Are Mergers the Most Appropriate Method of Strategic Growth in Today's - Essay Example

?In today’s business environment, it can be argued that mergers are the most appropriate method of strategic growth. The current business environmentis dynamic hence it may be wise for companies to merge their operations in order to gain a large market share if the other company is poorly performing. As such, this paper seeks to critically evaluate the significance of mergers and acquisitions in today’s business environment with regards to strategic growth. The paper starts by explaining the meaning of strategic growth in order to gain a clear understanding of the whole concept. This will be followed by an explanation of key terms namely: mergers, acquisitions, alliances and joint ventures. The main body of the paper will identify the issues and challenges of external methods of strategic growth as well as well as to attempt to establish how these relate to today’s business environment. According to BusinessDictionary (2013), strategic growth is growth aimed at winning larger market share even at the expense of short term earnings. There are four broad growth strategies namely product development, diversification, market penetration and product development. Campbell, Gaule & Morrison (2005) also suggest that “growth in profits can come from improving the profitability of the existing revenue stream, expanding existing businesses by gaining market share or extending into new markets or products, or entering one or more new businesses by acquisition, joint venture or greenfield investment.” On the other hand, Liabotis (2007) posits to the effect that growth strategy can be achieved through growing the core business, growing by sub-segmenting the customers as well as growing adjustment opportunities. As a point of departure, it is imperative to explain the meaning of key terms highlighted above. Weinberg and Blank (1979) “define merger as an arrangement whereby the assets of two companies become vested in or under the control of one company,” (as cited in Marimuthu, 2008, p. 8). On the other hand, an acquisition can be defined as any transaction where a buyer acquires the assets of the other company and eventually takes control of them (Scharf,1971 as cited in Marimuthu, 2008). A joint venture is a strategic alliance where two or more people or companies agree to contribute goods, services and or capital to a common commercial enterprise (Cook, 2010). The main advantage of joint ventures is related to access and sharing of resources among the partners which can also contribute to the joint ventures profitability. However, this paper will specifically focus on mergers and acquisitions and their contribution to strategic business growth during the contemporary period. There are different reasons why mergers are carried out by different companies. The merging companies will be seeking to increase their market share since they may be joining operations with successful companies in the market. The other reason is that the merged companies may be seeking to gain the skills and expertise of the other employees from the other company as they will cross the floor when a major has taken place. Growth can be achieved through product development, diversification, market penetration or market development (Kotler, 2003). Ansoff suggests that the growth strategy of a company mainly depends on two variables, whether it is the desire to develop new products or new customers as shown in appendix 1. More customers for a specific product can contribute to an increase in the company’s market share. The major aim of various businesses is to attract customers who form the foundation of the organization. In order to attract new customers, there may also be need for developing the products so that they can appeal to a large number of the targeted customers. Product expansion is mainly concerned with keeping the same market of customers while at the same time trying to increase sales through offering more products (Kotler, 2004). This can be achieved through identification of the changes in the customers’ tastes. On the other hand, market development seeks to increase market share with the same products through attracting more new customers to buy them (Kotler, 2004). There is need to segment the market so that it becomes easy to target new customers for the products offered in the market. It is imperative for the merged company to put measures in place that are meant to appeal to the tastes of the targeted customers. The other strategy is diversification where a company can embark on introducing diversified products in the market so that it can appeal to the interests of different customers. If there are varied products in the market, the chances of success are high given that if one product fails, then the other product is likely to cover up for the gap created. If carefully managed, this can be a growth strategy that can significantly contribute to the company’s endeavour to expand to other new markets. A success story of a merger and acquisition can be illustrated through the case of SAB which of late has been SAB Miller as a result of its acquisition of the later. SAB Miller has operations in different parts of the globe and its success can be attributed to the diversification strategy where it offers different brands in different countries. Some brands perform well in different places while they perform poorly in other areas. The success of the acquisition is that SAB acquired its competitors so it managed to gain a large market share in the beer and liquor industry. For instance, Miller on its own is a very popular brand in countries like Britain and Russia so this gave SAB a competitive advantage given that it was acquiring an already popular brand in the market. This contributed to the success of the company. The other strategy that has been adopted by the company is that it seeks to penetrate new markets. According to its official website, SAB has more than 50 brands on the market and it can achieve its growth strategy through marketing these brands to new markets. This can contribute to strategic growth of the company since it will expand its operations in different parts of the globe. In spite of its success in its global operations, it can be seen that its acquisition also faced some external challenges that impacted negatively on its operations. Being a company that originates from Africa is a challenge to the company. The main challenge is that of cultural differences among the people from different parts of the globe where it operates. The other challenge that it faced was related to different tastes of the targeted customers in different parts of the globe. Some customers in different parts of the globe were accustomed to the usual brands they were used to. This was a challenge for SAB as it sought to establish itself as a force to reckon with in the global markets of beer. International mergers and acquisitions are regarded as key corporate strategies that are used by multinational corporations (MNCs) when they seek to expand, diversify or consolidate their businesses (Rotig, 2007). It can also be observed that “acquisitions across borders continue to be very popular and remain the main vehicle through which MNCs undertake foreign direct investment,” (The Economist, 2007; UN Conference on Trade and Development, 2000 as cited in Rotig, 2007). However, some studies have indicated that international mergers and acquisitions often