BN 926 Strategy and Management of Change. Mergers, Acquisitions, Strategic Alliances and the Boundaries of the Firm Professor Julian Lowe. Aims. To highlight corporate considerations in strategy To examine diversification as a strategy
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BN 926 Strategy and Management of Change Mergers, Acquisitions, Strategic Alliances and the Boundaries of the Firm Professor Julian Lowe
Aims To highlight corporate considerations in strategy To examine diversification as a strategy To understand the nature of the firm and its limitations To assess where mergers, or acquisitions or alliances are most appropriate To assess the impact and importance of scale, scope and transaction costs on the size, scope and nature of the firm
Questions • What determines the scale and scope of your organisation? How does it differ from its competitors? • What is diversification and why diversify? • Why do mergers fail? • Why has there been a boom in alliances? What are the dangers? • Are alliances and partnerships different in Asia/Europe/N. America?
Wesfarmers • Why did Wesfarmers diversify? • What sort of diversification strategy did it follow? • How does it manage diversification?
Diversification • Define corporate strategy and its importance to the diversified firm • Explain why firms move from a single business strategy to a multi business strategy? • How do diversified firms create value? • Related/unrelated? • What incentives and resources help manage diversified businesses • Why do diversified businesses go wrong?
Levels of diversification • Single business – 95% of revenue comes from a single business • Dominant – 70 – 95% from a single business • Related - < 70% from a single business but these have strong links • Unrelated - < 70% and no strong links • Examples in each category?
Motives, Incentives and Resources for Diversification • That enhance strategic competitiveness? • Neutral to strategic competitiveness? • Managerial motives?
Motives, Incentives and resources for Diversification • Motives to enhance strategic competitiveness • Economies of scope (related diversification)Sharing activitiesTransferring core competencies • Market power (related diversification)Blocking competitors through multi-point competitionVertical integration • Financial economies (unrelated diversification)Efficient internal capital allocationBusiness restructuring • Incentives and resources with neutral effects on strategic competitiveness • Antitrust regulation • Tax laws • Low performance • Uncertain future cash flows • Risk reduction for firm • Tangible resources • Intangible resources • Managerial motives (value reduction) • Diversifying managerial employment risk • Increasing managerial compensation
Related Diversification • Operational relatedness? • Corporate relatedness? • Market power?
Unrelated diversification • Financial economies • Efficient internal capital market allocation • Restructuring and sell - off
Value Value-creating strategies of diversification: Operational and corporate relatedness High Sharing: Operational relatedness between businesses Low Low High Corporate relatedness: Transferring skills into businessesthrough corporate headquarters Source: Hanson, Dowling, Hitt, Ireland & Hoskisson p203
Incentives for diversification • Low performance • Uncertain future cash flows • Firm risk reduction
Resources required for diversification • Tangible • Intangible
Mergers and Acquisitions (M&A) • Current scope of mergers? • Why are M&A popular? • Why M&A and not internal growth? • Conflict between M&A and competitive strategy? • Attributes of M&A that influence competitive success? • The nature of restructuring?
Extent? • 1999 – US$3.4 trillion world – wide • Why? – internet, cross border/wto, fad • Result- 1999 KPMG report – 83% failed to increase shareholder wealth in acquiring firms. 53% significantly reduced shareholder wealth.
KPMG 2005 survey • The biennial survey, which was undertaken in conjunction with an independent research company, is the third in the series and looks at major global deals completed during 2000/20001. The survey shows that a higher proportion of deals now enhance value for the acquirer’s shareholders. At 34 percent the figure is double that in our 1999 survey, and for the first time it exceeds the proportion reducing value. Indeed, if the measure is restricted to post-acquisition performance only, then 52 percent of deals can be said to enhance value, up from 36 percent in 2001.
