3H Strategy and International Business 2001/02
Session 12 - Methods of Corporate Development
As we saw last week in the Coppella video, corporate developments can
be viewed as combinations of methods and directions. The three
overarching methods are:
Internal Development
Clearly organisations can choose to develop existing activities, or enter
new markets and products relying upon their own resources. Closure of
a particular business operation or business unit can be seen as a
withdrawal from existing activities without involving other
organisations.
The great advantage of developing the organisation using “organic”
methods is that skills and expertise are built internally, which may itself
spawn further advances, for example the successful research and
development team creating new products and services. Control of
developments can also be easier for managers because greater familiarity
with people and processes is maintained. However, time or cost suggests
frequently that other methods also need to be considered.
The Peake family had developed their farming business, expanding from arable crops
into orchards. From that position they undertook to forward integration into the
production of apple juice with Coppella, later expanding their product range by
introducing “Mrs Peake’s Organic Apple Juice. The opening of their golf club being
an example of an unrelated diversification. All of these developments were the result
of internal methods, the deal with Taunton being the first time other methods had
been used.
Such organic growth was probably slower than other methods, but more in keeping
with the culture and capabilities of this family business. Specific competences could
be built over time, which was probably particularly helpful in the period when
Coppella was an innovative product and external expertise was necessarily limited.
However, by the time of the deal with Taunton Cider, the Peake family was stretched
in terms of its capital and competences, but needed to move quickly to survive. In
such conditions, other methods needed to be considered.
Acquisitions and Mergers
Acquisitions have long been considered are a major tool of corporate
strategy, particularly by US and UK companies, where corporate
structure and the prominent role of stock markets lend support to both
hostile and friendly takeovers, as well as mergers between companies.
Within Europe, the UK has traditionally been seen as the centre of
acquisition activity - John Kay quotes Geroski and Vlassopoulus, who
calculated that in 1988 UK firms accounted for 85% by number or 75%
by value of European acquisitions. However, acquisitions have increased
in countries like Germany in recent years and cross-border acquisitions
are becoming more prominent - BMW’s takeover of Rover in 1994 and
VW’s acquisition of the Rolls Royce factory (although not the name!) in
1998, being two examples from the car industry.
The evidence supporting mergers and acquisitions as a successful method
is mixed. Frequently, the reason for an acquisition is given as
diversification, indeed many commentators and studies confuse direction
and method. Some argue that individual investors can fulfil this task
both better (more accurately reflecting their own risk profile within their
share portfolio) and cheaper (no premium price to be paid because
company is a takeover target) than a corporation.
Method of evaluation
1. Subjective opinions of
company personnel
2. Acquired business kept
in long term
3. Comparison of
profitability before and
after acquisition
4. Effect on stock market
valuation
Major studies
Hunt et al (1987)
Conclusions
Around half are successful
Ravenscraft & Scherer
(1987) and Porter (1987)
Meeks (1977), Mueller et
al (1980); Ravenscraft &
Cosh et al (1990) and
Scherer (1987)
Franks & Harris (1986);
Franks, Harris & Mayer
(1988)
More divested than
retained
Nil to negative effect
Positive initial impact
Based on Figure 10.1 in J Kay, Foundations of Corporate Success, OUP, 1995
The problems of managing an acquisition do not end once the takeover
has been completed. Johnson and Scholes discuss the reasons for
acquisitions and the problems of integration post-merger.
Reasons for Mergers/Acquisitions
Speed
of market entry
new competences
Reduce competitive backlash
Asset stripping
Cost reduction
BUT SOME DIFFICULTIES
No-one available
Integrating activities
Clash of cultures
Acquiring
one dominates?
keep separate?
build hybrid?
In 1984, the Swedish manufacturer, Electrolux acquired the Italian company, Zanussi.
Whilst both produced domestic appliances, the product range was extended as
Electrolux was stronger in products like refrigerators and vacuum cleaners, whilst
Zanussi was best known for “wet products” like washing machines. These
complimentary product ranges were matched by their relative strengths in European
markets, with Electrolux strong in Scandinavia and Northern Europe, and Zanussi
strong in the South. Electrolux also achieved some vertical integration, thanks to
Zanussi’s component manufacturing operations.
For Electrolux, the acquisition allowed it to pursue its strategy of growth in order to
become a domestic goods manufacturer of global scale. However, Zanussi’s owners
also welcomed the deal as it allowed a loss-making company to be turned around.
Viewed a number of years after the event, the acquisition was largely seen as
successful. Certainly, Zanussi’s financial position had been turned around, but
results of the broader globalisation strategy were still uncertain.
In his article on the “synergy trap”, Sirower suggests that successful
acquisitions depend upon the exploitation of synergies between the two
organisations. Without these synergies the acquirer is likely to end up in
a “synergy trap”, with the move with any premium paid for the
acquisition unlikely to be realised. The cornerstones of these synergies
are consonance in four key areas:
 Strategic Vision
 Operating Strategy
 Systems Integration
 Power and Culture
In this argument, Sirower touches on themes that we shall tackle next
week.
