Management for All

Sunday, January 20, 2013

STRATEGIC ALLIANCE

STRATEGIC ALLIANCE

From software to steel, aerospace to apparel, the pace of strategic alliances worldwide is accelerating. A strategic alliance is an agreement between firms to do business together in ways that go beyond normal company-to-company dealings, but fall short of a merger or a full partnership. Strategic alliances can be as simple as two companies sharing their technological and/or marketing resources. In contrast, they can be highly complex, involving several companies, located in different countries. Strategic alliances are becoming more and more prominent in the global economy.

Strategic alliances enable business to gain competitive advantage through access to a partner’s resources, including markets, technologies, capital and people. Teaming up with others adds complementary resources and capabilities, enabling participants to grow and expand more quickly and efficiently. Strategic alliances also benefit companies by reducing manufacturing costs, and developing and diffusing new technologies rapidly. Any firm opting for strategic alliance incurs certain costs and risks compared to a firm going alone. These risks include the loss of operational control and confidentiality of proprietary information and technology. In addition, the parties may deprive themselves of future business opportunities with competitors of their strategic partner. Alliances also raise the spectre of potential conflicts, loss of autonomy, difficulties in coordination and management, mismatch of cultures, etc.

TYPES OF STRATEGIC ALLIANCES

Thursday, January 3, 2013

M & A AND STEPS IN M & A

WHAT IS M & A ? WHY M & A ? STEPS IN M & A DEAL ?

MERGERS AND ACQUISITIONS (M&A)

Mergers and acquisitions and corporate restructuring - or M&A for short - are a big part of the corporate finance. One plus one makes three: this equation is the special alchemy of a merger or acquisition. The key principle behind buying a company is to create shareholder value over and above that of the sum of the two companies. Two companies together are more valuable than two separate companies -at least, that’s the reasoning behind M&A. This idea is particularly attractive to companies when times are tough. Strong companies will act to buy other companies to create a more competitive, cost-efficient company. The companies will come together hoping to gain a greater market share or achieve greater efficiency. Because of these potential benefits, target companies will often agree to be purchased when they know they cannot survive alone.

A corporate merger is essentially a combination of the assets and liabilities of two firms to form a single business entity. Although they are used synonymously, there is a slight distinction between the terms ‘merger’ and ‘acquisition’. Strictly speaking, only a corporate combination in which one of the companies survives as a legal entity is called a merger. In a merger of firms that are approximate equals, there is often an exchange of stock in which one firm issues new shares to the shareholders of the other firm at a certain ratio. In other words, a merger happens when two firms, often about the same size, agree to unite as a new single company rather than remain as separate units. This kind of action is more precisely referred to as a “merger of equals.” Both companies’ stocks are surrendered, and new company stock is issued in its place. When a company takes over another to become the new owner of the target company, the purchase is called an acquisition. From the legal angle, the ‘target company’ ceases to exist and the buyer “gulps down” the business and stock of the buyer continues to be traded.

In summary, “acquisition” is generally used when a larger firm absorbs a smaller firm and “merger” is used when the combination is portrayed to be between equals. For the sake of discussion, the firm whose shares continue to exist (possibly under a different company name) will be referred to as the acquiring firm and the firm’s whose shares are being replaced by the acquiring firm will be referred to as the target firm. However, a merger of equals doesn’t happen very often in practice. Frequently, a company buying another allows the acquired firm to proclaim that it is a merger of equals, even though it is technically an acquisition. This is done to overcome some legal restrictions on acquisitions.

Sunday, December 30, 2012

DIVERSIFICATION

WHAT IS DIVERSIFICATION ? TYPES OF DIVERSIFICATION AND WHY DIVERSIFICATION ?

DIVERSIFICATION :

Diversification involves moving into new lines of business. When an industry consolidates and becomes mature, most of the firms in that industry would have reached the limits of growth using vertical and horizontal growth strategies. If they want to continue growing any further the only option available to them is diversification by expanding their operations into a different industry. Diversification strategies also apply to the more general case of spreading market risks: adding products to the existing lines of business can be viewed as analogous to an investor who invests in multiple stocks to “spread the risks”. Diversification into other lines of business can especially make sense when the firm faces uncertain conditions in its core product-market domain.

While intensification limits the growth of the firm to the existing businesses of the firm, diversification takes it beyond the confines of the current product-market domain to uncharted and unfamiliar products- market territory. In other words, this strategy steers the organization away from both its present products and its present market simultaneously. Of the various routes to expansion, diversification is definitely the most complex and risky route. Diversification approach to expansion is complex since it seeks to enter new product lines, processes, services or markets which involve different skills, processes and knowledge from those required for the current business. It is risky since it involves deviating from familiar territory: familiar products and familiar markets.

