Strategic Approaches in M&A

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A new world faces us in this new Information age A new global market with an extensive competitive landscape.

Ever changing business dynamics compelling businesses to be more responsive to changes in the external environment.
Menacing speed of technological developments changing business equations almost on a daily basis. New businesses being created and old models disappearing in a matter of clicks. 27-Mar-12

These changes are leading to the emergence of unique trends in the way people do business globally.
Businesses are positioning them strategically to meet the challenges of this global economy.
Businesses are entering into cross border alliances to broad base their networks. Industries are going through phases of consolidation to build and harness advantages of mass. Businesses are diversifying to spread risk functionally and globally. 27-Mar-12

ENVIRONMENT
Globalisation Deregulation Disintermediation

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Implications for companies

Cost led Pricing to price led costing Convert business costs to value for the customer Access to funds Explosion in connectivity

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Strategy is about positioning an organization for sustainable competitive advantage.

It involves making choices about which industries to participate in, what products and services to offer, and how to allocate corporate resources to achieve a sustainable competitive advantage. And its primary goal is to create value for shareholders and other stakeholders by providing customer value (de Kluyver, 2000).

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COMPETITIVE ADVANTAGE
A competitive advantage has three key characteristics: 1. it provides superior value to customers 2. it is hard to imitate 3. it enhances ones ability to respond to changes in the environment.

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SOURCES OF COMPETITIVE ADVANTAGE

Government subsidy or support Established or monopolistic markets Product innovation Process innovation, Cost efficiencies Superior Service Human Resource Management
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Competitive Positioning
Cost Position High Cost Low Cost Position Position Product Differentiation High Product Differentiation Differentiation & Cost Leadership Overall Cost Leadership

Low

Stuck in The Middle

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Types of Competitive Advantage and Sustainability

Generic strategies
Overall cost leadership
Low-cost-position relative to competitors Manage relationships throughout the entire value chain

Differentiation
Create products and/or services that are unique and valued Non-price attributes for which customers will pay a premium
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90 80 70 60 50 $ 40 30 20 10 0
Average Competitor Low Cost Strategy Differentiation Strategy

Cost Price Profit

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Conditions Suitable for Seeking a Cost Advantage

Nature of the product does not allow benefit enhancement Consumers relatively price sensitive and Product is a search good rather than an experience good
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Overall Cost Leadership

Aggressive construction of efficient-scale facilities Vigorous pursuit of cost reductions from experience Tight cost and overhead control Avoidance of marginal customer accounts Cost minimization in all activities in the firms value chain, such as R&D, service, sales force, and advertising
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Pitfalls of Overall Cost Leadership Strategies

Too much focus on one or a few valuechain activities All competitors share a common input or raw material Erosion of cost advantages when the pricing information available to customers increases

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Differentiation Advantage
Consumers are willing to pay a premium for benefit enhancements Economies of scale and learning have been already exploited and differentiation is the best route to value creation and Experience good
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Differentiation
Several dimensions at once Achieve and sustain above-average profits when price premiums exceed extra costs of being unique Speed or quick response

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Differentiation
Differentiation can take many forms
Prestige or brand image Technology Innovation Features Customer service Dealer network
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Potential Pitfalls of Differentiation Strategies

Uniqueness that is not valuable Too high a price premium Differentiation that is easily imitated Dilution of brand identification through product-line extensions

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Change Creates Value

Value Creation

Sub-Functional Cost Reduction

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Process Improvement

Process Innovation

Business Redefinition
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Scope

Resources and Capabilities

Specific assets like patents and trademarks
Physical assets, non-tangible assets (brand reputation), location e.g. William

Capabilities are things that the firm does better than its rivals
E.g. HLLs skills in brand promotion, 3Ms ability to innovate, Dell aggressive negotiator to suppliers
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Focus
Focus is based on the choice of a narrow competitive scope within an industry
Firm selects a segment or group of segments (niche) and tailors its strategy to serve them Firm achieves competitive advantages by dedicating itself to these segments exclusively

Two variants
Cost focus Differentiation focus

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Essential Elements in Strategic planning process

Assessment of changes in the environment Evaluation of company capabilities and limitations Assessment of expectations of stakeholders Analysis of company, competitors, domestic economy and international economies. Formulate long range strategy program Organisation, funding to implement the strategy Info flow and feedback Review and evaluation
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Strategy Methodologies
SWOT or WOTS UP Analysis GAP analysis : goals v/s forecasts Top Down and/or Bottom Up : Company forecasts v/s aggregation of segments Computer models Competitive analysis Synergy Comparative histories: learn from others experiences Delphi technique: iterated opinion reactions Game theory: logical assessment of competitors actions and reactions Game playing: assign roles and stimulate alternative scenarios.

