Strategic

Development:
Directions
and
Mechanisms
Chapter 11
 Learning Objectives

• Describe the general directions of

business growth
• Define and know the difference
between external and internal growth
• Understand mergers and acquisitions
• Understand strategic alliances
Review: Strategic Growth
Options

• Market penetration
• Market development
• Product development
• Diversification (related and
unrelated)
 Ansoff Growth Matrix
Products
Existing New

Market Product
Existing

Penetration Development
Markets

Market Diversification
Development
New
 Unrelated vs. Related
Development

• Unrelated development –
entering a different, or new
industry
• Related development – growth
within the organization’s existing
industry (i.e., competitive
environment)
Unrelated development

• Concentric – existing
competences can be exploited in
the new industry
• Conglomerated – existing
competences cannot be leveraged
in the new industry
 Related Development

• Vertical growth – growth within

the supply chain (either backwards
or forwards)
• Horizontal growth – growth in the
same stage of the supply chain
Mechanisms for Growth

• Internal (Organic) growth

• External growth
 Internal Growth External Growth

-Based on -Based on merger,

reinvestment takeover or
of profits or loan acquisition
capital -Riskier than internal
-Lower risk than growth
external growth -Less control
-More control -Faster than internal
-Slower than growth
external growth
 Mergers & Acquisitions:
Introduction
• Mergers & Acquisitions are common ways
companies try to grow quickly
• Unfortunately, more than 50% of mergers
fail
– Example: Daimler-Chrysler; AOL-Time-Warner
• Mergers & Acquisitions need to be part of
an overall strategy, otherwise they will
likely fail
 Mergers & Acquisitions
Merger
A B = AB

Acquisition/Takeover

A B = A
 Strategic Tactics in M&A

• Grow market share quickly (market penetration)

• Improve the use of cash on-hand
• Provide additional products for existing customers
(product development)
• Recruit hard to find personnel
• Expand into new markets (market
development/diversification)
• Gain control of brands
• Access to distribution channels
• Widen the organization’s product range
• Gain access to new technology
• Economies of scale
 Reasons for Growth:
Combinations of Foreign and
Domestic Chinese Companies

• The sales force of local Chinese

companies can be helpful in
enlarging Asian language related-
growth
• May provide a cost-effective
operation center
• Price paid is relatively lower than
other countries
 M&A Goal: Synergy

• Synergy – whole is greater than the

parts
• Concept is easily understood by the
formula 2+2=5
• Greater efficiency of the combined
organization than the two organizations
would have separately = synergy
• Value added = distinctive capability is
exploited more effectively
 Reasons for failure

• Lack of research
• Cultural incompatibility
• Lack of communication
• Loss of key personnel
• Paying too much
• Assuming growth in the target
company will always continue
Tools for M&A Evaluation

• Comparison Matrix
• Porter’s M&A Criteria
 Sample Comparison
Matrix
Company strategy is to become the industry leader in GPS mapping
software:
Requirement Company A Company B Company C
Grow share to 51 Commands 12% Commands 3% Commands 18%
percent in our
current market
Acquire 15 new Has 12 Outsources this Has 25 support
engineers for programmers; function. Contracts engineers
customer some may be ok may be
service to move to transferable.
customer service

Expand into Not a participant in Commands 24% Not a participant in

commercial this market of this market this market
aircraft GPS
Estimated $210 million $72 million $158 million
purchase price of
less than $250
million
 Porter: 3 Criteria for
Success in M&A

• Attractiveness – related to the

likelihood of making above
average profits
• Cost of entry – cost of the merger
or acquisition, including all fees
• Competitive advantage – relates to
whether synergies will be achieved
between the two companies
 Examples: M&A

• Example Acquisition:
– A recent report in a Chinese newspaper
rumored that Facebook is looking to
acquire social networking site
Zhanzhuo.com
– It would allow Facebook to enter the
Chinese market in a large way, with lower
risks than if Facebook developed its own
local Chinese site
 Examples: M&A

