a strategic analysis of an organisation in the Transport industry.

27/04/2020

1

MGT30005 Strategic Planning in Dynamic Environment

Strategy Narrative 8

Acquisition and Restructuring Strategy

CRICOS 00111D TOID 3059

Introduction

This session will address the following issues:

• Distinguish between mergers and acquisitions and

determine their relative merits in exploiting the linkages

between different businesses

• Assess the relative advantages of vertical and horizontal

integration in organising related activities

• Portfolio Analysis

27/04/2020

2

E-commerce giant Amazon purchased high-end

organic grocery chain Whole Foods for $13.7

billion. The purchase took Amazon near the top of

the $700 billion grocery industry, and sank stocks

of traditional grocers on fears that they would be

outmanoeuvred into oblivion.

Is it a business level strategy

or corporate level strategy?

What drives Amazon for

making this strategy?

In 2018, Intel has completed its tender offer for the

outstanding shares of Mobileye, a company that develops

sensors and cameras for Advanced Driver Assisted

Systems (ADAS); the company is also known for its

computer vision and machine learning technology. The

$15.3 billion deal gives Intel a huge advantage in the

growing self-driving car industry, a market they estimate will

grow to $70 billion annually by 2030.

Is it a diversification

strategy?

27/04/2020

3

Different types of corporate-level strategy

Fig. 8.1

Mergers and acquisitions

• Acquisition refers to the purchase of one company by another (also known as a takeover or a buyout

• It usually refers to a purchase of a smaller company by a larger one

• An acquisition may be friendly or hostile

• There are 2 types of acquisition: – share acquisition – asset acquisition

27/04/2020

4

Mergers and acquisitions

• Merger is the combination of two companies into

a bigger company

• Both companies’ stocks are surrendered and

new company stock is issued in its place

• A merger is a transaction in which the assets of at least

two companies are transferred to a new company so that

only one separate legal entity remains.

• Acquisition is a transaction in which both companies in

the transaction can survive but the acquirer increases its

percentage ownership in the target

Reasons for merger and acquisition

• Many companies actively engage in merger

and acquisition activities to seek better

financial performance.

• The following reasons are the most common:

• Economies of scale

• Economies of scope

• Tax benefits

• Higher return on investment

27/04/2020

5

Some examples of Merger and

Acquisition

• BHP Billition - – In 2001, BHP merged with the Billiton mining company to form BHP

Billiton, the largest mining company in the world

• GlaxoSmithKline – 1999 merger of Glaxo Wellcome and SmithKline Beecham, both firms ceased to

exist when they merged, and a new company,[GlaxoSmithKline], was created.

• Chrysler & Daimler Benz

• Walt Disney @ 21st Century Fox

• PriceWater houseCoopers (PWC)

• Microsoft LinkedIn

In 2018, Alphabet's Google division confirmed that it plans

to acquire part of HTC's mobile division team for $1.1 billion

as it grows its smartphone hardware business. Google has

become very serious about its hardware development with

the debut of its Pixel line of smartphones, and scooping up

a chunk of HTC's team means that the tech giant can better

directly challenge Android partners like Samsung, LG, and

Huawei.

Is it an example of

acquisition or Merger?

How do you explain this

kind of partial takeover?

27/04/2020

6

Quiz

Many companies engage into mergers and

acquisitions to seek better financial performance.

All of the following are common reasons, except:

a. Increase return on investment

b. Economies of Scale

c. Reducing the size or diversity of operations to

increase organisational flexibility

d. Tax benefits

Integration strategy

• The objective of integration strategy is to

develop a consistent approach to guide

implementation decisions and reduce

costs of key projects

• A company seeking integration strategies

faces a subset of choices:

– horizontal and

– vertical integration

27/04/2020

7

Vertical & Horizontal integration options

Figure Diversification and integration options: car manufacturer example

Dimensions of Vertical integration

• Vertical integration is integration along a supply chain through which a company will control the production and distribution of products

• Vertical integration has many dimensions: • Backward

• Forward

• Full integration

• Partial integration

27/04/2020

8

Benefits of Vertical integration

• Vertical integration has multiple dimensions and

offers potential benefits including:

– Technical economies from physical integration

– Developing distinctive capabilities

– How to manage strategically different businesses?

– The incentive problem

– Competitive effects of vertical integration

– Flexibility

https://www.youtube.com/watch?v=JHzm0YSQmSU

Choosing between alternative vertical relationships

• Designing vertical relationships is not just a ‘make or buy’ choice

• Between full vertical integration and spot market contracts, there is a broad spectrum of alternative organisational forms

• Choosing the most suitable vertical relationship depends on the economic characteristics of the activities involved, legal and fiscal circumstances, and the strategies and resources of the companies involved

27/04/2020

9

Horizontal integration strategy

• Horizontal integration refers to the expansion or addition of business activities in the same industry and at the same level of the supply chain

• Organisations can achieve horizontal growth through mergers and acquisitions

• Horizontal integration offers significant advantages as well as drawback to the organisations

Facebook bought Instagram

• In 2017, Facebook announced one of the best

business takeover in the history of Silicon Valley:

The $1 billion purchase of a photo-sharing app

called Instagram. At the time of the

takeover, Instagram had just 30 million users

and zero revenue.

