The Most Appropriate Approach to Strategic Development In Todays Business Environment - Essay Example

ARE MERGERS AND ACQUISITIONS THE MOST APPROPRIATE APPROACH TO STRATEGIC DEVELOPMENT IN TODAY’S BUSINESS ENVIRONMENT? Table of Contents Table of Contents 2 Introduction 3 Definitions, Analysis and Evaluations 3 Conclusion 13 Reference List 15 Appendix 1: 18 Appendix 2: 19 Appendix 3: 20 Introduction Business strategies have seen change in its approach in every age that had direct correlation with the changing market dynamics. The objectivity of businesses in various economies has its own unique perspective that it materialize through its strategy formulations and execution thereof. However, the developments of business in new markets, aiming to cater a new segment of consumers, diversify the product line, achieve cost effective production and distribution have seen business take steps for aligning other firms to achieve an edge over competitors Merger, acquisition, strategic alliance, joint ventures are few terms that is widely circulated in the business management studied. This can demonstrate the future strategies or objectives that the business wishes to pursue in future for growth, development or to achieve greater benefits out of such strategic alliances. The critical analysis of each of such partnering between two firms is critically examined here to analyze the effects of each of the activities with its effects on business and market. The various literature sources are used to demonstrate the point of views of business management scholars with relevant examples from the contemporary global business history ( Refer to Appendix 1). Definitions, Analysis and Evaluations The theory suggests that business activities takes into consideration various market factors along with competitive structures of the market to ascertain the need for such merger, acquisition or strategic alliance with another firm. This partnering can be domestic or international depending on the objective and span of control that the business targets to achieve. However, the traditional approach in business management is dependent on the trends of the market added with the past experience of the managers that helps them to formulate a pathway for future business activities, also called strategizing the business in accordance to an estimated future idea (Das et al. 2009). The strategic directions of the business are the base on which the further additions, changes, budgeting, focus etc are developed. The uncertainties of the market due to its unpredictable nature, especially in the international scenario have the ability to prove the strategic approach wrong at times, creating panic and uncertainties of business future. The DFC (Discounted Cash flow) or the budget fixation is a major step in business planning where the resource allocation is devised for the future business ventures. However, if the future is uncertain the ability of such alignment may prove dangerous and beneficial, that predictions have little control upon. An understanding of future helps predictions to be more effective in controlling the adverse effects. But the danger stays if the managers don’t calculate future trends in perspective, developing a faulty strategic plan. Taking opportunity available while reducing future threats to business forms the key to a strategized business plan (Please refer to appendix 2 to observe the IT benefit related association). However, the level of uncertainties in strategic plans can be eliminated by a sound trend of market study that which gives the future demands for business enhancing the futuristic planning abilities. The other one is that the market information with modern day analytical tools may give the business an idea of certain unknown facts that gets exposed after the survey giving the business ample scope to modify and avoid uncertainty risks. Cravens et al. (1993) argued that the analysis of future trends of market helps the business to get a clear idea of future to plan in accordance. In case if the future has a challenge waiting, the business may develop alternative plans to avoid them. Nevertheless, the applications of futuristic projections are not always successful for a business as the change in market dynamics may have retrospective effects on other variables which may have least predictability, making the business innovate contingency strategies to cope. Further there can be an option where the managers keep the views open for a range of probable events those may occur in the future. Thus a bundle of problems with probable solutions are thought of prior to execution. The last one is ambiguity in prediction where the managers have least or no control or ability to predict any outcome with a certain degree of certainty. Therefore a strategic focus for future growth and prosperity has to have a strong strategic plan. One instance is the ongoing talks between the Indian and US governments for Pharmaceutical manufacturing facility building at India to develop the South East Asian markets. However the price competence and legal issues pertaining to patent is one aspect that the US business needs to ponder on. For an instance, the price competence of Indian manufactured medicines suites the economy of Indian consumers but the introduction of US based Pharmaceutical product manufacturers may have adverse effect on pricing making the venture unrealistic for South East Asian economy. The overall strategic management model can be broken into two major phases: strategy development and strategy deployment. The overall mission and goals and objectives of a business are devised in a manner to execute them. There had been different theories and model proposed by various scholars of which scenario planning gets a more comprehensive deduction from the set tools of assessments. Based upon the findings, the business is supposed to take innovative steps of which the aforesaid strategic association is a part of the concepts like merger, strategic alliance, joint venture etc have its own meaning and definitions (Refer to appendix 3). The acquisition is a process that is also termed as ‘takeover’ where a business takes over another. For various reasons the acquisition is about 100% transfer of a business’s market, liabilities and assets to another who is buying. Nevertheless, public and private acquisitions have its own special term meaning where the public acquisition points to the buying of an existing business supposed to give the business an added advantage in strategic terms (Reed and Lajoux, 1999). The public acquisition in developed economy suggests the buying of a firm that has equity distributed via the national regulation. However, Clark (1991) observed in his lectures that the acquisition of about 50% failed to be successful to achieve the needed objective for such venture. There are many additional dimensions and