Strategy FormulationHCAD 5390

Strategies

Defining Future DirectionAt what levels is future direction defined?Who is responsible for defining future direction?How is future direction expressed? Where can it be seen?

Strategy-Making Levels in an OrganizationCorporate CenterIndividual SBUsFunctional AreasDepartmentsTeams and Task ForcesIndividual Employees

Responsibility for Defining Future DirectionBoard of DirectorsCEOTop Executive TeamStrategic Planning UnitMiddle Level ManagersAll EmployeesSuppliers and Customers

Future Direction DocumentsMissionVisionValuesObjectives

Mission StatementCurrent purpose of the organizationWhat it is, what it does, and what it does not doThe business of the firm, its domainThe areas in which it operates and the means by which it competes in those areasThe current activities and operations of the firm

Mission Statement - Spheres of Operation and CompetitionIndustryIndustry value chainProducts or servicesTechnologies and competenciesCustomers and market segmentsDistribution channelsGeographic areas

Reasons for a Mission StatementFosters organization-wide unanimity of purposePoint of identification for employees and stakeholdersSteers operations and activities in certain directions and away from othersBasis for allocating resourcesProjects coherent, positive image to external stakeholders

Characteristics of a Good Mission Statement (I)Succinct: one page, 200-300 wordsMemorable and recitableBroad enough to allow management creativityNarrow enough to limit management recklessnessDistinguishes firm from its competitorsReconciles differences among stakeholdersArouses positive feelings about the organization

Characteristics of a Good Mission Statement (II)Tells managers where to look and where to avoid in seeking strategic opportunitiesConveys image of a successful, well managed, self-aware organization worthy of investment and supportUnderstood and embraced by all organization membersMore immediate and pragmatic than a vision statement

Vision Statement (I)Describes an ideal, desirable future state for the organizationA future that the organization will work actively to create for itselfAntithesis of allowing the future to shape the organization, or adapting the organization to the future

Vision Statement (II)Empowers and motivates employees to higher levels of achievementValue of creating shared visionCan be prepared at all organizational levelsJoin all stakeholders in a future search for a vision

Characteristics of a Good Vision Statement (I)A kind of dream that inspires and drivesDifferent from what is being done nowImprovement over what is being done nowA stretch for the organization with uncertainty about the chances of achievementGrounded in reality and possible of achievement

Characteristics of a Good Vision Statement (II)

Reflects understanding of resources and competencies, as well as external opportunities and threatsA challenge for employees to accomplish, requiring new abilities and performance at the highest levelsAll stakeholders see an aspect of the vision that serves their interests

Values StatementGuidelines for employee behavior on the jobAddress beliefs and attitudes of all organization membersImplicit (organizational culture) vs. Explicit (code of ethics)

ValuesJohnson & Johnsons credo sets its responsibilities to:J&J product users.J&J employees.Communities in which J&J employees live and work.J&J stockholders.Source: Courtesy of Johnson & Johnson.

Texas Health ResourcesMission, Vision and Values Mission To improve the health of the people in the communities we serve. Vision Texas Health Resources, a faith-based organization joining with physicians, will be the health care system of choice. Values Respect Respecting the dignity of all persons, fostering a corporate culture characterized by teamwork, diversity and empowerment. Integrity Conduct our corporate and personal lives with integrity; Relationships based on loyalty, fairness, truthfulness and trustworthiness. Compassion Sensitivity to the whole person, reflective of God's compassion and love, with particular concern for the poor. Excellence Continuously improving the quality of our service through education, research, competent and innovative personnel, effective leadership and responsible stewardship of resources

Arlington Memorial HospitalArlington Memorial Hospital (AMH) is a full-service acute-care medical center with417 beds, serving Arlington andits surrounding communities. Since opening its doors in 1958,AMH has contributed to the medical and health education needs of area residents, who pooled their resources to help build the original 75-bed hospital. Today, with more than 550 physicians on the medical staff, 1,900 employees and 300 volunteers, AMH is larger and more advanced than the founders could have imagined. But its community-oriented focus, establishedmore thanfive decades ago, has not changed.AMH remains a not-for-profit, community hospital dedicated to providing quality, compassionate health care.