• Is it an integration or acquisition?

27/04/2020

10

Quiz

Vertical integration provides:

a. Integration up or down a supply chain through

which a company will control the production and

distribution of products

b. A larger margin

c. Increased power over rivals in the same industry

d. Superior visibility at different stages of the value

chain of an industry

Retrenchment strategies

• When a company is not performing well enough,

its management considers either a turnaround or a retrenchment strategy

• retrenchment strategy refer to the plan and effort to return an underperforming company to acceptable levels of profitability and long-term growth

• A well-designed retrenchment strategy involves

redefining strategic objectives, reducing cost and restructuring organisational processes

27/04/2020

11

Retrenchment & Turnaround activities

• There are four activities that characterise

retrenchment and turnaround:

• Restructuring

• Divestment

• Liquidation or bankruptcy

• Tie to a larger company

German $350 million takeover: Continental AG buys Kmart Tyre

and Auto Service in Australia

• Kmart Tyre and Auto Service (KTAS) has 258 stores

across Australia with over 1,200 employees. It is one of

Australia’s largest tyre, automotive service and repair

retailers.

• Wesfarmers announced the sale of KTAS to Continental

AG for 350 million Australian dollars. Continental is

based in Germany. Its five divisions in 2017 generated

sales of 44 billion Euro and it currently employs more

than 243,000 people in 60 countries.

• Is it a Retrenchment strategy for Kmart?

27/04/2020

12

Portfolio analysis

• Portfolio analyse is one of the key means of

analysing the scope of activities of a diversified

organisation

• It is an important aspect to understand the

position of each SBU in relation to its

competitors and growth potential

Portfolio analysis methods

Growth/Share (BCG) Matrix

Directional Policy (GE-McKinsey) Matrix

Parenting Matrix

27/04/2020

13

The growth share (or BCG) matrix (1)

Figure: The growth share (Boston Consulting Group - BCG) matrix

The growth share (or BCG) matrix (2)

• A star is a business unit which has a high

market share in a growing market.

• A question mark (or problem child) is a

business unit in a growing market, but it does

not have a high market share.

• A cash cow is a business unit that has a

high market share in a mature market.

• A dog is a business unit that has a low

market share in a static or declining market.

27/04/2020

14

The growth share (or BCG) matrix (3)

Problems with the BCG matrix:

 definitional vagueness,

 capital market assumptions,

 motivation problems,

 self-fulfilling prophecies and

 possible links to other business units.

The directional policy: (GE–McKinsey) matrix

Figure Directional policy (GE–McKinsey) matrix

27/04/2020

15

The directional policy

(GE–McKinsey) matrix (2)

Figure Strategy guidelines based on the directional policy matrix

The parenting matrix (1)

Figure The parenting matrix: the Ashridge Portfolio Display Source: Adapted from M. Goold, A. Campbell and M. Alexander, Corporate Level Strategy, Wiley

27/04/2020

16

The parenting matrix (2)

1. Heartland business units - the parent understands these well and

can add value. The core of future strategy.

2. Ballast business units - the parent understands these well but can

do little for them. They could be just as successful as independent

companies.

If not divested, they should be spared corporate bureaucracy.

3. Value-trap business units are dangerous. There are attractive

opportunities to add value but the parent’s lack of feel will result in

more harm than good . The parent needs new capabilities to move

value-trap businesses into the heartland. It is easier to divest to

another corporate parent which could add value.

4. Alien business units are misfits. They offer little opportunity to add

value and the parent does not understand them. Exit is the best

strategy.

Quiz

In the Boston Consulting Group Matrix, stars:

A. Have high growth rates and low relative market

share

B. Have low growth rates and high relative market

share

C. Have low growth rates and low relative market

share

D. Have high growth rates and high relative market

share

E. Have low growth rates and low profitability

27/04/2020

17

Summary • This session has covered issues of Corporate

level strategy including:

• Merger and acquisition

• Vertical and horizontal integration – Shell New Energies, a subsidiary of oil major Royal Dutch Shell,

acquired EV charging start-up Greenlots, claiming a bigger stake

in the emerging electric mobility marketplace.

– Greenlots will keep its brand and leadership, and will become

the “foundation” of Shell’s electric mobility business in North

America, the companies said in a statement.

• Portfolio Analysis