Module 2

M&A–A
strategic
perspective
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
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
Essential elements in strategic
planning
• Assessment of changes in environment
• Evaluation of capabilities and limitations
• Assessment of stakeholders’ expectations
• Analysis of company, competitors, industry,
domestic economy, and international
economies
• Formulation of the missions, goals, and
policies for the master strategy
• Development of sensitivity to critical
environmental changes
Contd….
• Formulation of performance measurements and
benchmarks
• Formulation of long-range strategy programs
• Formulation of mid-range programs and short-run
plans
• Organization, funding, and other methods to
implement all of the preceding elements
• Information flow and feedback system for
continued repetition of above activities and for
adjustments and changes at each stage
• Review and evaluation of above processes
 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
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
Organization cultures
Corporate cultures affect
strategic thinking and
planning
Failure to mesh divergent
cultures is a major obstacle to
successful merger integration
Alternative strategy methodologies
• SWOT or WOTS UP - inventory and analysis of organizational
strengths, weaknesses, environmental opportunities and
threats
• Gap analysis - assessment of goals versus forecasts or
projections
• Top-down or Bottom-up - relate to company forecasts versus
aggregation of forecasts of segments
• Computer models - opportunity for detail and complexity
Contd…
• Competitive analysis - assess customers,
suppliers, new entrants, products, and
product substitutability
• Synergy - look for complementarities
• Logical incrementalism - well-supported
moves from current bases
• Muddling through - incremental changes
selected from a small number of policy
alternatives
• Comparative histories - learn from the
experiences of others
Contd…
• Delphi technique - iterated opinion
reactions from selected groups
• Discussion group technique - stimulating
ideas by unstructured discussions aimed at
consensus decisions
• Adaptive processes - periodic reassessment
of environmental opportunities and
organization capability adjustments
required
• Environmental scanning - continuous
analysis of all relevant environments
• Intuition - insights of brilliant managers
Contd…
• Entrepreneurship - creative
leadership
• Discontinuities - crafting strategy
from recognition of trend shifts
• Brainstorming - free-form repeated
exchange of ideas
• Game theory - logical analysis of
competitor actions and reactions
• Game playing - assign roles and
simulate alternative scenarios
 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
Contd…
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
Contd…
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
Contd…
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
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)
Michael Porter Approach (1980,
1985, 1987)

Select attractive industry — Five Forces

Diagram
Develop competitive advantage through
cost leadership, product differentiation,
or focus
Develop attractive value chains
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
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 ways to close gap
Select alternatives for analysis
Cost/benefit analysis of alternatives
Tentative selection — formulate plans
and actions
Contd…
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
 Evaluation of Alternative
Approaches to Strategy

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
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
Matrix analysis
Product-market matrix
Product
Present Related Unrelated
Market

Low High
Present
Risk Risk

Related

High Highest
Unrelated
Risk Risk
Competitive-position matrix
Product Cost
Differentiation Leadership

Narrow
Focus

BroadRange
of Markets
Growth-share matrix

Market Growth Rate

Market Share

High Low

High
Star
Question
Product
Marks
Performers

Low
Cash
Dogs
Cows

Strength-market attractiveness
matrix
Industry Attractiveness
High Medium Low
Business Strengths

Medium High

Invest /
Grow
Low

Harvest /
Divest
Global strategy
Country Attractiveness
High Medium Low

Invest /
High

Grow
Business Strengths

Medium

Harvest /
Low

Divest
Formulating a competitive
strategy
 Environmental reassessment

 It helps to provide the firm with a

choice among strategic alternatives

 A strategic choice is made from this

set such that the chosen strategy
best relates the firm’s situation to
external opportunities and threats.
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
Grove (1996)
Firm must adjust to six forces

Existing competitors
Potential competitors
Complementors
Customers
Suppliers
Industry transformation
 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
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
  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
 Connection between strategic
planning and merger

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

 Strategy and Structure

Unitary or U-Form

President

V.P. V.P. V.P. V.P.

Research Production Marketing Finance
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
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
Holding company or H-Form

President
Accounting and Finance

Autos Movies Toys Food

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
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
Multidivisional organization or M-Form

President

Division 1 Division 2 Division 3 ...Division 10

Production Marketing
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
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
Matrix form

President

Product A Product B Product C

Research
Manager
Production
Manager
Marketing
Manager
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
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