ParklandMandateTo furnish medical aid and hospital care to indigent and needy persons residing in the hospital district.VisionBy our actions, we will define the standards of excellence for public academic health systems.MissionDedicated to the health and well-being of individuals and communities entrusted to our care.

Values IssuesViolations of the lawIntegrity, honesty, and ethicsAttitude toward and treatment of coworkers, customers, and suppliersAcceptance of risk taking and failureAttitude toward innovation and the futureTolerance for change within the organizationBalance of profit-making and patient welfare

Complications in ValuesHow to communicateHow to enforceDifferences among organizational unitsDifferences among professions and specialtiesEffect on implementation of strategies

Strategic ObjectivesLong-term strategic thrustsDesigned to realize the organizational visionExplicit and workableProvide guidelines for specific strategiesSet at both the corporate and SBU levels

Criteria for Strategic ObjectivesBased on measurable attributesSpecific unit of measurement for each attributeSpecific attribute level to be achievedTime deadline for reaching the levelDelegate responsibility to a named person for reaching the level by the deadline

Typical Corporate Strategic ObjectivesImprove market price of common stockIncrease economic profit of SBU portfolioIncrease total annual revenues of SBU portfolioIncrease portfolio cash flow to support rapid-growth SBUsDiversify portfolio into new industriesDivest no longer related SBUsIncreasing resource sharing among SBUs

Typical SBU Strategic ObjectivesConduct a turnaround of the businessImprove the businesss market shareIncrease the businesss revenues or profitsImprove the quality of products and servicesAcquire or develop specific new technologiesAcquire or develop new employee competencies

Tips on Setting Strategic ObjectivesStretch the abilities of employees assigned to achieve themSupport them with appropriate resourcesTolerate risk-taking and innovationWatch for objectives and incentives that motivate undesirable behaviorEmployees assigned to achieve objectives participate in setting them

Challenges in Documents Defining Future DirectionConfusing mission and vision statements with each otherDefining visions distinguished from the competitionOverly long vision statements and too many strategic objectivesVision and values that inspire employeesCreating documents useful in strategic management process

Distinguishing Corporations from Strategic Business Units (SBUs)Multi-SBU Corporations:Sole separate legal entityAuthorized to execute contractsAble to borrow money and sell equityProduces no goods or servicesQuite small staffPrimary function is to assemble and manage a portfolio of SBUs

Distinguishing Corporations from Strategic Business Units (SBUs)Strategic Business Units:No separate legal existenceNo separate ability to contract or raise capitalProduce goods and servicesCompete in one or more marketsRelative autonomy to manage operations and strategy

Value-Adding Functions of the Corporate CenterManage the Portfolio of SBUsRaise Financial Capital for Allocation to SBUsAllocate Resources and Services to SBUsFacilitate Synergies Among SBUsChoose Parenting Style for SBU InteractionsParticipate in SBU Strategic Planning ProcessOversee and Monitor SBU PerformanceManage Corporate Relations With Stakeholders

Corporate Management of an SBU Portfolio (I)In pursuit of a corporate visionAcquires, merges with, or develops internally new SBUsDivests existing, unwanted SBUsSet performance goals for SBU managementProvide input to SBU strategic decisionsCount upon SBUs to perform unique strategic functions

Corporate Management of an SBU Portfolio (II)Balance between central corporate direction and individual SBU autonomyControl vs spontaneityHire good SBU managers, give them general guidelines, and let them loose or Give detailed directions, watch closely, and intervene frequently

Model Portfolio Management ProcessChoose strategic thrust of the corporationGrowthStabilityRetrenchmentChoose geographic areas, markets, and products or services to offer in themDecide how many SBUs in the portfolio and which businesses they will be

Texas Health ResourcesTexas Health Resources (THR) is one of the largest faith-based, nonprofit health care delivery systems in the United States and the largest in North Texas in terms of patients served. The system's primary service area consists of 16 counties in north central Texas, home to more than 6.2 million people. THR was formed in 1997 with the assets of Fort Worth-based Harris Methodist Health System and Dallas-based Presbyterian Healthcare Resources. Later that year, Arlington Memorial Hospital joined the THR system. THR has 12 acute-care hospitals and one long-term care hospital that total 3,100 licensed hospital beds, employs more than 18,000 people, and counts more than 3,600 physicians with active staff privileges at its hospitals.THR is alsoa corporate member or partner in six additional hospitals and surgery centers.

