business policy and strategic management.pdf

7/28/2019 BUSINESS POLICY AND STRATEGIC MANAGEMENT.pdf

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BUSINESS POLICY AND STRATEGIC MANAGEMENT

ASSIGNMENT ON

"ACQUISITION AND RESTRUCTURING STRATEGY"

Submitted to:

Prof. Dr. Antony Cruz

MBA IV SEM

Sandra Mallisa

Shruthi C N

Rajani K P

Shilpa N

Pallavi


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Q.1 What is Acquistion?

An Acquistion is a strategy through which one firm buys a controlling or 100%

interest in another firm with the intent of making the acquired firm a subsidary

business within its portfolio.

Q.2 What is Restucturing?

Restructuring is a strategy through which a firm changes its set of businesses or its

financial structure. Restructuring is the corporate management term for the act of

reorganizing the legal, ownership, operational, or other structures of a companyfor the purpose of making it more profitable, or better organized for its present

needs.

Q.3 What are the attributes of effective acquisitions?

Complementary assets or resources Friendly acquisitions facilitate integration of firms Effective due-diligence process (assessment of target firm by acquirer, such as

books, culture, etc.)

Financial slack Low debt position

oHigh debt can : Increase the likelihood of bankruptcy Lead to a downgrade in the firms credit rating Preclude needed investment in activities that contribute to the firms

long-term success

Innovation Flexibility and adaptability


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Q.4 What are the different acquisition strategies?

Adjacent industry strategy: An acquirer may see an opportunity to use one of itscompetitive strengths to buy into an adjacent industry. This approach may work if

the competitive strength gives the company a major advantage in the adjacent

industry.

Diversification strategy: A company may elect to diversify away from its corebusiness in order to offset the risks inherent in its own industry. These risks usually

translate into highly variable cash flows which can make it difficult to remain in

business when a bout of negative cash flows happen to coincide with a period of

tight credit where loans are difficult to obtain. For example, a business environment

may fluctuate strongly with changes in the overall economy, so a company buys

into a business having more stable sales.

Full service strategy: An acquirer may have a relatively limited line of products orservices, and wants to reposition itself to be a full-service provider. This calls for

the pursuit of other businesses that can fill in the holes in the acquirers full-service

strategy.

Geographic growth strategy: A business may have gradually built up an excellentbusiness within a certain geographic area, and wants to roll out its concept into a

new region. This can be a real problem if the companys product line requires local

support in the form of regional warehouses, field service operations, and/or local

sales representatives. Such product lines can take a long time to roll out, since the

business must create this infrastructure as it expands. The geographical growth

strategy can be used to accelerate growth by finding another business that has thegeographic support characteristics that the company needs, such as a regional

distributor, and rolling out the product line through the acquired business.

Industry roll-up strategy: Some companies attempt an industry roll-up strategy,where they buy up a number of smaller businesses with small market share to

achieve a consolidated business with significant market share. While attractive in

theory, this is not that easy a strategy to pursue. In order to create any value, the


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acquirer needs to consolidate the administration, product lines, and branding of the

various acquirees, which can be quite a chore.

Low-cost strategy: In many industries, there is one company that has rapidly builtmarket share through the unwavering pursuit of the low-cost strategy. This

approach involves offering a baseline or mid-range product that sells in large

volumes, and for which the company can use best production practices to drive

down the cost of manufacturing. It then uses its low-cost position to keep prices

low, thereby preventing other competitors from challenging its primary position in

the market. This type of business needs to first attain the appropriate sales volume

to achieve the lowest-cost position, which may call for a number of acquisitions.Under this strategy, the acquirer is looking for businesses that already have

significant market share, and products that can be easily adapted to its low-cost

production strategy.

Market window strategy: A company may see a window of opportunity opening upin the market for a particular product or service. It may evaluate its own ability to

launch a product within the time during which the window will be open, and

conclude that it is not capable of doing so. If so, its best option is to acquire another

company that is already positioned to take advantage of the window with the

correct products, distribution channels, facilities, and so forth.

