Business Strategy of Hon Hai - Case Study Example

Strategic Analysis of Hon Hai (Foxconn A report on the Competitive Strength and Advantages Executive Summary The objective of this paper is to present a strategic analysis of the company Hon Hai (Foxconn) as to the sources of the competitive strengths and also the competitive advantages being enjoyed by the company by its relative position in the market vis--vis the competitors. For compiling this report, the study will use the primary data information collected from the company source and secondary data and information collected from electronic sources. The study will use the tools like SWOT analysis, PESTLE and Porter's Five Forces analysis to report on the analysis of the internal and external environment of the company and the industry. The study will also cover the merger and acquisition activities of the company along with the position of the company before and after the merger and acquisition activities. The report will also use key financial ratios to report on the financial performance of the company. 1.0 Introduction While 'business strategy' represent the goal of the company to attain sustainable competitive advantage in one of the businesses of the company, 'corporate strategy' represents the objective of the company to manage multi-business activities to create corporate-wide advantage that will benefit each of the business the company owns and operates. The corporate strategy looks into the opportunities available to the company both internally and externally to enhance its competitive strengths and sustain its sales growth and profitability. A strategic analysis of any company thus includes assessing the strengths and weaknesses of the company on the basis of the internal environment as well as threats and opportunities that the company is subjected to because of its relative positioning in the market and the industry. The main objective of any strategic analysis is to identify the ways in which the existing resources can be shared between the multiple business activities and also identifying new resources which will enhance the competitive strengths of the company. This may include the opportunities for mergers and acquisitions which will provide the combined synergies and scale economies to the company for enhancing its competitive edge. With this background this study intends to make a strategic analysis of the company Hon Hai (Foxconn) to report on the efforts of the company to enhance and sustain its competitive advantages. 1.1 Hon Hai (Foxconn) - An Overview Incorporated in the year 2004 the company is a group company of Foxconn Technology. Foxconn Group is the foremost provider of joint-design, joint-development, manufacturing, assembly and after-sales services to global Computer, Communication, and Consumer-electronics ("3C") leaders. Focusing on fields of nanotechnology, heat transfer, wireless connectivity, material sciences, and green manufacturing process, Foxconn's over 15,000 patents granted worldwide by 2005 made it a recognized leader of innovation and technical know-how in rankings such as MIT's patent scorecard. HonHai is mainly producing Hinge related products adopting an innovative technology. The production process is different from that of the traditional Hinge companies. By using the new technology the company has enhanced the production capacity to a great extent and has reduced the cost of production. The company has made a net operating income of $ 10.17 million representing 8 percent of the turnover, as of the end of the year 2006. The company is following a different production process than the competitors operating in the industry. The use of this modern technology has enhanced the production capacity of the capacity while lowering the cost of production. The company presently employs around 975 people. 1.2 Research Objectives The study will cover the following objectives among other things: (1) A detailed study of the advantages and disadvantages of merger and acquisition activities in general (2) A strategic analysis of the Company Hon Hai (Foxconn) for the relative competitive advantages of the company and its internal and external environment (3) A comparative study of whether Hon Hai (Foxconn) would be more benefited in terms of enhancement of stockholders' wealth by undertaking more merger and acquisition activities rather than involving in more of research and development activities for expansion 2.0 Literature Review Despite the fact that the mergers and acquisitions of the companies are of recent origin, we can find a number of literature available on the subject of mergers and acquisitions. While the literatures available on the pre and post merger scenario of different mergers are aplenty, the literature on the impacts of a company after the merger or acquisition has taken place with respect to its financials and wealth creation is very less in number and content... Moreover the available literature does not provide enough materials or resources to prove the hypothesis put forth by this paper. However a wider research on the domestic and cross-border mergers has lead to the following presentation. 2.1 Domestic Mergers Several scholars and researchers have studied the subject of mergers and acquisitions with a view to present the influence of such activities on the wealth creation of different companies. There had been quite a number of studies conducted on the subject of merger activities since the year 1980 and in the beginning the researchers mainly focused on domestic mergers. Parkinson and Dobbins (1993) have identified that these studies have concentred on three distinct aspects. The first objective of such study is to assess whether the activities have resulted in the wealth building of different firms. The second one focused on the examination of the financial characteristics of the acquiring and target companies. The third aspect focused on looking into whether the merger and acquisition activities have resulted in gains or losses to the stockholders of the bidding and acquired companies. Jensen and Ruback (1983) and Jensen (1989) observed that the merger activities had the objective of wealth creating to signify that merger activities have proved financially beneficial to the companies involved in the activities. Sudarsanam (1995) also commented that merger activities are a "positive sum game even if the most of the gains do go to the target shareholders". However, there are other view points expressed from different scholars. Firth (1980) observed that in the UK context the shareholders' wealth of acquitting companies have deteriorated due the merger activities undertaken by them, since these companies netted losses during the period of bidding. He further points out the losses to the acquiring company wipes off the stockholders' gain in the acquired company. Out of the study conducted by Limmack (1991) of 552 merger bids in the UK that took place during 1977 and 1986 it was found that bidder companies have made significant losses to the extent of 5.5% during the month the bidding process was on. However, the study conducted by Franks and Harris (1989) which surveyed around 1800 merger bids in the UK over a longer period of 1955 to 1985 reported that the stockholders of bidder companies have gained up to 1 percent and 7.9 percent gains were reported when studied over a four month event window. The general