Adaptive Strategies

Adaptive StrategiesExpansion Adaptive Strategy:Orientation toward growthExpand, cut back, status quo?Concentrate within current industry, diversify into other industries?Growth and expansion through internal development or acquisitions, mergers, or strategic alliances?

Corporate-Level Strategic Options:Growth Expand the PortfolioMost common corporate-level strategy directionCritical to maintaining share in a growing marketIn pursuit of economies of scale and scopeIncrease in experience and learningTop executive egos to be satisfied

Growth By ConcentrationAll businesses start hereDedicate all resources and competencies to one or a few products or servicesAchieved in one of three ways:Sell more of current products in current marketsSell current products in new marketsSell new products in current marketsTo sell new products in new markets is diversification

Adaptive StrategiesBasic Growth Strategies:ConcentrationCurrent product line in one industryVertical IntegrationMarket DevelopmentProduct DevelopmentPenetrationDiversificationInto other product lines in other industries

Adaptive StrategiesExpansion of ScopeBasic Concentration Strategies:Vertical growthHorizontal growth

Adaptive Strategies

Adaptive Strategies

Horizontal Growth

Horizontal integration

Concentration on a Single BusinessAdvantagesOperational focus on a single familiar industry or market.Current resources and capabilities add value.Growing with the market brings competitive advantage.DisadvantagesNo diversification of market risks.Vertical integration may be required to create value and establish competitive advantage.Opportunities to create value and make a profit may be missed.

Concentration No Longer Sufficient to Maintain GrowthUnlikely to capture a greater share of current marketCurrent market is stagnating, maturing, shrinking, or otherwise lacking growth potentialExcess cash on hand needs to be invested productivelyManagement has greater ambitions for further strategic achievement

Growth By Related DiversificationMove beyond existing markets and productsEmploy existing resources and competenciesNew businesses are closely connected (related) to existing businessesDirections of related diversificationVertical forward integration (toward customers)Vertical backward integration (toward suppliers)Horizontal expansion

Forms of RelatednessProducts or servicesMarketsProcesses, systems, or other operating featuresManufacturing facilities, distribution channels, marketing media, or support servicesBrand image, corporate reputation, creativity or innovation skills, or general managerial expertise

Adaptive Strategies

Basic Diversification Strategies:

Concentric Diversification

Conglomerate Diversification

Adaptive StrategiesConcentric Diversification

Growth into related industrySearch for synergies

Adaptive Strategies

Adaptive StrategiesUnrelated (Conglomerate) DiversificationGrowth into unrelated industryConcern with financial considerations

Adaptive Strategies

Reasons for DiversificationReasons to Enhance Strategic CompetitivenessEconomies of scope/scaleMarket powerFinancial economics

Reasons for DiversificationIncentives with Neutral Effects on Strategic CompetitivenessAnti-trust regulationTax lawsLow performanceUncertain future cash flowsFirm risk reduction

Incentives to DiversifyExternal Incentives:Relaxation of anti-trust regulation allows more related acquisitions than in the pastBefore 1986, higher taxes on dividends favored spending retained earnings on acquisitionsAfter 1986, firms made fewer acquisitions with retained earnings, shifting to the use of debt to take advantage of tax deductible interest payments

Incentives to DiversifyInternal Incentives:Poor performance may lead some firms to diversify an attempt to achieve better returnsFirms may diversify to balance uncertain future cash flowsFirms may diversify into different businesses in order to reduce risk