Product supplementation strategy: An acquirer may want to supplement itsproduct line with the similar products of another company. This is particularly

useful when there is a hole in the acquirers product line that it can immediately fill

by making an acquisition.

Sales growth strategy: One of the most likely reasons why a business acquires is toachieve greater growth than it could manufacture through internal, or organic,

growth. It is very difficult for a business to grow at more than a modest pace

through organic growth, because it must overcome a variety of obstacles, such as

bottlenecks, hiring the right people, entering new markets, opening up new

distribution channels, and so forth. Conversely, it can massively accelerate its rate

of growth with an acquisition.

Synergy strategy: One of the more successful acquisition strategies is to examine


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other businesses to see if there are costs that can be stripped out or revenue

advantages to be gained by combining the companies. Ideally, the result should be

greater profitability than the two companies would normally have achieved if they

had continued to operate as separate entities. This strategy is usually focused on

similar businesses in the same market, where the acquirer has considerable

knowledge of how businesses are operated.

Vertical integration strategy: A company may want to have complete control overevery aspect of its supply chain, all the way through to sales to the final customer.

This control may involve buying the key suppliers of those components that the

company needs for its products, as well as the distributors of those products and theretail locations in which they are sold.

Q.5 What are the types of restructuring strategies?

DownsizingThis restructuring strategy is about reducing the manpower to keep employee costs

under control. Take the case of auto-giant General Motors, which in 1991 decided toshut down 21 plants and lay off 74,000 employees to counter its losses.

Another example is that of IBM, which had never laid off staff ever since its

incorporation, but had to layoff 85,000 employees to stay in business. This type of

restructuring is tough to manage and is mostly adopted to overcome adverse

situations. Downsizing is not always a result of business losses; it may be needed

even in cases of takeovers, acquisitions and mergers, where duplicity of the staff

propels this form of organizational restructuring.whether you are acquiring a

business or some other business is acquiring your business, restructuring will be

needed post acquisition. The business being acquired undergoes major restructuring

to get in-line with the organizational setup of the acquiring business.

When AT&T acquired BellSouth, BellSouth was restructured to fit into the

organizational setup of AT&T. And it wasnt just BellSouth that was restructured, as


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AT&T too saw some restructuring to accommodate BellSouth. Altogether, AT&T

had to cut down 10,000 employees over a period of three years, following acquisition

of BellSouth.

Also, when two businesses decide to merge together, organizational restructuring is a

must to unite the two distinct organizations into one organization. When Glaxo

Wellcome and SmithKline Beecham merged together to form Glaxo SmithKline in

1999, both the companies had to undergo major restructuring, and there was some

major downsizing before as well as after the new company was formed.

StarbustThis restructuring strategy involves breaking a company into smaller independent

business units for increasing flexibility and productivity. This may be done either to

dissect the business into manageable chunks or when the business wants to diversify

and foray into unrelated areas. One of the latest examples of this strategy is Pfizers

decision to spin off four non-pharmaceutical firms this year.

Starbursting may also be used for expansion of the existing business such as when a

business decides to spin off subsidiaries to handle business in different geographic

areas.

VerticilazationThis is the latest in restructuring trends, wherein an organization restructures itself to

offer tailored products and services to cater to the requirements of a specific industry.

In 2002, HCL verticalized its operations to meet the specific demands of five

different industries: retail, media and telecom, manufacturing, finance and life

sciences. This type of restructuring opens up avenues for specialization.

De-layeringDe-layering involves breaking down the classical pyramid setup into a flat

organization. The main objective of this type of restructuring is to thin out the top


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layer of unproductive and highly paid white collar staff. General Electric has

reduced the number of management levels from ten to four in some of its work

facilities in order to improve overall productivity.

Hewlett Packard, on the other hand, has de-layered to promote innovation, build

customer intimacy and increase consumer satisfaction. The major advantage of

de-layering is that the decision making process becomes shorter and more effective.