Reasons for acquisitions and problems in achieving successSource: Hanson, Dowling, Hitt, Ireland & Hoskisson p243 Increased market power Integration difficulties Inadequate evaluation of target Large or extraordinary debt Acquisitions Inability to achieve synergy Too much diversification Managers overly focused on acquisitions Too large Reasons for acquisitions Problems in achieving success Overcome entry barriers Cost of new product development Increased speed to market Lower risk compared to developing new products Increased diversification Avoid excess competition
Reduced labour costs Loss of human capital Downsizing Reduced debt costs Lower performance Downscoping Emphasis on strategic controls Higher performance Leveraged buyout High debt costs Higher risk Restructuring and outcomes Alternatives Short-term outcomes Long-term outcomes Source: Hanson, Dowling, Hitt, Ireland & Hoskisson p258
Some Diagnostics IPR and complementary assets control v. risk strategic impact/relative competences
Boundaries of the firm • Examine why we have firms • How they can be improved • The value of strategic alliances
Quote – Day, J., & Wendler, J.C. (1998) ‘The New Economics of Organisation’ McKinsey Quarterly No. 1. Pp 5 – 18. • In their present forms, markets motivate and hierarchies coordinate • Have we learned to combine the best of both • Two challenges for the corporation of the future: Entrepreneurialism and knowledge
Problems With Modern Corporation • Central control • Costly consensus building • Lack of entrepreneurship/motivation • Extensive path dependencies Can disaggregation help? Internal – but corrupted and planning interventions External – loss of control and potential synergy
Alliance v. Acquisition Infeasibility Alliance v. Acquisitions Information asymmetry Indigestibility Investment in options
Relational Forms Personal initiative Market Relational forms External disaggregation Internal disaggregation Hierarchy Enforced cooperation and coordination Relational forms – making coordinated moves in a more entrepreneurial environment
Strategic Alliances: Definitions and Distinctions • Collaboration • Networks • Partnerships • Alliances • Joint Ventures • Consortia • Constellations • …… vertical and/or horizontal School of Strategic Management, Bristol Business School
Traditional Competition single firms
Collective Competition pair triad group
Theoretical Perspectives • Transaction costs • Scale • Risk • Control • Agency • Synergy • Knowledge transfer
Alliances and Constellations • Alliance • incomplete or open contract between separate firms, involving shared control • Constellation • set of firms linked through alliances • alternative to a single firm as a way to control a set of capabilities needed to compete in a given context
Strategic Alliances: Rationales Increasing Development Costs Shorter Product Life-cycles Building new businesses or introducing new products SpeedNPD New generation of product technology Develop upstream technology INCREASING ATTRACTIVENESS OF STRATEGIC ALLIANCES Increase capacity utilisation Achieve market penetration Exploit economies of scale Improving economics of existing business Fill product line gaps Increasing Cost Pressures Globalisation
Small Firm : Large Firm Issues • Large Firms • Growth and sales • Partners R & D • Additional resources • Preempt comp’n • Small Firms • Exploit technology • Access foreign markets • Access reputation and expertise • Access finance • Share risk
Some Diagnostics IPR and complementary assets control v. risk strategic impact/relative competences
Strategic Alliances: Pitfalls • Transaction costs • Diffusion of Strategic Assets • Appropriation of Competitive Advantage • Effect on Competitiveness and Innovation School of Strategic Management, Bristol Business School
Strategic Alliances: Reasons for Failure • Not enough attention paid to detail • Different strategic goals • Lack of top executive commitment • Mutual trust failed to develop • Organisational culture differences • Change in partner objectives School of Strategic Management, Bristol Business School
Strategic Alliances: The Problem of Fit Collaborative Advantage if Cultural Adjustment Optimal Collaborative Advantage + strategic fit No Compatibility or Collaborative Advantage Compatible but no Collaborative Advantage - - + cultural fit School of Strategic Management, Bristol Business School School of Strategic Management, Bristol Business School
Strategic Alliances: The Network Organisation DESIGN DESIGN SUPPLY SUPPLY BROKER BROKER MARKETING & DISTRIBUTION MARKETING & DISTRIBUTION PRODUCTION PRODUCTION DISTRIBUTORS CORE FIRM STABLE NETWORK SUPPLIERS School of Strategic Management, Bristol Business School
Strategic Alliances: New Managerial Roles • Move to boundary spanning roles • More emphasis on (less) human resources • New control strategies • Acceptance of organisation as an open network system • Politics and conflicts • Organising learning processes • Incongruence and divergence between authority and responsibility • Changing labour relations School of Strategic Management, Bristol Business School
Strategic Alliances:Design and Management Issues • Goal congruence and strategic compatibility • Trust and mutual interaction • Structural and cultural compatibility • Communication and systems compatibility • Interaction and transaction costs • Flexibility within strategic control School of Strategic Management, Bristol Business School
Strategic Alliances: The View From a Guru • Individual excellence • Importance • Interdependence • Investment • Information • Integration • Institutionalisation • Integrity strategictacticaloperationalinterpersonalcultural
Strategic Issues Pre and Post Alliance Capture value : Ownership of assets that are scarce and complementary • brand • supply chain • technology Control of ‘stickiness’ • facilitate transfer and absorption but guard against loss of critical knowledge Maintain large surface area of contact • disaggregation provide more access points for knowledge management Control costs of coordination • disaggregation can go too far
The Future • No one way • Innovative forms of joint ownership • Further growth through growth of connectivity • Trust v. Contract v. Guanxi • Focus on the strategic
Questions • How do transaction costs influence the scale and scope of an enterprise? • Does the failure of many mergers mean we will see fewer of them? • What impact on scale and scope of the firm and alliances will we see from capital markets, technology change, and globalisation?