Resources and DiversificationBesides strong incentives, firms are more likely to diversify if they have the resources to do soValue creation is determined more by appropriate use of resources than incentives to diversify

Managerial Motives (Value Reduction)Diversifying managerial employment riskIncreasing managerial compensationReasons for Diversification

Managerial Motives to DiversifyManagers have motives to diversify diversification increases size; size is associated with executive compensationdiversification reduces employment riskeffective governance mechanisms may restrict such motives

Bureaucratic Costs and the Limits of DiversificationNumber of businessesInformation overload can lead to poor resource allocation decisions and create inefficiencies.Coordination among businessesAs the scope of diversification widens, control and bureaucratic costs increase.Resource sharing and pooling arrangements that create value also cause coordination problems.Limits of diversificationThe extent of diversification must be balanced with its bureaucratic costs.

Relationship Between Diversification and PerformancePerformanceLevel of DiversificationDominantBusinessUnrelatedBusinessRelatedConstrained

Restructuring:Contraction of ScopeWhy restructure?Pull-back from overdiversification.Attacks by competitors on core businesses.Diminished strategic advantages of vertical integration and diversification.Contraction (Exit) strategiesRetrenchmentDivestment spinoffs of profitable SBUs to investors; management buy outs (MBOs).Harvest halting investment, maximizing cash flow.Liquidation Cease operations, write off assets.

Why Contraction of Scope?The causes of corporate declinePoor management incompetence, neglectOverexpansion empire-building CEOsInadequate financial controls no profit responsibilityHigh costs low labor productivityNew competition powerful emerging competitorsUnforeseen demand shifts major market changesOrganizational inertia slow to respond to new competitive conditions

The Main Steps of TurnaroundChanging the leadershipReplace entrenched management with new managers.Redefining strategic focusEvaluate and reconstitute the organizations strategy.Asset sales and closuresDivest unwanted assets for investment resources.Improving profitabilityReduce costs, tighten finance and performance controls. AcquisitionsMake acquisitions of skills and competencies to strengthen core businesses.

Adaptive StrategiesMaintenance of ScopeEnhancementStatus Quo

Market Entry StrategiesAcquisition: a strategy through which one organization buys a controlling interest in another organization with the intent of making the acquired firm a subsidiary business within its own portfolioLicensing: a strategy where the organization purchases the right to use technology, process, etc. Joint Venture: a strategy where an organization joins with another organization(s) to form a new organization

Reasons for Making Acquisitions

Reasons for Making Acquisitions:

Factors increasing market powerwhen a firm is able to sell its goods or services above competitive levels orwhen the costs of its primary or support activities are below those of its competitors usually is derived from the size of the firm and its resources and capabilities to compete Market power is increased byhorizontal acquisitionsvertical acquisitionsrelated acquisitionsIncreased Market Power

Reasons for Making Acquisitions:Barriers to entry includeeconomies of scale in established competitorsdifferentiated products by competitorsenduring relationships with customers that create product loyalties with competitorsacquisition of an established company may be more effective than entering the market as a competitor offering an unfamiliar good or service that is unfamiliar to current buyersCross-border acquisitionOvercome Barriers to Entry

Reasons for Making Acquisitions:Significant investments of a firms resources are required todevelop new products internallyintroduce new products into the marketplaceAcquisition of a competitor may result inlower risk compared to developing new productsincreased diversificationreshaping the firms competitive scopelearning and developing new capabilities faster market entryrapid access to new capabilities

Reasons for Making Acquisitions:An acquisitions outcomes can be estimated more easily and accurately compared to the outcomes of an internal product development processTherefore managers may view acquisitions as lowering riskLower Risk Compared to Developing New Products

Reasons for Making Acquisitions:It may be easier to develop and introduce new products in markets currently served by the firmIt may be difficult to develop new products for markets in which a firm lacks experienceit is uncommon for a firm to develop new products internally to diversify its product linesacquisitions are the quickest and easiest way to diversify a firm and change its portfolio of businessesIncreased Diversification