Business Process Reengineering

This type of restructuring is carried out for making operational improvements. It

begins with identifying how things are being done currently and then it moves on to

re-engineering the tasks to improve productivity.

Business process re-engineering usually results in changing roles. While at times

BPR may lead to layoffs, it can also create new employment opportunities.

When Ford Motor was trying to reduce its cost, it found that the process at its

accounts payable department needed to be re-engineered. The reengineering helped

in simplifying the controls and maintaining the financial information more

accurately, that too after laying off 75 percent of the staff from the accounts payable

department.

OutsourcingTodays businesses prefer to outsource some of their processes to other firms. There

are two ways outsourcing benefits a business; first, it helps in reducing costs and

second, it allows the business to concentrate on its core business and leave the

remaining tasks to outsourcing firms.

Whenever a business plans to outsource one of its processes, it will cause some major

restructuring and reshuffling within the company. Downsizing is common when a

business outsources its processes. For instance, Nokia plans to layoff 4000 of its

employees by the year end 2012, as it will be outsourcing the production of its


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Symbian operating system.

VirtualizationVirtualization is the last on our list of restructuring strategies. This strategy involves

pushing employees outside the office to places where they are more needed like at

the clients site. It also involves upgrading to technology, which allows unmanned

virtual offices to be set up. For example, the ATMs offered by banks are their virtual

units.

Q.6 What are the reasons for acquisition strategy?

Companies follow acquisition strategies for a variety of reasons, including:

Increased Market PowerA primary reason for acquisitions is that they enable companies to gain greater market

power. While a number of companies may feel that they have an internal core competence,

they may be unable to exploit their resources and capabilities because of a lack of size. A

company may be able to gain the size necessary to exploit its core competence by

becoming larger in terms of the size of its market share. And, an increase in market share

enables the company to increase its market power. Because of this, acquisitions to meet a

market power objective generally involve buying a supplier, a competitor, a distributor, or a

business in a highly related industry.

Horizontal AcquisitionsBuying a competitor or a business in a highly related industry--which increases the

company's market power--provides the company with the size it needs to exploit its core

competence and gain a competitive advantage in its primary market. When a competitor in

the same industry is acquired, a company has engaged in a horizontal acquisition.

Vertical Acquisitions


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A vertical acquisition has occurred when a company acquires a supplier or distributor,

which is positioned either backward or forward in the company's cost/activity/value chain.

Related AcquisitionsWhen a target company in a highly related industry is acquired, the company has made a

related acquisition. Recent evidence indicates that horizontal acquisition of companies

with similar characteristics--strategy, managerial styles, and resource allocation

patterns--results in higher performance because generally it is difficult to successfully

integrate the merged companies.

Companies that are able to gain greater market share or that gain core resources that can be

used to gain a competitive advantage have more market power that can be used against

competitors. Acquisitions in the pharmaceutical industry provide a good example of

companies pursuing market power objectives. While some of these mergers--such as the

Merck acquisition of Medco--represent vertical acquisitions to ensure distribution of

product lines, others have been either related or horizontal acquisitions to enable the

acquiring companies to take advantage of regulatory changes that are challenging the

power of pharmaceutical companies. As a trade-off, it is likely that pharmaceutical

companies are likely to divert funds from R&D into making and managing acquisitions.

Overcoming of Entry BarriersAs discussed earlier, barriers to entry represent factors associated with the market and/or

companies operating in the market that make it more expensive and difficult for new

companies to enter the market. For example, it may be difficult to enter a market dominated

by large, established competitors. As noted earlier, such markets may require:

a) Investments in large-scale manufacturing facilities that enable the company toachieve economies of scale so that it can offer competitive prices

b) Significant expenditures in advertising and promotion to overcome any brandloyalty enjoyed by existing products

c) Establishing or breaking into existing distribution channels so that goods are


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convenient to customers

When barriers to entry are present, the company's best choice may be to acquire a company

already having a presence in the industry or market. In fact, the higher the barriers to entry

into an attractive market or industry, the more likely it is that companies interested in

entering will follow acquisition strategies.

