©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston Chapter Strategic Processes

©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 2 Nature of Strategy Strategy defines the central plans, policies and culture of an organization in a long-term horizon Strategic planning is a dynamic process that requires inputs from all segments of the organization

©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 3 Acquisition and restructuring policies and decisions should be part of the company's overall strategic plans and processes Ultimate responsibility for strategic planning resides in the top executive group

©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 4 Essential elements in strategic planning 1.Assessment of changes in the environments 2.Evaluation of company capabilities and limitations 3.Assessment of expectations of stakeholders 4.Analysis of company, competitors, industry, domestic economy, and international economies 5.Formulation of the missions, goals, and policies for the master strategy 6.Development of sensitivity to critical environmental changes

©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston Formulation of organization performance measurements and benchmarks 8.Formulation of long-range strategy programs 9.Formulation of mid-range programs and short-run plans 10.Organization, funding, and other methods to implement all of the preceding elements 11.Information flow and feedback system for continued repetition of above activities and for adjustments and changes at each stage 12.Review and evaluation of above processes

©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 6 Diversity in Strategic Planning Processes Monitoring environments –Continuous monitoring of external environments –Should encompass both domestic and international dimensions –Include analysis of economic, technological, political, social, and legal factors

©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 7 Stakeholders –Take into account individuals and groups that have interests in the organization and its actions –Stakeholders include customers, stockholders, creditors, employees, governments, communities, media, political groups, educational institutions, financial community, and international entities

©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 8 Organization cultures –Corporate cultures affect strategic thinking and planning –Failure to mesh divergent cultures is a major obstacle to successful merger integration

©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 9 Alternative strategy methodologies 1.SWOT or WOTS UP - inventory and analysis of organizational strengths, weaknesses, environmental opportunities and threats 2.Gap analysis - assessment of goals versus forecasts or projections 3.Top-down or Bottom-up - relate to company forecasts versus aggregation of forecasts of segments 4.Computer models - opportunity for detail and complexity

©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston Competitive analysis - assess customers, suppliers, new entrants, products, and product substitutability 6.Synergy - look for complementarities 7.Logical incrementalism - well-supported moves from current bases 8.Muddling through - incremental changes selected from a small number of policy alternatives 9.Comparative histories - learn from the experiences of others

©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston Delphi technique - iterated opinion reactions from selected groups 11.Discussion group technique - stimulating ideas by unstructured discussions aimed at consensus decisions 12.Adaptive processes - periodic reassessment of environmental opportunities and organization capability adjustments required 13.Environmental scanning - continuous analysis of all relevant environments 14.Intuition - insights of brilliant managers

©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston Entrepreneurship - creative leadership 16.Discontinuities - crafting strategy from recognition of trend shifts 17.Brainstorming - free-form repeated exchange of ideas 18.Game theory - logical analysis of competitor actions and reactions 19.Game playing - assign roles and simulate alternative scenarios

©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 13 Alternative Analytical Frameworks Employed in Strategy Formulation –Product life cycles - introduction, growth, maturity, decline stages with changing opportunities, threats –Learning curve - costs decline with cumulative volume experience resulting in first mover competitive advantages –Competitive analysis - industry structure, rivals' reactions, supplier and customer relations, product positioning, complementor company analysis

©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 14 –Cost leadership - low-cost advantages –Product differentiation - develop product configurations that achieve customer preference –Value chain analysis - controlled cost outlays to add product characteristics valued by customers –Niche opportunities - specialize to particular needs or interests of customer groups –Product breadth - carryover of organizational capabilities

©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 15 –Correlations with profitability - statistical studies of factors associated with high profitability measures –Market share - high market share associated with competitive superiority –Product quality - customer allegiance and price differentials for higher quality –Technological leadership - keep at frontiers of knowledge –Relatedness matrix - unfamiliar markets and products involve greatest risk

©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 16 –Focus matrix - narrow versus broad product families –Growth/share matrix - aim for high market share in high growth markets –Attractiveness matrix - aim to be strong in attractive industries –Global matrix - aim for competitive strength in attractive countries

©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 17 Approaches to Formulating Strategy Boston Consulting Group Approach –Experience curve –Product life cycle –Product portfolio balance –Recent approaches Impact of the Internet and other technological innovations Performance measurements - cash flow return on investment (CFROI)

©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 18 Michael Porter Approach (1980, 1985, 1987) –Select attractive industry — Five Forces Diagram (Competitive Advantage, 1985, p. 5) –Develop competitive advantage through cost leadership, product differentiation, or focus –Develop attractive value chains

©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 19 Eclectic and Adaptive Processes –Strategy decisions as ill-structured problems Match resources to investment opportunities under environmental uncertainty Compounded by uncertain actions and reactions of competitors

©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 20 –Iterative solution methodology. Decision steps: State objectives Define environment Analyze strengths/weaknesses relative to environment Assess potential in environment Compare potential to objectives If gap, search for alternative ways to close gap Select alternatives for analysis Cost/benefit analysis of alternatives Tentative selection — formulate plans and actions