Reasons for Making Acquisitions:Firms may use acquisitions to reduce their dependence on one or more products or marketsReducing a companys dependence on specific markets alters the firms competitive scopeReshaping the Firms Competitive Scope

Reasons for Making Acquisitions:Acquisitions may gain capabilities that the firm does not possessAcquisitions may be used toacquire a special technological capabilitybroaden a firms knowledge basereduce inertia Learning and Developing New Capabilities

Problems With Acquisitions

Problems With Acquisitions

Integration challenges includemelding two disparate corporate cultureslinking different financial and control systemsbuilding effective working relationships (particularly when management styles differ)resolving problems regarding the status of the newly acquired firms executivesloss of key personnel weakens the acquired firms capabilities and reduces its valueIntegration Difficulties

Problems With Acquisitions

Evaluation requires that hundreds of issues be closely examined, includingfinancing for the intended transactiondifferences in cultures between the acquiring and target firmtax consequences of the transactionactions that would be necessary to successfully meld the two workforcesIneffective due-diligence process mayresult in paying excessive premium for the target companyInadequate Evaluation of Target

Problems With Acquisitions

Firm may take on significant debt to acquire a companyHigh debt can increase the likelihood of bankruptcylead to a downgrade in the firms credit ratingpreclude needed investment in activities that contribute to the firms long-term successLarge or Extraordinary Debt

Problems With Acquisitions

Synergy exists when assets are worth more when used in conjunction with each other than when they are used separatelyFirms experience transaction costs (e.g., legal fees) when they use acquisition strategies to create synergyFirms tend to underestimate indirect costs of integration when evaluating a potential acquisitionInability to Achieve Synergy

Problems With Acquisitions

Diversified firms must process more information of greater diversity Scope created by diversification may cause managers to rely too much on financial rather than strategic controls to evaluate business units performancesAcquisitions may become substitutes for innovationToo Much Diversification

Problems With Acquisitions

Managers in target firms may operate in a state of virtual suspended animation during an acquisitionExecutives may become hesitant to make decisions with long-term consequences until negotiations have been completedAcquisition process can create a short-term perspective and a greater aversion to risk among top-level executives in a target firmManagers Overly Focused on Acquisitions

Problems With Acquisitions

Additional costs may exceed the benefits of the economies of scale and additional market powerLarger size may lead to more bureaucratic controls Formalized controls often lead to relatively rigid and standardized managerial behavior Firm may produce less innovationToo Large

Strategic AllianceA strategic alliance is a cooperative strategy in whichfirms combine some of their resources and capabilitiesto create a competitive advantage A strategic alliance involvesexchange and sharing of resources and capabilitiesco-development or distribution of goods or services

Strategic Alliance

Types of Cooperative StrategiesJoint venture: two or more firms create an independent company by combining parts of their assetsEquity strategic alliance: partners who own different percentages of equity in a new ventureNonequity strategic alliances: contractual agreements given to a company to supply, produce, or distribute a firms goods or services without equity sharing

Strategic AlliancesVertical AllianceSuppliervertical complementary strategic alliance is formed between firms that agree to use their skills and capabilities in different stages of the value chain to create value for both firmsoutsourcing is one example of this type of alliance

Strategic AlliancesBuyerPotential Competitorshorizontal complementary strategic alliance is formed between partners who agree to combine their resources and skills to create value in the same stage of the value chainfocus on long-term product development and distribution opportunitiesthe partners may become competitorsrequires a great deal of trust between the partnersBuyer

Mergers, Acquisitions, and TakeoversStats and Background (p. 242)There were five waves of mergers and acquisitions in the 20th century, with the last twoin the 1980s and 1990s. About 40%45% of the acquisitions in recent years were madeacross country borders. There were 55,000 acquisitions valued at $1.3 trillion in the1980s, but acquisitions in the 1990s exceeded $11 trillion in value. The annual value ofmergers and acquisitions peaked in 2000 at about $3.4 trillion and fell to about $1.75 trillionin 2001. Slightly more than 15,000 acquisitions were announced in 2001 comparedto over 33,000 in 2000.