determinants that are responsible for a success story in acquisition. Further, Imaa-institute.org, (2015) observed the rate of success is varied between businesses that are regular acquisition makers to occasional acquisition efforts that are less fruitful to the previous model of regular buying. In such a context, Becker (2010) noted that the reverse merger of business also occurs where a lesser known brand may purchase a listed company with equity in the stock exchange, to ride on the image and values of the brand. The acquisition of WhatsApp by Facebook in 2014 gave this acquisition a new edge for the users where the utility for users significantly increased giving social media a new growth push. Merger on the other hand is the scope where two or more business comes to an agreement based on mutually developed policies to merge their businesses with certain uniformities. The benefits that the merger has are supposed to help all the people in the stakeholder’s role for the merger businesses (Becker, 2010). It is often regarded as a friendly approach between businesses to utilize their combined capacities to fight market dynamics. Generally, firms of similar sector of the industries that follows the role of supply chain line ease for value generation to have a more competitive positioning in the market with perfect competitions’ to add more value being merged with a business. The merger of Korean Daewoo truck division with Indian Truck manufacturing business TATA motors is an example where the businesses merged to share technology and market for mutual gains (Hbr.org, 2009). The other most significant aspect of business to business contact is been developed by the strategic partnerships where the independent identity is maintained and even so the products are different. The utility that the product may bring in is revenue increments and innovative creation by merging the two aspects to create something new aiding both the parties’ benefits of gain from such strategic alliances. Imaa-institute.org (2015) describe the phenomenon of taking control of a larger firm by a smaller firm to use its expertise to gain benefits for the business, while retaining the brand name of the larger firm, is termed as reverse takeover. The objective is to have better policies, management controls and systems at place from the smaller but competent firm for mutual benefits. Again, reverse merger is the concept where the business with the potential to improve goes for an equity exposure for asset and resource generation. McManus and Hergert (1988) argued that even though the merger and acquisition have its own risks but the objective of the venture is to have value addition, efficient use of assets, market sharing and expansion. The Indian business of Aditya Birla Group’s insurance division’s alliance with Sun life insurance of US is one such example along with its Fashion retail model modifications. However, the demerger or spin out is the concept where a firm splits into two, which may or may not engage into equity sharing (Economictimes.com, 2015). Strategic alliance is another very vibrant aspect of business where two different firms form a strategic alliance where the merger and acquisition may be considered as a part of such alliance (Iankova, 2005). The cooperation and collaboration in such an alliance is a good instance where the businesses shares technology, resources, as they do for shared risks and benefits as partners. Nevertheless, the joint ventures as a part of strategic alliance is developed to share resources, knowledge, and develop measures to supplement assets, capabilities and supply-chain, market share etc to have a better competence in a specific market. The acquisition of Delta Airlines of North Eastern cheap passenger carrier by Australian based Qantas is one such example that gave the later a chance to venture the new market of North East Asia (Quantas.com, 2014). The legalities involved in such strategic alliance acts as partners to share core competencies with partial or equal share in ownership between the parties. A Strategic alliance is another form of business to business coordination where the parties enter into a shared relationship for mutual benefits. A strategic alliance helps a firm to develop effective process, expand into a new market or develop an advantage over a competitor, to name among many other possibilities among other possibilities. One example is the Strategic partnership between Nokia and Microsoft in 2010 was based out of technology sharing for their new Microsoft OS based Nokia launch (Hbr.org, 2015). The alliance in this partnership aimed to develop the needed technological inputs with mutual knowledge and asset sharing, to come up with an innovative product. The idea of merger, acquisition, joint partnering, strategic alliance are all aimed to develop mutual core competencies use, develop competence unique to such partnerships, develop core market knowledge if the firm in partnership is new in a market where it use the competencies of the partner gain market share. Nevertheless, the needful activities needed to be performed and development of leadership capabilities are few of the offerings that businesses get out of partnership development as merger, acquisition, joint venture, etc. The answer to the question that tries to evaluate the need for strategic alliance among different businesses can be answered in a much distinct fashion when examples of twenty-first century business market dynamics are evaluated. The example of J.P. Morgan merger with Chase bank for a wholesome multi-dimensional financial service proved to be successful for both parties and their consumers. Reuters.com (2012) published, organizations in the twenty-first century is dependent on strategic and organizational innovations long with issues including size, operational flexibility and responsiveness towards market stimuli. So the new alliances are aimed at cooperative strategy developments, complexity of market studies, changes in corporate social responsibility, etc. Therefore the strategic planning requires new models of leadership with less formal structures, and commitment towards confidently developed directions. In the days of consumer behaviour changes ethical dilemmas need attention for an ethical practice and outlook inclusions (Pettit, 2008). However, the researcher finds that the business needs to have an idea of the cultural and social factors of a market while associating itself in a strategic partnership. The merger of the UK based steel producer of Mittal Steel with Arcelor Steels to form Arcelormittal with larger production capacity, resources and technology for cost effective global leadership is one example (Rasmussen.edu, 2009). The table below gives the reader an idea of evolution of strategic planning processes that has direct correlation with the strategic partnership aspects of