-Benefit; Real
options; SVA
Stakeholder Reactions:
Risk:
Financial ratio projections;
Sensitivity analysis
Political factors; Mapping
Adapted from Johnson, Scholes & Whittington, 2011
Some criteria for understanding the
acceptability of strategic options
Johnson, Scholes & Whittington, 2011
Feasibility
• Considers the extent to which an organisation
has the resources and competences to
successfully develop the strategic option.
• Largely based on Finance and Resource
deployment.
• It is useful to consider the ‘softer’ aspects of
organisations here as well i.e. the people
perspective
Option Evaluation
Identifying Options
• Generic Strategies
• Alternatives Directions
• Alternative Methods
Evaluating/ Screening
Options
Selecting Strategy
• Criteria
- suitability (consistency)
• Criteria
- acceptability (returns)
• Criteria
- feasibility (resources)
• Tests
- strategic logic
- cultural fit
- PIMS
• Tests
- return
- risk
- stakeholder reaction
• Tests
- return
- risk
• Techniques
(Strategic logic)
- portfolio analysis
- life-cycle analysis
- value chain
analysis
(Cultural fit)
- life cycle analysis
- stakeholder impact
analysis
(PIMS)
- comparative analysis
• Screening
- ranking
- decision trees
- scenarios
• Techniques
(Return)
- profitability analysis
- cost/benefit analysis
- shareholder value
analysis
(Risk)
- financial ratio
analysis
- sensitivity analysis
- decision matrices
- simulation modelling
- Heuristic models
(Stakeholder
Reactions)
- impact analysis
• Techniques
- resource
deployment
analysis
- funds flow analysis
BE analysis
Johnson, Scholes & Whittington, 2011
Option Evaluation - Critical Success Factors
• Identify the CSFs for a specific strategy
• Identify the underpinning core competencies required
to achieve the CSFs
• Do these CCs offer sustainable competitive advantage?
• Identify specific performance requirements around the
CSFs
• Assess competitive reaction