Although acquisitions have slowed, their number remains high. Firms make acquisitionsto increase market power, reduce competitive threat, to enter a new market, tospread risk, or as a way to obtain options that allow shifts in core business. Studies showthat shareholders of acquired firms often earn above-average returns from an acquisition,while shareholders of acquiring firms typically earn returns from the transaction that areclose to zero.Reasons for Making AcquisitionsAcquisitions (p. 244)Regardless of size, Horizontal Acquisitions occur when the acquirer and acquired companiescompete in the same industry. Examples include McDonalds acquisition of BostonMarket, Daimler-Benzs acquisition of Chrysler, Coors acquisition of Bass Brewers, andAmgens acquisition of Immunex.

A Vertical Acquisition refers to a firm acquiring a supplier or distributor of one or moreof its goods or services. This kind of acquisition leads to additional controls over parts ofthe value chain such as Walt Disney Companys acquisition of Fox Family Worldwide.Since entering international markets is extremely difficult, acquisitions strategies arecommonly used to overcome such barriers. The importance of entering and competing successfullyin international markets is the fact that the five emerging markets of China, India,Brazil, Mexico, and Indonesia are among the 12 largest economies in the world, with acombined purchasing power that is one-half that of the G7 industrial nations of the UnitedStates, Japan, Britain, France, Germany, Canada, and Italy. (Continued on next slide.)

Reasons for Making Acquisitions (p. 244) (cont.)What is one of the most persuasive reasons to merge?

Market Power: The Staple-Office Depot Proposed Merger Rationalize the market, gaining strength to fend of discount national chains invading space (Wal-Mart,Target, and Kmart in office supplies and Best Buy and Circuit City in electronics) Merger would have given Staples-Office Depot a tremendous advantage over its closest rival, OfficeMax, even if it was forced to sell off 63 stores to Office Max Merger would help Staples-Office Depot to lower costs to better compete with larger rivals Wal-Mart,Kmart, etc.Anecdotal EvidenceAccording to Office Depots own ads, file folders cost $1.95 in Orlando, Florida, where it competes withStaples and Office Max, and $4.17 in Leesburg, Florida, some 50 miles away, where it is the only officesupply superstore (Source: FTC judgment). The Federal Trade Commission was concerned that the mergewould allow the combined firm, which would have approximately 1,000 superstores, to control prices forthe sale of office supplies in more than 40 markets throughout the United States.

For some people, office supplies are a subject that inspires much passion. The CEO of Office Depottold Reuters that he's using bodyguards because of threats, apparently from his employees. A few of theseemployees, at least, seem to buy their executives' argument that the merger will probably lead to price cutsbecause it will definitely lead to job cuts. Other believers include investors who have bid up the stockprices of both firms.

Punch LineOn March 10, 1997, The Federal Trade Commission rejected the proposed merger of Staples and Office Depot.The Commission fears the $4.9 billion merger would hurt competition in the growing market for officesupplies. Staples and Office Depot are two of the three largest office supply superstores in the country.