©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 21 Repeat process from several viewpoints (research, production, marketing, financial, etc.) and all over system standpoint Commit resources to implement plan Competitive reactions Follow-up to compare performance to plan Repeat comparison of objectives and potential Goal is effective alignment to changing environments

©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 22 Evaluation of Alternative Approaches to Strategy All are eclectic in actual practice Computerization ties approaches closer together Results of strategy viewed differently: –Firms can develop and implement strategic planning and diversification strategies to obtain competitive advantage –Adaptive process approach — competitive advantage not permanent; planning as a continual learning and adjustment process

©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 23 Formulating a Merger Strategy Requires continuing reassessment –Industry analysis –Competitor analysis –Supplier analysis –Customer analysis –Substitute products –Complementors –Technology changes –Societal factors –Firm's strengths/weaknesses relative to present/future industry conditions

©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 24 Matrix analysis –Product-market matrix –Competitive-position matrix

©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 25 –Growth-share matrix –Strength-market attractiveness matrix

©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 26 –Global strategy

©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 27 Goal/capability analysis –Are current goals, policies appropriate? –Do goals, policies match resources? –Does timing of goals/policies reflect ability of firm to change? Work out strategic alternatives –May not include current strategy –Choose best –Mergers represent one set of alternatives

©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 28 Grove (1996) –Firm must adjust to six forces Existing competitors Potential competitors Complementors Customers Suppliers Industry transformation –Eclectic adaptive processes approach to strategy

©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 29 Business goals - general or specific, but must be quantifiable to facilitate progress assessment –Size objectives Large enough to use fixed factors effectively Critical mass necessary to attain cost levels for profitable operation at market prices –Growth objectives - sales, assets, EPS, values To get favorable P/E multiple for shares To increase market to book value of shares

©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 30 –Stability objectives - two kinds of instability Large erratic fluctuations in total size and abrupt program shifts (e.g., defense industry) Cyclical instability of durable goods industries –Flexibility objectives - ability to operate in a variety of product markets and responsive to consumers Breadth of capabilities, e.g., research, manufacturing, marketing Technological breadth Stay close to customers

©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 31 Aligning firm to changing environments –Gap between objectives and potential based on current capabilities Change environment or capabilities Use iterative process due to high uncertainty –Various approaches: Choose products related to needs of customer that provide large markets Focus on technological bottlenecks - may create new markets Be at frontier of technological capabilities and aim for attractive product fallout Emphasize economic criteria - attractive growth and high value prospects

©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 32 –Connection between strategic planning and mergers Diversification strategy may be necessary if firm must alter product-market mix or capabilities to reduce or close strategic gap Both involve evaluation of current capabilities relative to those needed to reach objectives Related diversification involves lower risks

©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 33 Strategy and Structure Unitary or U-Form

©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 34 –Description Highly centralized under the president Broken into functional departments - no departments can stand alone President must stay close to the departments No easy way to measure each department as a profit center Long-term vision left mainly to the president Allows rapid decision making Only successful in small organizations Difficult to handle multiple products

©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 35 –Acquisition strategies Acquired firms must fit into limited span of control of top executive group Acquisitions likely to be horizontal or closely related activities New units likely to be fully consolidated into unitary organization

©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 36 Holding company or H-Form

©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 37 –Description Arranged around various unrelated operating businesses Leadership of firm is able to evaluate each unit individually Resources can be allocated according to projected returns Firm has superior knowledge of the situation in each unit

©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 38 –Acquisition strategies Possible for firms to acquire relatively unrelated businesses Acquired operations are permitted to function almost as an independent company May be unable to integrate activities that are widely diverse

©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 39 Multidivisional organization or M-Form

©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 40 –Description Between centralization of U-Form and decentralization of H-Form Each division is autonomous enough to be judged a profit center All divisions share some general staff assistance in areas such as production or marketing Can handle related product and geographic market extensions

©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 41 –Acquisition strategies Acquired firm with related product line –Might be served by same functional staff groups effectively –Might become a separate division Groups of divisions may have elements in common and at some point might require their own thrust with support staff groups having the required specialized knowledge

©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 42 Matrix form President Product AProduct BProduct C Research Manager Production Manager Marketing Manager

©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 43 Description –Managers of functional departments such as finance, manufacturing, and development –Employees of functional departments are assigned to subunits organized around products, geography, or some other criteria –Employees report to a functional manager and a product manager –Effective in firms characterized by many new products or projects

©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 44 Acquisition strategy –Can handle acquisitions of related products –Can handle acquisitions for geographic market expansion –Importance of effective communication system - new product groups may increase possibility of disputes and conflicts arising from multiple lines of authority

©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 45 Virtual integration (Dell Computers) –Links of value chain are brought together by informal arrangements among suppliers and customers Close ties with suppliers Effective customer ordering and services Arrangement of supply shipments and customer needs facilitated by efficient computer systems –Represents a blurring of company boundaries –Strengthen communication ties between different firms in value chain creates a "form of organization"