M&A - Points to Refresh Weston's Book Ch.5

Strategy

Nature of Strategy

Strategy defines the central plans, policies and culture of an organization in a long-term horizon.

A more broader definition will be strategies define objectives (mission), goals (vision), plans, policies, and cultures of an organization over along time period.

Mission is the objective concerned with the customers.

Vision is one of the goals that excites everybody in the organization and hence it is emphasized, talked about, publicized and closely monitored.


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 the environments
Evaluation of company capabilities and limitations
Assessment of expectations of stakeholders
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
Formulation of organization 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/Tools/Models


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
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

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 managersEntrepreneurship - 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
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 capabilitiesCorrelations 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 riskFocus 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 (Competitive Advantage, 1985, p. 5)
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 alternative ways to close gap
Select alternatives for analysis
Cost/benefit analysis of alternatives
Tentative selection — formulate plans and actions

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

All are eclectic in actual practice
Computerization ties approaches closer together
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 Acquisition/Merger Strategy

Requires continuing reassessment

Industry analysis
Competitor analysis
Supplier analysis
Customer analysis
Substitute products
Complementors
Technology changes
Societal factors

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
Firm's strengths/weaknesses relative to present/future industry conditions

Connection between strategic planning and mergers

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