In recent years, de-mergers have also become a major aspect of
corporate development. The demerger of ICI into ICI and Zenica in the
mid-1990s and break-up of Hanson plc started in 1996 are two examples
from the UK. Here, it is argued, the diversified corporation can be
unbundled, allowing each part to concentrate on a more closely related
set of operations.
Disposal of part of a corporation by selling it to another corporation is
another method of withdrawal from particular activities. Management
buyouts, where the business is sold to the existing management team,
often supported by investment bankers, also rose in prominence in the
UK and France during the late 1980s and 1990s. The privatisation and
break-up of British Rail in 1995/6 included a number of management
buyouts of train operating companies.
Strategic Alliances
Strategic alliances have become a major trend within many industries
since the 1980s. Often these arrangements extend across national
boundaries and are frequently linked to discussions about the increasing
globalisation of business, as the example of the world airline industry
indicates.
ALLIANCES IN THE WORLD AIRLINE INDUSTRY
In 1995, the magazine “Airline Business” identified 320 different alliances between
companies within the world airline industry. These alliances were generally of a
code-sharing format, were the airlines combine connecting services on a single ticket.
A similar study of the airline industry concentrated upon 274 alliances and attempted
to classify the arrangements based on the number of activities shared between the
companies. It found 230 loose arrangements (3 or less activities) which were mainly
code-sharing; 30 intermediate arrangements (4 to 6 activities); and 14 strong form
arrangements (more than 6 activities shared) which often extended into formal joint
venture agreements.
The current attempts by British Airways and American Airlines to combine their
operations to create one of the world’s largest airlines has excited the attentions of
both competitors and regulators on both sides of the Atlantic Ocean.
Based on an unpublished MBA research project.
It can be seen from this illustration that it is probably a misnomer to call
alliances one method of corporate development as they can take a variety
of forms of joint development between organisations. Formal joint
ventures have been a feature of business life for many years, with the
Royal Dutch/Shell Group growing out of an agreement made in 1907.
The Taunton deal with the Peake family is also an example of a joint venture, this
time with Taunton as the major shareholder, but members of the Peake family still
having a major say on the management of the new joint company.
Recent years have seen an explosion in the number and range alliances,
varying between formal agreements to much looser arrangements.
Type of Alliance
Joint Venture
Consortia
Franchising
Licensing
Description
Partners set up a new,
jointly-owned, operation
Usually focused on a
particular project, and may
involve more than two
partners
Selling of a business
concept
Grant rights to make or
distribute a product
Sub-contracting
Contract part of a service
or process
Networks
Collaboration of two or
more organisations
through trust/mutual
understanding rather than a
formal link
Examples
Royal Dutch/Shell Group
Airbus Industrie;
Trans Manche Link which built the Channel
Tunnel between the UK
and France
McDonalds restaurants
Coca Cola licences
bottling and distribution in
most countries
House building in the UK
is based on sub-contracting
the separate trades such as
bricklaying, plumbing etc.
Best Western - an
international network of
independent hotels
The reasons for organisations adopting these approaches can vary.
Contractor and Lorange argue that companies can co-operate as well as
compete against each other and they go on to identify a range of potential
reasons for alliances, ranging from risk reduction to quasi vertical
integration.
Reasons for Forming Alliances
 Risk Reduction
- Product portfolio diversification
- Dispersion/reduction of fixed costs
- Lower capital investment
- Faster entry and payback
 Economies of Scale and/or Rationalisation
- Lower average cost for larger volume
- Lower cost by using comparative advantage of each partner
 Complimentary Technologies and Patents
- Technological synergy
- Exchange of patents and territories
 Co-opting or Blocking Competition
- Defensive joint ventures to reduce competition
- Offensive joint ventures to increase costs and /or lower market
share for third company
 Overcoming Government Restrictions
- Local partner requirements
- Local content requirements
 Initial International Expansion
- Benefit from local partner know-how
 Vertical Quasi-integration
- Access to materials; technology; labour; capital
- Regulatory permits
- Access to distribution channels
- Benefits of brand recognition
- Establishing links with major buyers
- Drawing on existing fixed marketing establishment
Hamel, Doz & Prahalad argue that the main reason for entering into
alliances with competitors is learning. This argument, coming as it does
from three of its main proponents, falls clearly within that of the
resource-based approaches. For them, alliances promote the transfer,
support or acquisition of core competences.
Johnson and Scholes explore some of the structural issues implicit
within their organisation and the risks that may be involved. From this
they identify a series of issues that need to be addressed if the alliance is
likely to be successful.
Making Alliances Work
Proactive attitudes
trust
cultural sensitivity
inter-personal relationships
Clear organisational arrangements
Desire
Allow
to learn (not substitute)
evolution
These issues are well illustrated by the alliance between Rover and
Honda in the 1980s, which features as a case study in Johnson and
Scholes.
During the late 1980s and early 1990s an alliance developed between the car
manufacturers Rover and Honda. The British company wanted access to new
technology and models to assist product development. In contrast, Honda wanted
experience of the styling demands of European customers in order to support its
market entry strategy. Both seemed to get benefits from the relationship, which
developed from a loose agreement to a position of much greater trust and
commitment. In many ways the alliance was seen as a success by both sides. The
alliance ended when British Aerospace sold Rover to BMW, much to Honda’s
annoyance.