1. External Strategic Growth & Option Evaluation

2. 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?

3. 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

4. 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).

5. 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

6. 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

7. A Successful Strategy? Huge investments are involved:
$23.4 trillion (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?

8. 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

9. Getting it Right Yes careful targeting of acquisition
learn from mistakes from previous acquisitions
avoid too high a price premium
adopt an appropriate post-acquisition 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 post-acquisition
hidden weaknesses spotted too late
too much money paid and premium cannot be recovered
Thompson, 2001

10. 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

11. 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

12. Funding Methods Internal cash generation from operations
from owners’ pockets
sale of assets
External
debt (‘leverage’)
new partner
issue new equity

13. 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?

14. Strategic Alliances

15. 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.

16. 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)

17. Types of Alliances Joint Ventures Consortia Networks
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.

18. 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.

19. 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

20. 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.

21. Types of and Motives for Strategic Alliances
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

22. 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)

23. Strategic Directions & Option Evaluation

24. Overview
Johnson, Scholes & Whittington, 2011

25. Option Identification
Identify the organisation's SBUs and their and the corporate competitive position
- SBU identification
- relative position matrices
- strategic group mapping
AUDIT
External
Culture
Internal
PEST
- impact/ probability
Structural Analysis
Scenario development
Cultural Web
Stakeholder Analysis
Resource Audit
Value Chain Analysis
Balance Audit
- resources
- portfolio

26. 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

27. Option Identification
Development strategies
What Basis ?
Which Direction ?
How ?
Generic Strategies :
• Cost based
• Differentiation
• Focus
Alternative Directions :
• Do Nothing
Withdrawal
• Consolidation
Product Development
• Market penetration
• Market development
• Diversification -
- related
- unrelated
Alternative Methods :
• Internal
• External
Johnson, Scholes & Whittington, 2011

28. Ansoff’s Product/Market matrix
Johnson, Scholes & Whittington, 2011

29. 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?

30. Impact = Likelihood x Consequence
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

31. Success Criteria
Suitability
Acceptability
Feasibility

32. Suitability
Do the options fit with the strategic position of the organisation?
Three ways of evaluating:
Environment
Resources/Competencies
Expectations

33. Some examples of suitability
Johnson, Scholes & Whittington, 2011

34. 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.

35. Acceptability Concerned with the expected outcomes of the options.
Return:
Profitability; Cost-Benefit; Real options; SVA
Risk:
Financial ratio projections; Sensitivity analysis
Stakeholder Reactions:
Political factors; Mapping
Adapted from Johnson, Scholes & Whittington, 2011

36. Some criteria for understanding the acceptability of strategic options
Johnson, Scholes & Whittington, 2011

37. 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

38. Option Evaluation Identifying Options Evaluating/ Screening
• Generic Strategies
• Alternatives Directions
• Alternative Methods
• Criteria
- suitability (consistency)
• Tests
- strategic logic
- cultural fit
- PIMS
• 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
Evaluating/ Screening
Options
Selecting Strategy
• Criteria
- acceptability (returns)
• Tests
- return
- risk
- stakeholder reaction
• Techniques
(Return)
- profitability analysis
- cost/benefit analysis
- shareholder value
analysis
(Risk)
- financial ratio
- sensitivity analysis
- decision matrices
- simulation modelling
- Heuristic models
(Stakeholder
Reactions)
- impact analysis
• Criteria
- feasibility (resources)
• Tests
- return
- risk
• Techniques
- resource
deployment
analysis
- funds flow analysis
BE analysis
Johnson, Scholes & Whittington, 2011

39. 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