• Example Merger:
• In 2005, Yahoo! China and Alibaba
combined in a deal in which Yahoo!
contributed its assets in exchange for
40% of the voting stock of Alibaba
• The deal gives Alibaba access to
Yahoo!’s search technology, while
giving Yahoo! access to e-commerce
platform
 Strategic Alliances

• Strategic alliance = cooperation

between two or more companies
(example, Joint Venture)
• Types of strategic alliances:
– Focused and complex alliances
– Consortia
 Focused and Complex
Alliances

• Focused alliance – cooperation on

one or two stages of the value
chain
• Complex alliance – cooperation
over a wide range of value chain
activities
 Example: Strategic
Alliance
• NEW DELHI (Reuters) -- Wal-Mart Stores Inc., the world's biggest retailer, is
entering India's sprawling retail market through a tie up with Bharti Enterprises
Ltd., beating off a challenge from Britain's Tesco Plc.
• The joint venture will start opening stores in Asia's fourth-largest economy from
2007, and Bharti Enterprise Chairman Sunil Mittal said he expected it will have
several hundred stores across the country in the next 4 to 5 years.
• Bharti did not immediately disclose financial terms of the deal, but the Financial
Express daily said earlier this month that the two firms would initially invest
$100 million, going up to $1.46 billion, citing industry sources.
• The Indian retail industry is estimated at about $300 billion, and is forecast to
grow to $427 billion in 2010 and $637 billion in 2015, according to consultancy
Technopak Advisors. But small local stores account for 97 percent of the
market.
• "This joint venture is a winning combination. Wal-Mart's logistics skill and
Bharti's execution capability will create a potent force in the Indian market,"
Gajendra Nagpal, director at Unicorn Investments.
• "Bharti already has a retail network and is a household name in telecoms, and
this deal will prove its capabilities as a company with strong execution
capability."
• "The joint venture with equal stakes will operate in areas where the government
allows foreign investment in retail like cash-and-carry and logistics," Sunil Mittal
said.
 Consortia

• Consortium – cooperation between

2 or more organizations, usually
for a specific project
• Example: In 2006, a six-institute
consortium led by Citigroup Inc.
and China Life Insurance Group
acquired 86.5% of the shares of
Guangdong Development Bank for
24.3 billion yuan
 CSF’s for Successful
Alliances (Brouthers)

• Complementary skills
• Compatible goals
• Cooperative cultures
 Disposals

• “Spin-off” – breaking a part of the

organization off into a separate
company
• Sale of part of the organization to
another organization
 Reasons for Disposals

• Believe that the remaining organization will

perform better without the disposed of part
• Belief that shareholder value will increase for
both parts
• Allows an organization to get rid of an
underperforming business
• Allows an organization to focus on its core
business
• Allows an organization to raise funds
 Example: Spin-off
• NEW YORK (Money) -- First Data Corp. hoped to enhance the
value of its financial services businesses by spinning off
Western Union
• Western Union's chief business is person-to-person money
transfers. By separating this consumer service from
commercial businesses, First Data hoped to improve both its
balance sheet and its long-term growth prospects.
• Western Union has taken on $3.5 billion of debt, leaving First
Data with only $2.1 billion. That should give First Data the
financial flexibility to make strategic acquisitions that enhance
its services for commercial customers.
• The impact of the split on earnings growth for both companies
is more complex. Longer-term, Western Union is aiming for at
least 12 percent annual growth in earnings per share. But the
company projects only single-digit gains for the next couple of
years.
 Regulation of M&A

• EU Treaties
– EU has the power to investigate M&A
involving companies located in the
EU, and prohibit those that they
believe will negatively affect markets
and customers
• UK law
– Office of Fair Trading
– The Competition Commission
 Homework

• Read Chapter 11, Strategic

Development: Directions and
Mechanisms, pp. 210-230