Reasons for Making Acquisitions (cont.)Cost of New Product Development and Increased Speed to Market (p. 247)Acquisition activity is extensive throughout the pharmaceutical industry, where firms use acquisitionsto enter markets quickly to overcome product-development costs and to increasethe predictability of returns on investments. Interestingly, Merck & Co. tends not to acquirenew drugs but to develop them internally, a strategy that has worked in the last 20 years. Itbecame the worlds largest pharmaceutical firm. However, now Merck has experienced problemsand it trails Pfizer and GlaxoSmithKline in the industry. Merck may be unable to returnto its number one ranking unless it acquires a successful pharmaceutical firm.Acquisitions often represent the fastest means to enter international markets and helpfirms overcome the liabilities associated with such strategic moves.Reasons for Making Acquisitions (cont.)Synergy: The HP-Compaq MergerExtended broader product lines for combined firm and rationalize market standingsMelded the product service model of the two firms and brought scale vis-a vis competitors like IBM, EDS, etc.Product Categories:HIGH END UNIX Servers: World-wide (2000)HP mkt share: 11.4% Compaq mkt share: 3.0% Combined 14.4% stronger position against mkt leader Sun Microsystems w/ 47.1% shareMID-RANGE UNIX servers: World-wide (2000)HP mkt share: 30.3% Compaq mkt share: 4.0% Combined 34.3% stronger position against mkt leader Sun Microsystems w/ 23.5% sharePCs: US-only (2001)HP mkt share: 9.4% (w/ -21.3 growth rate)Compaq mkt share: 4.0% (w/ -18.8 growth rate) Combined 13.4% stronger position against mkt leader DELL w/ 24% share (and 9.8% growth rate)Laptops / Notebooks (2000)HP mkt share: 4.5% (w/ 129.2 growth rate)Compaq mkt share: 11.6% (w/ 10.4 growth rate) Combined 16.1% stronger position against mkt leader IBM w/ 13.3% share Rationalized combined operations to squeeze cost structure, (i.e. economies of scale argumentReasons for Making Acquisitions (cont.)Synergy: The HP-Compaq Merger (cont.)Anecdotal EvidenceMichael Capellas, chairperson and CEO of Compaq, said that his company's merger withHewlett-Packard could receive a financial boost as the combined company thins the ranksof its component suppliers and uses size to increase its competitiveness. With higher volumeson its side, the merged companies will trim the number of suppliers they use forcomponents such as memory chips and monitors, creating a significant reduction in costs.Industry analysts have questioned whether the merge would help HP compete more successfullyagainst Dell Computer Corp. and IBM. Becoming large enough to competeagainst IBM was a reason cited by HP executives, but the new company is still far fromits goal. It will more likely succeed at giving HP the bulk to better dictate its own termsin working with suppliers and partners such as Microsoft Corp., Oracle Corp. and IntelCorp. Previously, if HP did not do what Microsoft wanted, Microsoft could go to Compaq.Strategic suppliers could leverage the two companies against each other. With themerger, they won't be able to.(Continued on next slide.)Source: Stacy Cowley. With deal closed, countdown to new hp begins merger plans arewell organized, but some products and employees will become history, analysts say. IDGNews Service, May 6, 2002. (http://www.computerworld.com/hardwaretopics/hardware/story/0,10801,70882,00.html)

Reasons for Making Acquisitions (cont.)Cost of New Product Development and Increase Speed to Market:SkillSoft and SmartForceSkillSoft and SmartForce created an e-learning outfit company. The global economic slowdownforced them to rationalize their operations and conclude that combining forces would lead to betterproduct development, better client relations, and sustained competitive advantage.The Facts A global e-Learning leader Combined strength of two leaders: SkillSoft and SmartForce Content development team on four continents Over 4.5+ million registered online learners Content in 15 languages Over 18 years experience in learning 44 industry certifications offered Annual investment in R&D of $50+ million Around the world in 65 countries More than 2,500 enterprise-level customers Largest library of more than 300,000 learning objectsPlatform for Development Combination of SmartForces content with SkillPort, SkillSofts learning platform, to includesupport for SmartForce Integration of SkillSoft content with the MySmartForce learning platform Develop links to Books 247 Referenceware Engineer SmartForces e3 courses(Continued on next slide.)

Reasons for Making Acquisitions (cont.)Cost of New Product Development and Increase Speed to Market:SkillSoft and SmartForceResults of Merger Gain competitive advantage Drive business transformation Launch products faster Improve customer loyalty Increase productivity Reduce costs Retain employees Ramp new hires faster Increase job satisfaction Eliminate knowledge gaps Educate extended enterprise Train globally, 24/7