Wednesday, November 28, 2012

INTERNATIONAL EXPANSION

INTERNATIONAL EXPANSION

An organization can “go international” by crossing domestic borders as it employs any of the strategies discussed above. International expansion involves establishing significant market interests and operations outside a company’s home country. Foreign markets provide additional sales opportunities for a firm that may be constrained by the relatively small size of its domestic market and also reduces the firm’s dependence on a single national market. Firms expand globally to seek opportunity to earn a return on large investments such as plant and capital equipment or research and development, or enhance market share and achieve scale economies, and also to enjoy advantages of locations. Other motives for international expansion include extending the product life cycle, securing key resources and using low-cost labour. However, to mold their firms into truly global companies, managers must develop global mind-sets. Traditional means of operating with little cultural diversity and without global competition are no longer effective firms (Kedia and Mukherji, 1999).

International expansion is fraught with various risks such as, political risks (e.g. instability of host nations) and economic risks (e.g. fluctuations in the value of the country’s currency). International expansions increases coordination and distribution costs, and managing a global enterprise entails problems of overcoming trade barriers, logistics costs, cultural diversity, etc.

Saturday, November 24, 2012

EXPANSION STRATEGIES

EXPANSION STRATEGIES

Every enterprise seeks growth as its long-term goal to avoid annihilation in a relentless and ruthless competitive environment. Growth offers ample opportunities to everyone in the organization and is crucial for the survival of the enterprise. However, this is possible only when fundamental conditions of expansion have been met. Expansion strategies are designed to allow enterprises to maintain their competitive position in rapidly growing national and international markets. Hence to successfully compete, survive and flourish, an enterprise has to pursue an expansion strategy. Expansion strategy is an important strategic option, which enterprises follow to fulfil their long-term growth objectives. They pursue it to gain significant growth as opposed to incremental growth envisaged in stability strategy. Expansion strategy is adopted to accelerate the rate of growth of sales, profits and market share faster by entering new markets, acquiring new resources, developing new technologies and creating new managerial capabilities.

Expansion strategy provides a blueprint for business enterprises to achieve their long term growth objectives. It allows them to maintain their competitive advantage even in the advanced stages of product and market evolution. Growth offers economies of scale and scope to an organization, which reduce operating costs and improve earnings. Apart from these advantages the organization gains a greater control over the immediate environment because of its size. This influence is crucial for survival in mature markets where competitors aggressively defend their market shares.

Conditions for Opting for Expansion Strategy

Wednesday, November 21, 2012

STABILITY STRATEGY

STABILITY OR CONSOLIDATION STRATEGY

Nature Of Stability Strategy

A firm following stability strategy maintains its current business and product portfolios; maintains the existing level of effort; and is satisfied with incremental growth. It focuses on fine-tuning its business operations and improving functional efficiencies through better deployment of resources. In other words, a firm is said to follow stability/ consolidation strategy if:

It decides to serve the same markets with the same products;
It continues to pursue the same objectives with a strategic thrust on incremental improvement of functional performances; and
It concentrates its resources in a narrow product-market sphere for developing a meaningful competitive advantage.

Monday, November 19, 2012

CORPORATE STRATEGIES

CORPORATE STRATEGIES

Growth is essential for an organization. Organizations go through an inevitable progression from growth through maturity, revival, and eventually decline. The broad corporate strategy alternatives, sometimes referred to as grand strategies, are: stability/consolidation, expansion/growth, divestment/ retrenchment and combination strategies. During the organizational life cycle, managements choose between growth, stability, or retrenchment strategies to overcome deteriorating trends in performance.

Just as every product or business unit must follow a business strategy to improve its competitive position, every corporation must decide its orientation towards growth by asking the following three questions:

v Should we expand, cut back, or continue our operations unchanged?

v Should we concentrate our activities within our current industry or should we diversify into other industries?

v If we want to grow and expand nationally and/or globally, should we do so through internal development or through external acquisitions, mergers, or strategic alliances?

MANAGEMENT STRATEGIES

MANAGEMENT STRATEGIES AT DIFFERENT BUSINESS LEVEL

Management Strategies deals with the issues, concepts, theories approaches and action choices related to an organization’s interaction with the external environment. Strategy, in general, refers to how a given objective will be achieved. Strategy, therefore, is mainly concerned with the relationships between ends and means, that is, between the results we seek and the resources at our disposal. For the most part, strategy is concerned with deploying the resources at your disposal whereas tactics is concerned with employing them. Together, strategy and tactics bridge the gap between ends and means.

Some organizations are groups of different business and functional units, each of them must be having its own set of goals, which may not necessarily be same as the goals of the corporate headquarters looking after the interests of the entire organization. Since the goals are different and the means to achieve them are different, strategies are likely to be different. This understanding has led to the hierarchical division of strategy at two levels: a business-level (competitive) strategy and a company-wide strategy (corporate strategy) (Porter, 1987). In addition to these strategies, many authors also mention functional strategies, practiced by the functional units of a business unit, as another level of strategy.