While the acquisition cost might be high (depending on such factors as attractiveness of

the business or market, competing acquisitions, or the cost of integrating operations), the

acquiring company achieves immediate market access, gains a brand that has access to

existing distribution channels, and may already have some degree of brand loyalty.

Entry barriers companies face when trying to enter international markets are often great.

Commonly, acquisitions are used to overcome entry barriers in international markets. It is

important to compete successfully in these markets since five of the emerging markets

(China, India, Brazil, Mexico, and Indonesia) are among the 12 largest economies in the

world with a combined purchasing power that is already one-half that of the Group of

Seven industrial nations (United States, Japan, Britain, France, Germany, Canada, and

Italy).

Cross-Border AcquisitionsCross border-acquisitions and cross-border alliances are alternatives companies consider

while pursuing strategic competitiveness. Compared to a cross-border alliance, a company

has more control over its international operations through a cross-border acquisition.

Acquisitions also represent a viable strategy for companies that wish to enter international

markets because acquisitions may be the fastest way to enter new markets, provides more

control over foreign operations than do strategic alliances with a foreign partner, enable the

acquiring company to make changes in the acquired company's operations and provides the

acquirer with access to the resources and capabilities of the acquired company

Cost of New-Product Development


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Acquisitions also may represent an attractive alternative to developing new products

internally because of the cost and time required starting a new venture and achieving a

positive return. Internal development of new products is often perceived by managers to be

costly and to represent high-risk investments of company resources. While sometimes

costly, it may be in the company's best interest to acquire an existing business because the

acquired company has a track record with an established sales volume and a customer base,

yielding predictable returns and the acquiring company gains immediate market access

In addition to representing attractive prices, large pharmaceutical companies have used

acquisitions to supplement products in the pipeline with projects from undervalued

biotechnology companies; thus, this is one way to appropriate new products.

Increased Speed to MarketCompanies also can implement an acquisition strategy to rapidly gain market entry,

establish relative market power over a competitor, and achieve a new product advantage.

Acquisitions also enable companies to enterforeign markets more rapidly as it is less costly

from a time perspective to acquire companies with established operations and supplier

and/or customer relationships in a foreign market than to develop them.

Lower Risk Compared to Developing New ProductsInternal product development processes can be risky, in that entering a market and earning

an acceptable return on investment requires significant resources and time. All the same,

acquisition outcomes can be estimated easily and accurately (as compared to the outcomes

of an internal product development process), causing managers to view acquisitions as

carrying lowering risk.

Because acquisitions recently have become such a common means of avoiding risky

internal ventures, they even could become a substitute for innovation enabling companies

to avoid the risk of internal ventures and overcome constraints on internal resources and

capabilities.


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Although they often enable companies to offset the risk of internal ventures and of

developing new products, acquisitions are not without risks of their own.

Acquisition-related risks will be discussed later in this chapter.

Increased DiversificationAcquisitions are a common strategy that companies can use to diversify. This may be

because it should be easier for companies to develop new products and/or new ventures

within their current markets because of market-related knowledge, so companies that

desire to enter new markets may find that current product-market knowledge and skills are

not transferable to the new target market.

Thus, internal ventures and new product development for new markets are not common

means of diversification. Acquisitions also may have gained in popularity as a related or

horizontal diversification strategy enabling rapid moves into related markets (or to expand

market power) and as an unrelated diversification strategy. Also, acquisitions are the most

frequently used means for companies to diversify their operations into international

markets.

However, companies must be careful when making acquisitions to diversify their product

lines because horizontal and related acquisitions tend to contribute more to strategic

competitiveness, and thus they are more successful than diversifying acquisitions.

Reshaping the company's Competitive ScopeTo reduce intense rivalry's negative effect on financial performance, a company may use

acquisitions as a way to restrict its dependence on a single or a few products or markets.

Reducing dependence on single products or markets results in a different competitive scope

for a company.

Q.7 What are the reasons for restructuring strategy?

