Chapter 11 – Strategic development

Question 1

What are the three main types of methods available to organisations looking to develop?

Answer 1

Thompson and Martin (2005)
1. Organic growth
2. Mergers and acquistions
3. Strategic alliances / Joint ventures

Question 2

What are the strategic motives with organic development?

Answer 2

• Dealing with the known – current capabilities can be maximised – learning organisation
• Staggered investment – capital investment costs can be controlled – allows the organisation to test the marketplace with a minimum risk to its financial viability
• Minimised disruption
• Self-reliance
• Strategy focus and Culture maintenance

Question 3

Outline the different types of mergers and acquisitions

Answer 3

• Merger – joining of two separate companies to form a single company
• Acquisition – purchase of a controlling interest in another company
• Horizontal integration – business acquires another business in the same industry at same production level
• Vertical integration – business acquires a business from same industry at different level in supply
• Conglomerate integration – two unrelated businesses merging

Question 4

What are the motives behind mergers and acquistions?

Answer 4

Strategic motives
* An extension of the customer potential in terms of geography, products or markets
* The consolidation of competitors – can reduce competition, enable the raising of prices, increase efficiency
* Combined capabilities of two organisations are likely to exceed individual potential
* The development of new market opportunities
* The organisational synergy should lead to greater competitive advantage and strategic focus
* Facebook acquiring Whatsapp – immediately address a significant customer marketplace and build a direct alignment with its own existing product range

Financial motives
* Greater combined financial strength – stronger balance sheet
* Greater financial efficiency – economies of scale
* Increase market value of firm
* Tax advantages may be derived by a profitable organisation acquiring a less profitable, or loss-making company
* Financial creativity – ‘black-hole opportunity’ > ‘reorganisation accruals’ – spread financial benefits over time and give an impression of gradual strategic success

Managerial motives
* Increased power, remuneration, job security or other benefits
* Hubris – excessive pride or self confidence

Question 5

What is a strategic alliance?

Answer 5

Strategic alliances – this is formed when two or more organisations agree to share resources and activities in the pursuit of a common strategy. This is a popular method of strategic growth, enabling many of the benefits of the acquisition process, but without the negative aspects of trying artifically to completely align all operational and cultural aspects of the organisations. It does require trust and integirty between the various parties involved.

Question 6

What are the 3 main motives for the creation of a strategic alliance?

Answer 6

1. Rapid achievement of critical-mass scale within a marketplace, leading to cost reduction and improved customer offering
2. Complementary of different capabilities ensuring a more holistic business and enhanced market coverage
3. **The learning potential without the need to change the underlying organisational structure or culture **– although there will always be cultural implications for the people directly involved in the alliance – e.g. Hewlett Packard (HP)

Question 7

Outline the different types of strategic alliance

Answer 7

1. Customer-end network alliance - focus on increasing the potential offering to existing customers
2. Supplier-end network alliance - seek to gain competitive advantage by creating a critical mass requirement from a common supply base - economies of scale
3. Formal partnerships
4. Joint ventures

Question 8

What are the pros and cons of a strategic alliance?

Answer 8

Advantages of strategic alliances
* Access to complementary resources without the need for substantive investment
* The sharing of risk and resource-enabling individual organisations to reduce their risk exposure
* The speed of access to the market
* Reduced political and legal complications through working within a structure that does not require external approval

Disadvantages of strategic alliances
* Recognition of true cost to each party in the development and operating of the alliance
* The risk of potential reputational damage through seeming to be associated with other non-alliance activities of a partner
* Confusion among middle managers, or even directors, as to who they actually work for and who they report to
* Erosion of capabilities and competencies creating a situation where in-house abilities are diminished with a reliance on the strategic partner

Question 9

Outline the different methods of evaluating strategic options

Answer 9

1. KPIs - useful benchmark for the potential strategic route to achieving objectives
2. Key evaluation criteria - Johnson et al - SAF - Suitability (external environment), Acceptability (stakeholders), Feasible (resources)
3. Real Options - delay, abandonment and platform
4. Evaluation, caution and the human psyche: Rumelt’s 4 fundamental principles - FACC - Feasibility, Advantage, Consistency and Consonance

Question 10

What is SAF?

Answer 10

o Suitability: does the strategic option address the realities of the internal, micro and macro environment within which the organisation is operating? This requires:
 An understanding of the mission and objectives of the strategy
 Use of a SWOT analysis to identify the skills, competencies and resources
 An understanding of the culture of the organisation
o Acceptability: does the strategic option meet the expectations of stakeholders, in particular with regard to potential risk and return. This requires an understanding of:
 The levels of expected returns to differing stakeholder groups
 The risk appetite and tolerance of the organisation and its stakeholders
 The perceived synergy that will be driven by the achievement of the strategic objectives
o Feasibility: will the proposed strategic option actually work in practice, in particular with regard to the availability of the resources required to deliver success? This requires:
 The ability to drive sustainable change from both a process and a people perspective
 The availability of finance and other resources
 The likelihood of gaining sustainable competitive advantage

Question 11

What are the different types of real options? DAP

Answer 11

o The delay option – potentially delaying the commitment of resources until further key information becomes available
o The abandonment option – organisation arranging an exit when the strategy fails to meet targets and expectations
o The platform option – organisation taking steps to extend the strategy as new opportunities become available

Question 12

What are Rumelt’s 4 fundamental principles relating to evaluation, caution and the human psyche? FACC

Answer 12

o Feasibility: the organisation must have the ability, the people and motivation to carry out the strategy
o Advantage: understanding of how competitive advantage can be created and maintained
o Consistency: goals and policies should be aligned to ensure there is no distance or conflict
o Consonance: strategy must be closely aligned with the external environment and able to adapt