Problems with AcquisitionsProblems in Achieving Acquisition Success (p. 249)Research suggests that about 20% of all mergers and acquisitions (M&A) are successful,60% produce disappointing results, and the last 20% are clear failures. Successful acquisitionsdemand a well-conceived strategy, avoiding paying too high a premium, and aneffective integration process. As shown in Figure 8.1 in the text, several problems mayprevent successful acquisitions. Integration is complex and involves a large number ofactivities. For instance, Intel acquired (DEC) Digital Equipment Corporations semiconductorsdivision. Successful integration was crucial. On the day Intel began to merge theacquired division into its operations, hundreds of employees working in dozens of differentcountries needed to complete 6,000 deliverables.Problems with AcquisitionsM&A: ImplementationManaging M&A implementation is challenging and often times beyond the scope of afirms core competence. Research and history shows that M&A is not value creating,rather it generally results in value-destroying. So why do firms do it? And what separatesthe great integrators from the rest?Classic Case: HP-Compaq Merger Integration Difficulties: Two very distinct cultures without a shared history. Compaqcoming off a badly integrated merger with Digital. Inadequate Evaluation of Target: Did HP realize the erosion of Compaqs market positionin key product domains vis--vis competitors like Dell, Gateway, Sun Microsystems,etc.? Debt: No evidence of threat to date (May just ignore) Too Large of Firm: Does HP have any history absorbing a merger partner of thissize? Managers Overly Focused on Acquisition(s): A proxy fight is not the best way to kickoff a merger deal. Too Much Diversification: Low margin product lines may need to be jettisoned? Inability to Achieve Synergy: Too early to tell, but melding the culture will go alongway towards achieving synergy(Continued on next slide.)

Problems with Acquisitions (cont.)M&A: Implementation (cont.)Classic Case: HP-Compaq Merger (cont.)Anecdotal EvidenceHP and Compaq claim to have dedicated some 1-million working hours to integrationplanning, which represents a thoroughness that is likely to pay off in the most well-organizedtransition plan in IT merger history, according to Paul McGuckin, an analyst atStamford, CN-based Gartner Inc.AskCould that 1-million working hours be dedicated to better R&D, cost-saving measures,customer service, etc.?AskIf you were a strategic planner for IBM how would you react to the HP-Compaq merger?AskWhat lessons did HP-Compaq learn from previous mergers, and why will this time beany different?Source: Stacy Cowley. With deal closed, countdown to new hp begins merger plans arewell organized, but some products and employees will become history, analysts say. IDGNews Service, May 6, 2002. (http://www.computerworld.com/hardwaretopics/hardware/story/0,10801,70882,00.html)

Problems with Acquisitions (cont.)Large or Extraordinary Debt (p. 251)Junk Bonds are a financing option through which risky acquisitions are financed withmoney (debt) that provides a large potential return to lenders (bondholders). Becausejunk bonds are unsecured obligations interest rates for these high-risk debt instrumentssometimes reached between 18%-20% during the 1980s. Junk bonds are now used lessfrequently to finance acquisitions, yet some firms still take on significant debt to acquirecompanies. For example, Disney increased its total debt by $5.3 billion to $15 billion toacquire Fox Family Worldwide. This action caused Moodys Investors Service to downgradeDisneys debt condition. Disney is now a potential takeover target because of itspoor performance. Analysts also question the amount of debt taken on by InternationalPaper to finance several acquisitions. The firm built its debt to $15.5 billion, equal to approximately50% of its capital and 400% of its annual cash flow.

In general, firms using related diversification strategies outperform those employingunrelated diversification strategies, yet conglomerates based on unrelated diversificationstrategy can also be successful. For example, Virgin Group, with interests ranging fromcosmetics to trains, is successful, operating over 200 companies worldwide and employingover 25,000 people.

Problems with Acquisitions (cont.)Managers Overly Focused on Acquisitions (p. 254)Acquisition strategies with which managers become involved include (1) searching foracquisition candidates, (2) completing due-diligence, (3) negotiations, and (4) managingthe post-acquisition integration. For example, Case Corporation acquired New Holland tocreate CNH Global with annual sales of almost $11 billion, resulting in the second highestmarket share in the agricultural and construction equipment industry. However, asmarkets were rapidly changing and customers were defecting, CNHs annual revenues in2000 declined by $2.5 billion. Clearly, executives should avoid focusing on an acquisitionstrategy at the expense of the firms long-term value creating ability.