fail to gain a considerable market share as a result of various factors. For instance, “a study based on a sample of 4,430 acquisitions showed that international acquisitions by US firms are characterized by significantly lower performance (based on stock returns and operating performance) than US-domestic transactions,” (Moeller and Schlingemann, 2005 as cited in Rotig, 2007). As such, research has shown that cross-cultural communication, connection, and control are the major determinants of success or failure of mergers and acquisitions. Hofsted (1980) observed that different cultural dimensions impact on the performance of the employees in an organization. His cultural dimension studies indicate that national culture plays very important role on the behaviour of people in the organization. The success of the organization can be witnessed if the cultural values of people from different nationalities are taken into consideration by the management. The aspect of culture plays a very important role in as far as organizational behaviour is concerned. A good example can be drawn from the case including the acquisition of Tokyo Bank by Mitsubishi Bank in 2003 where it can be noted that these organizations had different cultures. According to Rotig (2007), “Mitsubishi Bank’s employees shared the common cultural norms of always being on time for work ...and in contrast, Tokyo Bank’s employees were not used to reprimands for arriving late to work, and were not accustomed to a strict dress code.” This resulted in Tokyo Bank employees feeling alienated from the employees from Mitsubishi. The element of cultural differences is the only danger that can affect a merger and acquisition if it is not properly managed. Another example can be drawn from the case of a merger including Hewlett-Packard Company (NYSE: HWP) and Compaq Computer Corporation (NYSE: CPQ) which was supposed to create an $87 billion global technology leader. However, this merger has been widely criticised as a failure and it led to the resignation of the CEO (Palo & Houston, 2001). The newly formed company was supposed to create value through cost structure improvements and access to new growth opportunities. The merged company was supposed to be a force to reckon with in the IT industry. However, the cultures of the merged companies were not compatible and this is the main reason that led to the failure of the merger. Malone (2002) posits to the effect that the major resistance was mainly coming from HP employees and management who were resistant to change given that the new culture of the merged organization was alien to their usual way of doing things. The main factor that negatively impacts on the success of mergers in particular is that the employees from the two companies may have different cultures which cannot be easily merged. As such, the employees from both companies are likely to be forced to resist change if the new culture is not compatible with their usual way of doing things. Culture shapes the behaviour of the people working in an organization and any attempt to introduce a new culture in the organization may be met with stiff resistance. As illustrated in the case discussed above, it can be seen that culture in an organization is very important since it shapes the behaviour of the employees and it also ultimately impacts on the performance of the company as a whole. However, despite these shortcomings that can negatively impact on the success of mergers and acquisitions, they remain popular during the contemporary period as they are seen as strategic to growth. The differences between national and organizational cultures can produce positive results if properly managed. This can help the organization to grow and it can gain a significant competitive advantage if the merged companies share the same values and culture. The gap between different cultures of people in an organization can be closed through acculturation where the two companies remove their differences and agree to adopt a shared culture that can shape the behaviour of the employees in the company. Over and above, it can be concluded that mergers and acquisitions continue to be regarded as strategic methods for growth in different business environments. As observed above, strategic growth is mainly concerned with winning larger market share even at the expense of short term earnings and there are different methods that can be used to achieve this status. It has also been observed that there are four broad growth strategies which include product development, diversification, market penetration and product development that are used by different businesses during the contemporary period. The other growth strategy can be improved through expanding the existing businesses by gaining market share. This can be achieved through mergers and acquisitions, joint ventures as well as alliances. Though different, the above mentioned concepts describe new organizations that are formed when two or more companies join to form one entity. As discussed above, it can be seen that there are various advantages that can be obtained from mergers, acquisitions, alliances or joint ventures. When two companies are merged, there are high chances that the newly formed company will gain a large market share since it would be a combination of two companies operating as one in the company. The other advantage of mergers and acquisitions is that knowledge and skills transfer are enhanced if people from different companies are combined to form one entity. During the current period, it can be seen that knowledge management is a virtue as we move towards a knowledge economy. Employees from other companies have great skills compared to others and when these efforts are combined, the results are likely to be terrific. It can also be observed that mergers and acquisitions also help to reduce operational costs to a company that has been impacted by severe viability problems. The newly formed company can easily manage to handle the operations since these will be two combined companies operating as one. However, some studies as shown in the discussion above have indicated that not all mergers and acquisitions succeed. Some of them fail as a result of various factors. The major notable factor that can contribute to the failure of mergers and acquisitions is related to cultural differences especially in terms of international mergers. If the two companies fail to reconcile their cultures, then the merger and acquisition may be a failure. In order for a merge to be a success, a holistic approach should be taken so as to be in a position to address cultural problems that may impact on its success. However, regardless of the challenges that may be encountered especially in international mergers and acquisitions, it can be seen that they continue to be used as a viable strategy for business growth during the contemporary period. 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Appendix 1 Ansoff’s Matrix Present Products New Markets New Source: www.learnmarkerting.net 1) Market penetration seeks to increase the sales of the present product through reduction of price or embarking on a high promotional drive. 2) Product development aims at developing new products in the market which can go hand in hand with the existing product to increase the market share. 3) Market development is concerned with selling the existing product to new market segments. 4) Diversification entails innovation of something new. Read More