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BCGs Growth-Share Matrix

High Share Low Share

Growth Share Matrix

High Growth
Star Cash Cow

?
Question Mark Dog

Slow Growth

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The Industry AttractivenessBusiness Strength Matrix

Industry Attractiveness
High Medium Low

Business Strength

High

Investment and Growth

Selective Growth

Selectivity

Medium

Selective Growth

Selectivity

Harvest/ Divest

Low

Selectivity

Harvest/ Harvest/ Divest Divest

Harvest/ Harvest/ Divest Divest

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BCG
Experience Curve: Volume-Cost relationship. A strategy of early entry and price policies to develop. Product life cycle: Development and growth sales growth is rapid and entry is easy. Maturity and decline experience curve becomes unprofitable and firms merge or exit. Portfolio balance: Seeks to combine attractive investment segments (Stars) with cash generating segments (Cash cows), eliminating unattractive prospects (Dogs). Overall, total corporate cash inflows will roughly balance total corporate investments.
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BCG some thoughts..

Volume cost maintained by some firms only. Cost advantages neglect product quality, variety and innovations. Portfolio balance may be inconsistent with the maximisation of shareholder value. If many firms develop the same model, the efforts may be self-cancelling.
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Porter Approach
Select an attractive industry Develop competitive advantage through cost leadership Develop attractive value chains

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Attractive industry
Porter defines . entry barriers are high, suppliers and buyers have only modest bargaining power, substitute products or services are few, and rivalry among competitors is stable.

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Cost leadership and Value Chain

The focus could be only on narrow market segments or niches, broader markets or across the board.

Value chain matrix relates to HRM, infrastructure, technology development, logistics, operations etc. The aim is to minimise outlays and adding characteristics valued by customers.
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Porter Model some thoughts

If barriers to entry are high, costs of entry or acquisition will permit only a normal rate of return. Benefits of competitive advantages outweigh the gains from the attempts to collude (merge).

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Stages of the Industry Life Cycle

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Strategies in the Introduction Stage

Products are unfamiliar to consumers Market segments not well defined Product features not clearly specified Competition tends to be limited
Strategies Develop product and get users to try it Generate exposure so product becomes standard
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Strategies in the Growth Stage

Characterized by strong increases in sales Attractive to potential competitors Primary key to success is to build consumer preferences for specific brands
Strategies Brand recognition Differentiated products Financial resources to support value-chain activities
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Strategies in the Maturity Stage

Aggregate industry demand slows Market becomes saturated, few new adopters Direct competition becomes predominant Marginal competitors begin to exit
Strategies Efficient manufacturing operations and process engineering Low costs (customers become price sensitive)
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Strategies in the Decline Stage

Industry sales and profits begin to fall Strategic options become dependent on the actions of rivals
Strategies Maintaining Exiting the market Harvesting Consolidation

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Every CEO has to spend an enormous amount of time shuffling papers. The question is, how much of your time can you leave free to think about ideas? To me the pursuit of ideas is the only thing that matters. You can always find capable people to do almost everything else.
Michael Eisner, Fortune, December 4, 1989, page 116.

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Stages of the Industry Life Cycle

Stage Factor Generic strategies Market growth rate Number of segments Intensity of competition Emphasis on product design Introduction Growth Maturity Decline

Differentiation Differentiation Differentiation Overall cost Overall cost leadership leadership Focus Low Very few Low Very high Very large Some Increasing High Low to moderate Many Very intense Low to moderate Negative Few Changing Low

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Stages of the Industry Life Cycle

Stage Factor Emphasis on process design Major functional area(s) of concern Overall objective Introduction Low Growth Low to moderate Maturity High Decline Low

Research and Sales and Development marketing

Production

General management and finance Consolidate, maintain, harvest, or exit

Increase market share awareness

Create consumer demand

Defend market share and extend product life cycles

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