London Centre of Marketing ( LCM)
Level: Postgraduate Diploma in Business Management & Marketing
Module – Corporate and Business Management
Lecturer : Dr. SAMTA RAI
Jan, 2011
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LO3: Explain and assess the managerial processes needed to transform strategy
into action and to evaluate strategy effectiveness
Content: Methods for pursuing strategies , including organic, acquisition, and
alliances
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According to Johnson & Scholes, Strategy is the direction & scope of an organisation over the
long term, which achieves advantage for the organisation through its configuration of
resources within a changing environment & to fulfil stakeholder expectations.
The characteristics of strategic decisions
•The long term direction of an organisation
• The scope of an organisation’s activities – it means should the organisation concentrate on
one area of activity, or should it have many?
• It should bring advantage for the organisation over competition
• Strategic fit with the business environment – Organisations need appropriate positioning in
their environment, for example in terms of the extent to which products or services meet clearly
identified market needs
• Strategy is about exploiting the strategic capability of an organisation, in terms of its
resources & competences, to provide competitive advantage and/or yield new opportunities.
• Strategy should meet the expectations of powerful actors in and around the organisation.
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Methods of Strategy Development
1. Internal Development/Organic Development
2. Mergers & Acquisitions
3. Joint developments & Strategic Alliances
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1. Organic develpment/ Internal development
Definition: It is where strategies are developed by building on and
developing an organisation’s own capabilities.
By developing products internally rather than using outside agencies, the
company can have the advantage of using skills and knowledge acquired
during the development in order to market the product more effectively.
Similarly, developing new markets through the use of internal staff helps the
sales-force to better understand the market.
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Organic development/ Internal development ( contd..)
For many organisations organic development has been the primary method of
strategy development, and there are some compelling reasons why this should
be so :
1. Highly technical products
2. Knowledge and capability development may be enhanced by organic
development
3. Spreading investment over time
4. Minimising disruption
5. The nature of markets may dictate organic development
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2. Mergers and Acquisitions
Acquisition is where an organisation develops its resources & competencies
by taking over another organisation ( Eg., Acquisition of ABN AMRO by
consortium led by Royal Bank of Scotland
Mergers: It implies a mutually agreed decision for joint ownership between
organisations ( Eg., Time Warner Inc.,
Glaxo Wellcome and SmithKline Beecham, both firms ceased to exist when
they merged, and a new company, GlaxoSmithKline, was created.
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One of the advantages of acquisition as a method of carrying out a strategy is
that it enables the company to obtain new products or markets very quickly.
In order to test the effectiveness of acquisition Drucker has suggested five simple
rules:
(i) The acquiring business must consider what value it can add to the acquired
business. This may include management, technology, distribution, etc. Finance
is necessary but unlikely to be sufficient on its own.
(ii) A common core of unity must exist between the businesses in terms of markets,
products, technology, etc. This helps to create a common culture or at least
sympathy between the two separate ones.
(iii) The acquiring company's management must understand the business being
acquired.
Dr. Samta Rai
(iv) The acquiring company must put a quality management team quickly into the
acquired business.
(v) The acquiring business must be able to retain the best management from both
businesses.
As managers will see the acquisition both as a risk (and may therefore leave) and
as an opportunity (and will stay), a clear promotion and management development
strategy must be in place at the time of the takeover.
Porter suggested that the rate of acquisition failures is between 60% and 74%,
where there is a mismatch between the core competencies or experience of the
acquirer and those of the acquired business. The greater the mismatch, the greater
the risk of failure.
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Motives for acquisitions and mergers
1. Speed of entry
2. Financial markets may provide conditions that motivate acqusitions.
3. The competitive situation may influence a company to prefer acquisition.
There may also be capability considerations:
1. Cost efficiency
2. Obtaining new capability
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Acquisition can also be driven by the stakeholder expectations:
1. Institutional shareholder expectations may be for continuing growth and
acquisitions may be a quick way to deliver this growth. There are considerable
dangers, however, that acquisitive growth may result in value destruction rather
than creation.
2. Managerial ambition may motivate acquisitions because they speed the growth
of the company. In turn, this might enhance managers’ self-importance, provide
better career paths and greater monetary rewards.
3. Speculative motives of some stakeholders may stimulate acquisitions that bring
a short term boost to share value. Other stakeholders are usually wary of such
speculation since their short-term gain can destroy longer-term prospects.
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3. Joint development/Strategic alliances
A strategic alliance is where two or more organisations share resources and
activities to pursue a strategy. By the turn of the century the top 500 global
companies had an average of 60 alliances each.
This kind of joint development of new strategies has become increasingly popular.
This is because organisations cannot always cope with increasingly complex
environments or strategies ( such as globalisation) from internal resources and
competences alone.
They may need to obtain materials, skills, innovation, finance or access to
markets, but recognise that these may be as readily available through cooperation
as through ownership.
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Partners may provide the strategic alliance with resources such as products,
distribution channels, manufacturing capability, project funding, capital equipment,
knowledge, expertise, or intellectual property.
The alliance is a cooperation or collaboration which aims for a synergy where
each partner hopes that the benefits from the alliance will be greater than those
from individual efforts. The alliance often involves technology transfer (access to
knowledge and expertise), economic specialization. shared expenses and shared
risk.
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Examples of alliances
Beverage Start-up Gets A Big Boost From Anheuser-Busch:
Soho Natural Soda, a startup producer of natural carbonated beverages, was
operating out of a Brooklyn kitchen. With no money to build, rent or operate any
bottling facilities, it persuaded a regional beer company to use its excess capacity
to bottle the beverages. Soho then got brewer Anheuser-Busch to distribute the
product. In 11 years it grew from a kitchen table to $11 million in sales, with little
overhead or cost.
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Examples of alliances ( contd..)
Motorola And In-Focus Join To Route The Japanese:
Motorola and In-Focus Systems saw an opportunity to gain a share in the
burgeoning worldwide market for high-performance video display panels. In-Focus
developed a new technology that lets it make passive matrix displays that are
almost as good as active matrix displays but cost much less.
Motorola purchased a 20% interest in In-Focus for $20 million. They then formed
an equally owned joint venture to build display panels incorporating In-Focus's
technology Motorola's integrated circuits.
In-Focus got the capital it needed, a key customer, and access to Motorola's
international distribution manufacturing capabilities. Motorola locked in a strategic
technology that it was unable to develop internally. The technology permits
Motorola to leapfrog past rival Japanese competitors. It also created a captive
customer for its integrated chips while getting an equity that could rocket in value.
Dr. Samta Rai
Types of alliance
• Joint ventures – Here organisations remain independent but set up a newly
created organisation jointly owned by the parents.
• Consortia - May involve two or more organisations in a joint venture
arrangement typically more focused on a particular venture or project.
Other alliance arrangements exist usually of a contractual nature and unlikely to
involve ownership:
• Franchising involves the franchise holder undertaking specific activities such as
manufacturing, distribution or selling, whilst the franchiser is responsible for the
brand name, marketing and probably training. Perhaps the best known examples
are Coca –Cola and McDonald’s.
•Licensing is common in science-based industries where, for example, the right
to manufacture a patented product is granted for a fee.
• With subcontracting, a company chooses to subcontract particular services or
part of a process: for example, increasingly in public services responsibility for
waste removal, cleaning and IT services may be subcontracted to private
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companies/.
Illustration 10.1
Handout given pg 361
How law firms are going global
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Seminar
Differentiate between and critically evaluate organic, acquisition and alliances
approaches to achieving corporate strategic objectives
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