conclusion among the researchers and scholars was that while the merger bids resulted in positive gains to the target companies the gains to the bidding companies had a blend of profits and gains. After the merger activity different trends have been observed by the researchers both in the case of acquiring companies and acquired companies' profitability. Halpern (1983) found a consistent trend, in target companies experiencing large and positive abnormal returns, despite the use of different methodologies and event test periods. Agrawal et al (1992) argued that the differences in results are specific to the time period selected by re-examining. The study by Franks, Harris and Titman (1991) suggested that the concept that the post-merger returns were negative but not at a significant level. It may also be the case that the researchers adopt different return calculation models and methodologies which may lead to different results on the studies. According to Gregory (1987) that "the market model, market-adjusted returns, and size-decile adjusted returns have all been used in UK studies, whilst in the US the Dimson-Marsh (1986) and multi-factor models have been employed in more recent studies". In his study, six different models were employed while five of them controlled company size factor. The result showed that, on an average, the post-merger performance of large UK domestic mergers were considered to be considerably negative regardless of the kind of benchmark employed. It has been the conclusion of the most of the scholars that the reason for most of the studies showing negative or no significant positive returns is that the acquiring companies in their urge to conclude the merger or acquisition deal would have enhanced the premium amounts and have made excessive payments to the shares of target companies. Roll (1986) confirms that excessive optimism on the part of the bidder companies towards evaluation of merger activities might have resulted in an overpayment to the acquired companies. According to Roll (1986) the first reason for the managers to overpay the target companies is due to their over-pursuit and arrogance and also due to their overestimation of their abilities to operate the target companies. The other reason cited by him was that such decisions of overpayment might be the result of their self interest. According to Eccles, Lanes and Wilson (1999) managers of acquiring companies needed "to be sure that there are enough cost savings and revenue generators - synergy value - to justify the premium so that the target company's shareholders don't get all the value the deal creates". There are other views like the returns of merger activities were largely influenced by the mode of making payment to the acquired companies. Huang and Walkling (1987) and Laughran and Vijh (1997) point out the stockholders of the companies which make payments in equity suffer losses in the long run while where the merger payments are settled in cash such transactions would result in gains to the shareholders. 3.2 Cross-Border Mergers: The recent trend for enhancing the wealth of the companies is to undertake more of cross border mergers which have the definite advantage of speeding up the growth of the companies and also such activities enable the companies to sustain their wealth and values. This objective has forced larger as well as smaller financially sound companies to look for opportunities of merging or acquiring compatible and synergistic companies. The main purpose of such merger activities is to enhance their core strengths through a business re-engineering to reduce the production costs using the scale economies. It has been found by Accenture the consultant firm that the number of cross border merger and acquisition activities is showing an increasing trend. The study points out that though domestic mergers are considered easier to execute the tendency is to go in for cross border mergers with 58 percent of the recent merger deals cover cross border deals. There is wide availability of literature to show the effect of mergers on wealth creation of the companies such literature on the effect of cross border mergers appear to be limited in number. However it must be noted that in cross border merger deals because of different geographical locations and different capital markets involved the results on studies about the return to the companies may not really be consistent. Hence the studies available are showing mixed and conflicting results without any consistency. Doukas and Travlos (1988) observe that there are no gains for the US bidding firms on the cross border acquisitions. Morck and Yeung (1992) find a statistically significant and positive return of 0.29 percent on the event day. Another study, Conn and Connell (1990) find that the wealth effect of acquisitions between the U.K. and the U.S. are highly sensitive to the method used to estimate the market model's parameters and render no conclusive evidence on gains or losses to bidders. 3.0 Research Methodology This research will be completed using the qualitative method which in turn will use exploratory research approach and content analysis approach by collecting secondary data from all available resources. Exploratory research becomes useful when a problem could not be defined clearly on which a research study needs to be undertaken. By undertaking exploratory research the possibility of choosing the best research design and data collection method is greatly enhanced. The exploratory research relies largely on the information and data collected through secondary research. The method of content research analysis enables the researcher to analyse a large volume of data and systematically evaluate them to find out the relevance and suitability of the various information and data collected during the process of exploratory study. While conducting a detailed research by adopting qualitative method, the researcher is usually provided with a large volume of data which needs to be evaluated by the researcher using his expertise and knowledge in the topic under study. The researcher has to take a clear stand on the research material he is going to use and categorize the information and data according to the degree of importance. While doing this the authenticity and importance of the source need to be considered by the researcher. In fact content analysis is an important step in completing any research. 4.0 Conclusion In view of the depth involved in the study of the post merger profitability of the acquired and acquiring companies this study is considered important to analyse whether the company Hon Hai (Foxconn) would be able to enhance the stockholders wealth by indulging in more of acquaition activities rather than spending time on the research and development activities for the expansion of the group. 5.0 Time Plan for the Research The proposed time and activity plan of the proposed research study is presented below: Activity Proposed Date Submission of Research Proposal Approval of the Proposal Collection of Resources (Secondary) Preparation of Questionnaire Mailing of Questionnaire to Samples Receipt of Responses Analysis of the Responses Preparation of Dissertation Draft Submission of Draft Dissertation Corrections to the Draft Dissertation Submission of Final Dissertation List of References: Agrawal, Anup, Jeffrey F. 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