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- - - - - - - - Chapter 5 - - - - - - - -

- - - - - - - - Chapter 5 - - - - - - - -. Strategic Processes. Nature of Strategy. Strategy defines the central plans, policies and culture of an organization in a long-term horizon Strategic planning is a dynamic process that requires inputs from all segments of the organization.

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  1. - - - - - - - - Chapter 5- - - - - - - - Strategic Processes ©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 1

  2. Nature of Strategy • Strategy defines the central plans, policies and culture of an organization in a long-term horizon • Strategic planning is a dynamic process that requires inputs from all segments of the organization ©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 2

  3. 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 ©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 3

  4. 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 ©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 4

  5. 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 ©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 5

  6. 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 ©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 6

  7. 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 ©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 7

  8. Organization cultures • Corporate cultures affect strategic thinking and planning • Failure to mesh divergent cultures is a major obstacle to successful merger integration ©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 8

  9. Alternative strategy methodologies • 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 ©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 9

  10. 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 ©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 10

  11. 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 managers ©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 11

  12. Entrepreneurship - 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 ©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 12

  13. 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 ©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 13

  14. 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 capabilities ©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 14

  15. Correlations 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 risk ©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 15

  16. Focus 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 ©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 16

  17. 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) ©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 17

  18. 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 ©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 18

  19. 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 ©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 19

  20. 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 ©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 20

  21. 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 ©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 21

  22. 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 ©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 22

  23. Formulating a Merger Strategy • Requires continuing reassessment • Industry analysis • Competitor analysis • Supplier analysis • Customer analysis • Substitute products • Complementors • Technology changes • Societal factors • Firm's strengths/weaknesses relative to present/future industry conditions ©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 23

  24. Matrix analysis • Product-market matrix • Competitive-position matrix ©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 24

  25. Growth-share matrix • Strength-market attractiveness matrix ©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 25

  26. Global strategy ©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 26

  27. 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 ©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 27

  28. Grove (1996) • Firm must adjust to six forces • Existing competitors • Potential competitors • Complementors • Customers • Suppliers • Industry transformation • Eclectic adaptive processes approach to strategy ©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 28

  29. Business goals - general or specific, but must be quantifiable to facilitate progress assessment • Size objectives • Large enough to use fixed factors effectively • Critical mass necessary to attain cost levels for profitable operation at market prices • Growth objectives - sales, assets, EPS, values • To get favorable P/E multiple for shares • To increase market to book value of shares ©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 29

  30. Stability objectives - two kinds of instability • Large erratic fluctuations in total size and abrupt program shifts (e.g., defense industry) • Cyclical instability of durable goods industries • Flexibility objectives - ability to operate in a variety of product markets and responsive to consumers • Breadth of capabilities, e.g., research, manufacturing, marketing • Technological breadth • Stay close to customers ©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 30

  31. Aligning firm to changing environments • Gap between objectives and potential based on current capabilities • Change environment or capabilities • Use iterative process due to high uncertainty • Various approaches: • Choose products related to needs of customer that provide large markets • Focus on technological bottlenecks - may create new markets • Be at frontier of technological capabilities and aim for attractive product fallout • Emphasize economic criteria - attractive growth and high value prospects ©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 31

  32. 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 ©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 32

  33. Strategy and Structure • Unitary or U-Form ©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 33

  34. Description • Highly centralized under the president • Broken into functional departments - no departments can stand alone • President must stay close to the departments • No easy way to measure each department as a profit center • Long-term vision left mainly to the president • Allows rapid decision making • Only successful in small organizations • Difficult to handle multiple products ©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 34

  35. Acquisition strategies • Acquired firms must fit into limited span of control of top executive group • Acquisitions likely to be horizontal or closely related activities • New units likely to be fully consolidated into unitary organization ©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 35

  36. Holding company or H-Form ©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 36

  37. Description • Arranged around various unrelated operating businesses • Leadership of firm is able to evaluate each unit individually • Resources can be allocated according to projected returns • Firm has superior knowledge of the situation in each unit ©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 37

  38. Acquisition strategies • Possible for firms to acquire relatively unrelated businesses • Acquired operations are permitted to function almost as an independent company • May be unable to integrate activities that are widely diverse ©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 38

  39. Multidivisional organization or M-Form ©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 39

  40. Description • Between centralization of U-Form and decentralization of H-Form • Each division is autonomous enough to be judged a profit center • All divisions share some general staff assistance in areas such as production or marketing • Can handle related product and geographic market extensions ©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 40

  41. Acquisition strategies • Acquired firm with related product line • Might be served by same functional staff groups effectively • Might become a separate division • Groups of divisions may have elements in common and at some point might require their own thrust with support staff groups having the required specialized knowledge ©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 41

  42. President Product A Product B Product C Research Manager Production Manager Marketing Manager • Matrix form ©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 42

  43. Description • Managers of functional departments such as finance, manufacturing, and development • Employees of functional departments are assigned to subunits organized around products, geography, or some other criteria • Employees report to a functional manager and a product manager • Effective in firms characterized by many new products or projects ©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 43

  44. Acquisition strategy • Can handle acquisitions of related products • Can handle acquisitions for geographic market expansion • Importance of effective communication system - new product groups may increase possibility of disputes and conflicts arising from multiple lines of authority ©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 44

  45. Virtual integration (Dell Computers) • Links of value chain are brought together by informal arrangements among suppliers and customers • Close ties with suppliers • Effective customer ordering and services • Arrangement of supply shipments and customer needs facilitated by efficient computer systems • Represents a blurring of company boundaries • Strengthen communication ties between different firms in value chain creates a "form of organization" ©2001 Prentice Hall Takeovers, Restructuring, and Corporate Governance, 3/e Weston - 45

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