There are several reasons you may have to reorganize the operations and other structures of


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the organization. Restructuring a company can improve efficiency, keep technology up to

date, or implement strategic or governance changes made by, or mandated to, company

owners.

Changed Nature of BusinessIn todays business environment, the only constant is change. Companies that refuse to

change with the times face the risk of their product line becoming obsolete. Because of this,

businesses experiment with new products, explore new markets, and reach out to new

groups of customers on a continuous basis. Businesses seek to diversify into new areas to

increase sales, optimize their capacity, and conversely shed off divisions that do not add

much value, to concentrate on core competencies instead.

All such initiatives require restructuring. For instance, expansion to an overseas market

may require changes in the staff profile to better connect with the international market, and

changes in work policies and routines to ensure compliance with export regulations.

Starting a new product line may require changes in the system of work, hiring new experts

familiar in the business line and placing them in positions of authority, and other

interventions. Hiving off unprofitable or unneeded business lines may require changes to

retain specific components of such divisions that the main business may wish to retain.

DownsizingOne common reason for restructuring a company is to downsize the workforce. The

changing nature of economy may force the business to adopt new strategies or alter their

product mix, making staff redundant. Similarly, cutthroat competition and pressure on

margins from competitors who adopt a low price strategy may force the company to adopt

lean techniques, just in time inventory, and other measures to cut input costs and achieve

process efficiency.

In such situations, the organization will need to redo job descriptions, rework its team,

group, and communication structures and reporting relationships to ensure that the

remaining workforce does the job well. Very often, downsizing-induced restructuring leads


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to a flatter organizational structure, and broader job descriptions and duties.

New Work MethodsTraditional organizational systems and controls cater to standard 9 AM to 5 PM office or

factory based work. Newer methods of work, especially outsourcing, telecommuting, and

flex time require new systems, policies, and structures in place, besides a change in culture,

and such requirements may trigger organizational restructuring.

The presence of telecommuting employees, temporary employees, and outsourcing work

may require a drastic overhaul of performance management parameters, compensation and

benefits administration, and other vital systems. The newer work methods may, for

instance, require placing emphasis on the results rather than the methods, flexible reporting

relationships, and a strong communication policy.

New Management MethodsTraditional management science recommends highly centralized operations, and the top

management adopting a command and control style. The new behavioral approach to

management considers human resources a key driver of strategic advantage, and focuses on

empowering the workforce and providing considerate leeway to line managers in

conducting day-to-day operations. The top management intervenes only to set strategy and

ensure compliance; strategic business units receive autonomy in functioning.

Traditional management structures were bureaucratic and hierarchical. Of late,

management experts see wisdom in flatter organizations with wider roles and

responsibilities for each member of the team. Job flexibility, enlargement and enrichment

are key features of such new structures, but successful implementation requires changes in

the communication and reporting structures of the organization. While new organizations

can start with such new paradigms, old organizations have to restructure themselves to

keep up with these best practices to remain competitive.

Quality Management


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Competitive pressures force most companies to have a serious look at the quality of their

products and services, and adopt quality interventions such as Six Sigma and Total Quality

Management. Implementing new quality standards may require changes in the

organization. Most of the new quality applications strive to imbibe quality in the actual

work process rather than maintain a separate quality control department to accept or reject

output based on quality specifications.

In many cases, an organizational level audit precedes quality interventions, and such audits

highlight inefficiencies in the organizational structure that may impede quality in the first

place. For instance, reducing waste may require eliminating certain processes, and thereby

reallocation of personnel undertaking such activities.

Technology

Innovations in technology, work processes, materials and other factors that influence the

business, may require restructuring to keep up with the times. For instance, enterprise

resource planning that links all systems and procedures of an organizational by leveraging

the power of information technology may initially require a complete overhaul of the

systems and procedures first.

Such technology-centric change may be part of a business process engineering exercise

that involves redesigning the business processes to maximize potential and value added,

while minimizing everything else. Failure to do so may result in the company systems and

procedures turning obsolete and discordant with the times.

