BN 926 Strategy and Management of Change

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BN 926 Strategy and Management of Change

• Mergers, Acquisitions, Strategic Alliances
• and the Boundaries of the Firm
• Professor Julian Lowe

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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

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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?

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Wesfarmers

• Why did Wesfarmers diversify?
• What sort of diversification strategy did it
  follow?
• How does it manage diversification?

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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?

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Australian Diversified Industrials
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Levels of diversification

• Single business 95 of revenue comes from a
  single business
• Dominant 70 95 from a single business
• Related - lt 70 from a single business but these
  have strong links
• Unrelated - lt 70 and no strong links
• Examples in each category?

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Motives, Incentives and Resources for
Diversification

• That enhance strategic competitiveness?
• Neutral to strategic competitiveness?
• Managerial motives?

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Motives, Incentives and resources for
Diversification

• Motives to enhance strategic competitiveness
• Economies of scope (related diversification)Shari
  ng activitiesTransferring core competencies
• Market power (related diversification)Blocking
  competitors through multi-point
  competitionVertical integration
• Financial economies (unrelated diversification)Ef
  ficient 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

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Related Diversification

• Operational relatedness?
• Corporate relatedness?
• Market power?

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Unrelated diversification

• Financial economies
• Efficient internal capital market allocation
• Restructuring and sell - off

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• Value

Value-creating strategies of diversification
Operational and corporate relatedness
High
Sharing Operational relatedness between
businesses
Low
Low
High

• Corporate relatedness Transferring skills into
  businesses through corporate headquarters
• Source Hanson, Dowling, Hitt, Ireland
  Hoskisson p203

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Incentives for diversification

• Low performance
• Uncertain future cash flows
• Firm risk reduction

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Resources required for diversification

• Tangible
• Intangible

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Mergers and Acquisitions (MA)

• Current scope of mergers?
• Why are MA popular?
• Why MA and not internal growth?
• Conflict between MA and competitive strategy?
• Attributes of MA that influence competitive
  success?
• The nature of restructuring?

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Extent?

• 1999 US3.4 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.

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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 acquirers
  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.

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Reasons for acquisitions and problems in
achieving successSource Hanson, Dowling, Hitt,
Ireland Hoskisson p243

• 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
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Attributes of successful acquisitions
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Restructuring and outcomes
Alternatives Short-term outcomes Long-term
outcomes

• Source Hanson, Dowling, Hitt, Ireland
  Hoskisson p258

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Some Diagnostics
IPR and complementary assets
control v. risk
strategic impact/relative competences
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Boundaries of the firm

• Examine why we have firms
• How they can be improved
• The value of strategic alliances

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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

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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

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Alliance v. Acquisition
Infeasibility
Alliance v. Acquisitions
Information asymmetry
Indigestibility
Investment in options
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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
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Strategic Alliances Definitions and Distinctions

• Collaboration
• Networks
• Partnerships
• Alliances
• Joint Ventures
• Consortia
• Constellations
• vertical and/or horizontal

School of Strategic Management, Bristol Business
School
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Traditional Competition
single firms
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Collective Competition
pair
triad
group
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Theoretical Perspectives

• Transaction costs
• Scale
• Risk
• Control
• Agency
• Synergy
• Knowledge transfer

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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

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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
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Small Firm Large Firm Issues

• Large Firms
• Growth and sales
• Partners R D
• Additional resources
• Preempt compn

• Small Firms
• Exploit technology
• Access foreign markets
• Access reputation and expertise
• Access finance
• Share risk

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Some Diagnostics
IPR and complementary assets
control v. risk
strategic impact/relative competences
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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
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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
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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
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Strategic Alliances The Network Organisation
DISTRIBUTORS
CORE FIRM
STABLE NETWORK
SUPPLIERS
School of Strategic Management, Bristol Business
School
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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
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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
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Strategic Alliances The View From a Guru

• Individual excellence
• Importance
• Interdependence
• Investment
• Information
• Integration
• Institutionalisation
• Integrity

strategictacticaloperationalinterpersonalcultu
ral
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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

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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

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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?