Corporate Strategies: These are concerned with the broad, long-term questions of “what businesses are we in, and what do we want to do with these businesses?” The corporate strategy sets the overall direction the organization will follow. It matters whether a firm is engaged in one or several businesses. This will influence the overall strategic direction, what corporate strategy is followed, and how that strategy is implemented and managed. Corporate strategies vary from drastic retrenchment through aggressive growth. Top management need to carefully assess the environment before choosing the fundamental strategies the organization will use to achieve the corporate objectives.

Friday, October 26, 2012

COST FOCUS

COST FOCUS

The third business level strategy is focus. Focus is different from other business strategies as it is segment based and has narrow competitive scope. This strategy involves the selection of a market segment, or group of segments, in the industry and meeting the needs of that preferred segment (or niche) better than the other market competitors (Bolter & Mcmanus, 1999). This is also known as a niche strategy. In focus strategy, the competitive advantage can be achieved by optimizing strategy for the target segments.

Focus strategy has two variants. They are:

1. Cost Focus; and

2. Differentiation Focus

Cost focus is where a firm seeks a cost advantage in the target segment; and Differentiation focus where a firm seeks differentiation in the target segment (Cherumilan, 2004). We shall discuss these variants later.

Wednesday, October 24, 2012

DIFFERENTIATION

DIFFERENTIATION

CONCEPT OF DIFFERENTIATION :

Every individual customer is unique in itself so is his/her preferences regarding tastes, preferences, attitudes, etc. These needs of the customers are fulfilled by the firms by producing differentiated products. In our day-to-day life we see many such examples of differentiated products. Most of the fast moving consumer goods like; biscuits, soaps, toothpastes, oils, etc. come under the category of differentiated products. To satisfy the diverse needs of the customers, it becomes essential for the firms to adopt a differentiation strategy. To make this strategy successful, it is necessary for the firms to do extensive research to study the different needs of the customers. A firm is able to differentiate from its competitors if it is able to position itself uniquely at something that is valuable to buyers. Differentiation can lead to Differential advantage in which the firm gets the premium in the market, which is more than the cost of providing differentiation. The extent to which the differentiation occurs depends on the overall strategy of the firm. Previously differentiation was viewed narrowly by the firms, but in the present scenario it has become one of the essential components of the firm’s strategy. Reliance Infocomm, offers varied products like; different facilities to its customers in the CDMA telephones. This is differentiation.

When we talk of differentiation, it can be said that virtually any product can be differentiated (Sadler, 2004). The greatest potential of differentiation lies in products, which are of complex nature but do not have to adhere to strict regulatory standards, but the success of a differentiation strategy depends on the firm’s commitment towards customers and the understanding of customer needs as differentiation is all about perceiving on the part of the customer of something unique. Differentiation can be said to have more competitive advantage than the cost advantage as it is quite difficult to imitate the differentiated products. Even if the initiation is done in terms of concept, then also a particular product remains unique regarding its value, style, packaging, etc. Therefore, when we talk about differentiation, it is important to understand the demand of the customers and fulfilling this demand keeping in mind the differentiation advantage. In this case, one thing the firms should concentrate on its creativity and innovativeness than on market research. We have discussed about the concept of differentiation as a whole but we need to know the why aspect of differentiation, i.e., why do the firms need differentiation?

Thursday, October 18, 2012

COST LEADERSHIP

COST LEADERSHIP

The firms operating in this highly competitive environment are always on the move to become successful. To strive in this competitive environment the firms should have an edge over the competitors. To develop competitive advantage, the firms should produce good quality products at minimum costs etc. This means that the firms should provide high quality at low cost so that the customer gets the best value for the product he/she is buying. Therefore, it becomes necessary for the firms to have a strategic edge towards its competitors. One such competitive strategy is overall cost leadership, which aims at producing and delivering the product or service at a low cost relative to its competitors at the same time maintaining the quality. According to Porter, following are the prerequisites of cost leadership (Cherunilam, 2004):

1) Aggressive construction of efficient scale facilities;

2) Vigorous pursuit of cost reduction from experience;

3) Tight cost and overhead control;

4) Avoidance of marginal customer accounts;

5) Cost minimization.

According to Porter cost leadership is perhaps the clearest of the three generic or business level strategies (Bolten & McManus, 1999). To sustain the cost leadership throughout, the firm must be clear about its accomplishment through different elements of the value chain. Figure-1 shows a matrix of the three generic competitive strategies and their interrelationship given by Porter.