business. The multinational nature of today’s business are aimed to develop new markets, make a buffer for itself to sustain if the domestic market fails to achieve its objectives and in the process incorporate new management styles and innovation addition to stay valid, competitive and cost effective for a long term benefit in the global economy. Figure 1: The Evolution of Strategic Management/Strategic Planning (Source: Imaa-institute.org, 2015) The traditional strategic alliance may have its own negatives when the business tries to incorporate the processes and innovations which make the alliance of the businesses stronger over the perspective competitors. Iankova (2005) called it the fallacy of prediction, detachment and formalization which are considered as the responsible elements of strategic alliance failure. However, (Rosabeth, 2009) argues that the strategic alliance success is dependent on the partnering firm’s capabilities to take the technological, innovative or managerial model benefits to have best results from partnership. Nokia and Microsoft’s strategic alliance for new Operating Software development in 2010 is one example that turned out to be an acquisition of Nokia by Microsoft in 2012 (Bbc.com, 2014). Improving performances while reducing risks have the objective of better financial performances. In the 21st Century business environment, the underlying motives for business in the global context face many challenges, especially the Porter’s 5 Force effects acting on them. The theory suggests the challenges faced by a business as demonstrated in the figure below: Figure 2: Porter’s Model of Market Forces acting on a business at a specific market (Source: Mockler and Gartenfeld, 200, p.215) Therefore, the global increase in merger and acquisition of business requires a thorough evaluation of stakeholder’s benefits, business capabilities to adopt, resources availability prior to such merger and acquisition as advantage for the business and not otherwise. Furthermore, (Reed and Lajoux, 1999) observes that the merger or acquisition in today’s business dynamics tries to incorporate the structural changes without affecting their independent capabilities and strengths (Moulin, 1994). The elements of market forces acting on a business process can be further explained where the threat of substitutes in a market plays a role to create barriers to gain market share gains with its competitive offerings. The new entrants in a market face the challenge to grab a space where the market already dwells in oligopolistic competition making barriers for the new entrants. The bargaining power of consumers is supposed to be high when the product is rare and have lesser competition or availability of the same makes a pseudo monopoly. The business have an edge where the negotiating power of consumers is reduced while in contrary the perfect competition makes the bargaining power of consumers high as they have alternatives to choose from. The suppliers in an economy would have lesser bargaining power where the suppliers of similar product are in plenty giving the scope for bargaining lesser for the suppliers in such economy (Gates, 2000). The merger and acquisition of two businesses from different economies would have the ability to face the challenges posed by the market. A strategic alliance in a specific economy helps the foreign partner to enter a market relying on the shoulders of its domestic partner, utilize its supply chain, distribution channels to negate the entry barriers cost effective (Tong, 2004). The suppliers bargaining power is further reduced in the process where the partners have a wider choice to negotiate as the businesses have their accumulative suppliers in number, giving increased number of supplying entity for best deal attraction (Younger et al. 2011). The consumer’s power of bargaining in such strategic alliance is reduced as the joint venture is supposed to create differentiated offerings helping the product or service an edge over the rest of the available products in the market. The cost effectiveness of the new market entry by strategic alliance and partnership in the current global business scenario gives the edge to both the partners. The global competency seeks cost effective outputs that may gain the business a long term benefits of growth, sustenance and innovations for differentiation competency development. The objective of today’s business is to create cost effective processes to pass the cost benefits to the end users while creating quality outputs with use of technology and innovative processes. Therefore the advantages are many in such strategic alliance, may it be merger or acquisition or strategic alliances. However, there is little negativity in such alliance those may occur and the chances are high that this failure of prediction and control or distribution of organizational hierarchy can be disturbed creating gap in operations caused due to cultural, policy or responsibility shifts post alliance (Smith and Davies, 2009). While deciding upon the merger or alliance decision, the selection of suitable market, business health, competence etc are to be kept in mind else the strategic plans of joint venture may fail. For an example, the merger of AOL (American Online) with Times Warner in 2001, that proved to be a deal of 111 Billion USD. The reason is being the rise of technology that made the dial up internet of AOL obsolete, giving an 80% drop in the stock value of Times Warner (Forum, 2015). Conclusion Predicting the market future, potential, competitor’s ability, social dimensions, socio-political or economic shifts are few to site that gives the strategic alliance a direction. The strategic approaches have the chance to fail measurably if the predictions and study of futuristic potentials of market are not adequately assessed. Further, Gleich et al. (2010) argued the point of view for workers is an important aspect to be considered in strategic partnering else the compatibility of the new venture with new systems may fail due to alienation of employees from the business objectives. One interesting theory suggested by Danny Miller termed the Icarus Paradox to explain the reasons that determine the success or failure of such ventures. Miller describes four major causes of strategic failure namely leadership traps, monolithic culture practices and skills, power politics approaches and structural market memories (Mockler and Gartenfeld, 2001). All of these causes emerge during the period when an organization is experiencing success of its strategic initiatives. The role of these elements in strategic formulation for merger and alliance is key to the success of the activity. Thus the success or failure of merger and acquisition in today’s age is entirely dependent on the strategic plans and market condition analysis. 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