Mergers and Acquisitions

In todays corporate world, where survival of the fittest is the maxim, mergers and

acquisitions are commonplace and any merger or acquisition invariably heralds a

restructuring exercise. The reasons for such restructuring accompanying mergers and

acquisitions are many. Some of the common reasons are:

o Reconciling the systems and procedures of the merged organizations to ensure that


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the new entity has consistency of approach.

o Eliminating duplication of work or systems, such as two human resource or financedepartments.

o Incorporating the preferences of the new owners, and more.

Joint ventures may also require formation of matrix teams, special task forces, or a new

subsidiary.

Finance Related Issues

Very often, small and medium scale businesses have informal structures and reporting

relationships, and an ad-hoc style of decision-making. When such companies grow and

want to raise fresh funds, venture capitalists and regulations might demand a more

professional set up, with formal written-down structures and policies. A listed company

may undertake a restructuring exercise to improve its efficiency and unlock hidden value,

and thereby show more profits to attract fresh investors.

Bankruptcy may force the business to shed excess flab such as workforce, land, or other

resources, sell some business lines to raise cash, and become lean and mean, to attract

bail-outs or some other rescue package. Companies may try to restructure out of court to

avoid the high costs of a formal bankruptcy.

Buy Outs

At times, the restructuring exercise may be the result of the whims and fancies of the

owners. For instance, the company may have a new owner who wants to stamp his or her

personal authority and style onto the business. Restructuring allows the new owner to:

o Reshuffle key personnel and provide power to trusted lieutenants.o Start with a clean state and thereby exert greater control.o Preempt any inefficiencies that caused the previous owner to sell-out, and more.

With or without ownership change acting as a trigger, company owners may appoint a

management consultant to review the company and suggest macro-level changes, as a


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routine exercise.

Statutory and Legal ComplianceAt times, restructuring may be a forced exercise, to conform to some legal or statutory

requirements. For instance, the government may mandate financial and healthcare

institutions that deal with sensitive personal data to monitor their computer networks. A

new bill may require that private computer networks adopt the same security measures that

government networks adopt, to gain immunity from liability lawsuits in the eventuality of

cyber attacks.

Any organizational restructuring is basically a change initiative. Success depends on

managing resistance to change by convincing the remaining workforce of the need for

change and the possible benefits, an effective communication system to lend clarity to the

change process, and effective leadership.

Q.8 What are the problems in achieving acquisition success?

1. Integration difficulties

2. Inadequate evaluation of target

3. Large or extraordinary debt

Junk bonds: financing option whereby risky acquisitions are financed with money


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(debt) that provides a large potential return to lenders (bondholders)

4. Inability to achieve synergy

Synergy: Value created by units exceeds value of units working independentlyoAchieved when the two firms' assets are complementary in unique waysoYields a difficult-to-understand or imitate competitive advantagePrivate synergy: Occurs when the combination and integration of acquiring and

acquired firms' assets yields capabilities and core competencies that could not be

developed by combining and integrating the assets with any other company

5. Too much diversification

Diversified firms must process more information of greater diversityScope created by diversification may cause managers to rely too much on financial

rather than strategic controls to evaluate performance of business units

Acquisitions may become substitutes for innovation6. Managers overly focused on acquisitions

Necessary activities with an acquisition strategyoSearch for viable acquisition candidateso

Complete effective due-diligence processesoPrepare for negotiationsManaging the integration process after the acquisitionoDiverts attention from matters necessary for long-term competitive success (I.e.,

identifying other activities, interacting with important external stakeholders, or

fixing fundamental internal problems)

oA short-term perspective and greater risk aversion can result for target firm'smanagers

7. Too large

Bureaucratic controlsFormalized supervisory and behavioral rules and policies designed to ensure

consistency of decisions and actions across different units of a firm formalized

controls decrease flexibility

Additional costs may exceed the benefits of the economies of scale and additionalmarket power


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Larger size may lead to more bureaucratic controlsFormalized controls often lead to relatively rigid and standardized managerial

behavior

Firm may produce less innovation

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