Figure-1 : Three Generic Competitive Strategy

Saturday, October 13, 2012

COST STRATEGY TO GAIN COMPETITIVE ADVANTAGE

WHAT IS COST STRATEGY ? HOW TO GAIN COMPETITIVE ADVANTAGE THROUGH COST STRATEGY ?

Cost analysis occupies an important place in business strategy. In order to gain and sustain competitive advantage, a firm should not only monitor its cost performance but also should endeavour to control it. Several strategic decisions like fixation of competitive prices, provision of after-sale services, quality of the products etc. depend upon relative cost level of the business firm. The role of cost in different market conditions is to be examined. The Experience Curve analysis is also important to derive the cost strategy of a firm. Michael Porter in his book Competitive Advantage suggested three generic competitive strategies aiming to develop a dependable position in the long-run and out-perform the competitors. These three strategies are:

1. Cost Leadership,

2. Differentiation,

3. Focus.

All the three strategies can either be used individually or in combination to each other. Figure-1 shows a matrix of the three generic competitive strategies and their interrelationship given by Porter.

Figure-1 : Three Generic Competitive Strategies

Monday, October 8, 2012

EXPERIENCE CURVE AND ITS CAUSES

EXPERIENCE CURVE AND WHAT IS THE CAUSES OF EXPERIENCE CURVE EFFECT ?

Cost has been correlated with the accumulated experience (of say production) by the Experience Curve Effect. The underlying principle behind the experience curve is that as total quantity of production of a standardised item is increased, its unit manufacturing cost decreases in a systematic manner. The concept of the experience curve was presented by BCG in 1966 and since then it has been accepted as one of the important phenomenon.

The experience curve is a rule of thumb. It says “costs of value added net of inflation will characteristically decline 25% to 30% each time the total accumulated experience has been doubled” (Henderson, 1989). This is also known as learning curve. Initially, this inverse relationship was discovered for the learning costs which are the costs for direct labour input in the manufacturing cost. Thus, as the production of a particular item (such as aircraft components) increased, the quantum of time of direct labour component to make each of these successive items declined. This helped the aircraft manufacturers to predict the cost of man-hours required to manufacture in future, say the number of aircraft, and helped them to fix the price accordingly. The Experience Curve Effect phenomenon, where costs fall with accumulated volume of experience, was known to industrial managers for many years. It took momentum as a tool in business strategy after Boston Consulting Group (BCG) provided the concept.

Let us take an illustration to understand this concept. When one starts the production of a new product (2 units), the unit cost is, say Rs. 100. Then, as the accumulated production volume reaches 4 units, the unit cost is reduced by say 20%, to Rs. 80. Furthermore, as the accumulated production reaches 8 units, the cost gets reduced by another 20%, to only Rs. 64, and so on. This trend has been tabulated in Table -1

Table-1 : 80% Experience Curve

The data of this table when plotted on a plain graph, it gives an 80% Experience Curve, as shown in Figure-1. The Experience Curve has a hyperbolic shape.

Monday, September 10, 2012

PROCESS OF STRATEGY

THE PROCESS OF STRATEGY

The process of strategy is cyclical in nature. The elements within it interact among themselves. Figure-1 present the process for single SBU firm. The process has to be adjusted for multiple SBU firms because there it is conducted at corporate level as well as SBU levels as these firms insert SBU strategy between corporate strategy and functional strategy. Initially, the process of strategy was discussed in terms of four phases which are:

1. Identification phase

2. Development phase

3. Implementation phase

4. Monitoring phase

The process of strategy does not have the same steps as stated by different authors.

According to C.K. Prahalad, the process comprises of five steps. They are:

1. Strategic Intent

2. Environmental Analysis

3. Evaluation of strategic alternatives and choice

4. Strategy Implementation

5. Strategy Evaluation and Control

For our understanding, the process has been divided into the following steps:

1. Strategic Intent

2. Environmental and Organizational Analysis

3. Identification of Strategic Alternatives

4. Choice of Strategy

5. Implementation of Strategy

6. Evaluation and Control

FIG-1 : STRATEGIC PROCESS

FIG-1 : Strategic Process in a Single SBU Firm

Friday, June 8, 2012

PORTER'S FIVE FORCES FRAMEWORK

PORTER’S FIVE FORCES FRAMEWORK

The five forces framework developed by Michael Porter is the most widely known tool for analyzing the competitive environment, which helps in explaining how forces in the competitive environment shape strategies and affect performance. The framework as shown in Figure-I suggests that there are competitive forces other than direct rivals which shape up the competitive environment. These competitive forces are as follows:

1) The rivalry among competitors in the industry

2) The potential entrants

3) The substitute products

4) The bargaining power of suppliers

5) The bargaining power of buyers

Figure I : Five Forces Analysis

Five Forces Analysis

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