Strategic Growth Lecture 8

Learning Outcomes Establish the potential role of organic strategies Identify key issues in the successful management of mergers and acquisitions Identify the key issues in the successful management of strategic alliances Determine the appropriate choices between organic development, mergers and acquisitions and strategic alliances Compare key success factors in mergers, acquisitions and alliances

Three Strategy methods Johnson, Whittington and Scholes, (2011 p327) 3

Options for Growth Next week

Organic development Organic development is where a strategy is pursued by building on and developing an organisation’s own capabilities. This is essentially the ‘do it yourself’ method. 5

Advantages of organic development Knowledge and learning can be enhanced. Spreading investment over time – easier to finance. No availability constraints – no need to search for suitable partners or acquisition targets. Strategic independence – less need to make compromises or accept strategic constraints. 6

Corporate entrepreneurship Corporate entrepreneurship refers to radical change in the organisation’s business, driven principally by the organisation’s own capabilities. For example, Amazon’s development of Kindle using its own in house development, or Ryanair from inside the aircraft leasing company Guinness Peat. Discuss: Emergent strategy Inside-out/outside-in approach 7

Blue Ocean Strategy – Kim and Mauborgne (2005) New Market spaces where competition is minimised Encourages entrepreneurs to focus on “untapped market space, demand creation and the opportunity for highly profitable growth” Strategy is to find strategic gaps that competitors are not operating or exploiting So what is Red Ocean strategy? Lynch, (2012 p292)

Cirque du Soleil http://www.cirquedusoleil.com/en/shows/alegria/default.aspx

Blue Ocean Strategy Formulation Principles Implementation Principles Reconstruct market boundaries Focus on the big picture, not on the numbers Reach beyond existing demand Get the strategic sequence right Overcome key organisational hurdles Build execution into the strategy

Strategic alliances A strategic alliance is where two or more organisations share resources and activities to pursue a strategy. Collective strategy is about how the whole network of alliances of which an organisation is a member competes against rival networks of alliances. Collaborative advantage is about managing alliances better than competitors. 12

Types of strategic alliance There are two main kinds of ownership in strategic alliances: Equity alliances involve in the creation of a new entity that is owned separately by the partners involved. Non-equity alliances are typically looser, without the commitment implied by ownership. 13

Types of Strategic Alliances Equity Alliances Non-Equity Alliances Joint Ventures Franchising Licensing A contract manufacturer/ long-term subcontracting

Types of Strategic Alliances Equity Alliances - Joint Ventures Equity joint ventures: The partners share profits, losses and risk in equal proportion to their respective contributions to the venture's registered capital. These escalate upwardly in the same proportion as the increase in registered capital. Cooperative joint ventures (Contractual Operative Enterprises): Have a limited structure - the foreign investor provides the majority of funds and technology and the local party provides land, buildings, equipment, etc.

Types of Strategic Alliances Non-Equity Alliances - Franchising Responsibilities of the franchisee: Pay a royalty for the trademark Pay for the training and advisory services given to the franchisee Give a percentage of the individual business unit's sales. Responsibilities of the franchisor: Share trade secrets, technology, patents with the franchisor Provide equipment and training to staff What is the RISK?…

Types of Strategic Alliances Non-Equity Alliances – Licensing The Benefit of Licensing for Licensees transferring the values and consumer favour towards the property to the licensed product or service providing added value and differentiation from competitive offerings appealing to new target markets who have not historically been interested in a licensee’s product or service giving credibility for moving into new market sectors through product extension The Benefit of Licensing for Licensors exploit and enhance its brand or property increasing its brand presence at retail or distribution outlet entering new markets (consumer or geographical) which were unfeasible with it’s own resources or capabilities generating new revenue streams, often with little involvement or additional financial or other resource implications What is the RISK?...

Types of Strategic Alliances Non-Equity Alliances – A contract manufacturer Benefits Cost Savings Advanced Skills Quality Risks Lack of Control Relationships Quality concerns Intellectual Property Loss Competences to contract manufacturers.

Motives for alliances Scale alliances – lower costs, more bargaining power and sharing risks. Access alliances – partners provide needed capabilities (e.g. distribution outlets or licenses to brands) Complementary alliances – bringing together complementary strengths to offset the other partner’s weaknesses. Collusive alliances – usually illegal 19

Strategic alliance motives Johson Whittington and Scholes (2011 p341) 20

Strategic alliance processes Two themes are vital to success in alliances: Co-evolution – the need for flexibility and change as the environment, competition and strategies of the partners evolve. Trust – partners need to behave in a trustworthy fashion throughout the alliance. 21

Alliance evolution Figure 10.4 Alliance evolution 22 Source: Adapted from E. Murray and J. Mahon (1993), ‘Strategic alliances: gateway to the new Europe’, Long Range Planning, vol. 26, p. 109. www.sciencedirect.com/science/journal 22

Motives Critical Mass Cost reduction and improved customer offering Not area of competitive advantage within the partnership Larger competitive grouping Fast growth, low capital investment

Motives Co-specialisation Learning Each partner specialises in their capabilities eg across value chain, international growth Learning Temporary partnership eg agents or local partner for market entry, development of e-business

Strategic Alliances In Summary - Requirements Longer term Commitment of resources Core activity of a strategic nature for one or more of the partners Trust

For Effectiveness Shared purpose Clear goals, clear expectations Active management of the relationship Effective governance and organisational relationships Enough flexibility to allow evolution