These days, businesses have become more competitive. Therefore it is necessary for a business to define its business direction using strategic management to analyzing its environment inside and outside of the organisation and define but also implement appropriate strategies to control evaluations of the organizations operations over a long period of time. Strategic management is a planning system that requires sophisticated vision using conceptual models to drive the organisation into the right position throughout the market place.
This essay will start by discussing some of the basic strategic management models in brief starting with the Industry Life Cycle module. Then, Product Life Cycle followed by Scenario Planning, Value Chain and the SWOT analysis models. It will then concentrate on strategic management models and how they can help a manager with decision making. Next, in some detail it will discuss Acquisition and Alliance, first with a detailed definition of Acquisition and seconded followed with a detailed definition of alliance. It will then progress onto discussing the different types of acquisitions which range from horizontal, vertical and consolidation. The essay will move on to the benefits of strategic management models. After that it will talk about acquisitions and alliances that are sometimes taxable or tax-free and the two kinds of accounting methods that are used in acquisitions and alliances. Followed by, the basic four key points that need to be adhered to for an acquisition to be successful or fail, the key points include added value, commitment, synergies and cultural fit. Carried forward by a talk on the three basic factors that should be adhered to for a successful alliance this which includes strategic purpose, expectations and benefits of the alliance and alliance relationships. It will then advance on to discuss the strengths that can be seen from acquisition and alliances using illustrations on lower taxes, enhanced revenues, capital costs, changes of capital requirements, cost reduction and using organisation real world example from Cadbury alliance with Schweppes and Boots Group plc alliance with UniChem plc to prove the success of organisations who have found success with acquisition and alliance. It will show the risks involved in acquisition and alliance by discussing points such as cultural clashes, top employees may resign, post administrative problems may arise, over optimistic managers, an organisation's assets may not be as valuable as initially perceived and costs may increase and production may fall. These points will be backed up with real life organisations examples from Morrison's acquisition of Safeway and AOL merged with Time Warner of failure.
There are many conceptual models that might help a senior manager deal with the challenges that face them. Industry Life Cycle (ILC) is a model that's aimed at integrating technological and industrial evaluations in terms of trajectories and outcomes which will be observed to help with decision making (Suarez and Utterback, 1995 and Klepper, 2002) for instance; from an introduction of an organisation to its decline over a period of time ILC uses analysis usually using five stages reporting its growth to its demise by technological innovations (Scott, 2003).
Product Life Cycle (PLC) is a model that is also uses to research and analyse market trends but with greater importance than ILC, ILC research mainly focus on development issues while PLC mainly focus on the market trends inherited from the ILC approach . PLC and ILC are terms that are used interchangeably throughout strategic management (Lieberman and Montgomery, 1998 M. Lieberman and D. Montgomery, First-mover (Dis) advantages: retrospective and link with the resource-based view, Strategic Management Journal 19 (1998), pp. 1111-1125. Full Text via CrossRef | View Record in Scopus | Cited By in Scopus (184)Lieberman and Montgomery, 1998). For instance, tape cassettes, betamax video tapes and diskettes, which are examples of products that have become extinct PLC uses such examples to keep track on market trends.
Scenario planning is a model that is used to improve decision making by implementing games and simulations which is faster than reality of life and decision makers can experience many years of decision making in a short period of time, this can be as short as a day. Since the Royal Dutch/shell reported success with the use of scenario planning in the 1970's and 1980's to avoid the impact of the oil crisis scenario planning has exploded into a widely use strategic management model. Scenario planning can help senior managers deal with future scenarios through rigorous individual mental participation by examining alternatives decisions that can be made for a given scenario in real life (Stone, 2006)
Value chain is a model that is uses for a product to gain value through a chain of activities (Porter, 1980). The product must go through each activity in the chain in order to gain value. An example of value chain can be seen with a diamond cutter, a diamond cutter receives the diamond in its raw uncut state, after the diamond cutter has cut and shaped the diamond for consumer sale the diamond has gained tremendous value from the cutting. This example demonstrates the value of the value chain model (Scott, 2003).
Strength, weakness, opportunity and threat (SWOT) analysis is a model that is uses to aid managers in identifying internal and external strategy factors which are important to achieving the organizations objectives. The internal factors are the strengths and weaknesses of the organisation, the external factors are the opportunities and threats associated by outside factors to the organisation. The internal factors can be seen as both strengths and weaknesses but this depends on the organizations objectives, one objectives strength can be another objectives weakness. The internal factors can include the 4P's; plan "how to get from here to there", pattern "actions over time", position "reflects decisions of products and services in particular markets" and perspective "vision and direction" (Mintzberg, 1994) as well as finance, manufacturing capabilities and personnel. The external factors can include legislation, cultural changes, technological changes, marketplace changes and competitive position changes. A SWOT item that produces valuable strategies is important. SWOT items that generates no strategies in not important (Humphrey, 1960).
All these strategic management models which have been discusses above help managers deal with challenges that face them every day. Models help managers know if the organisation is on the right track and how the organisation can improve, they help detect relevant information about its organisation and how this information can be used to allow the organisation to perform more efficiently and analyse recourses to make the organisation conduct to a greater standard. Also, models assess ethical political risk and the risks involved with operating in foreign countries, help with future scenarios giving managers less stress due to stimulating games and finally, models help manager identify strategic factors through analysis.
This essay will now introduce Acquisitions and alliances as the final model. The attraction is how can two organisations come together and be as one. More over it is quite compelling to gain knowledge on any of independent organisations and this leads to the idea of this model study.
Acquisition is defined as the purchase of an organisation by another (Johnson et al., 2008); this can be done through the purchase of its shares or by purchasing the organisational assets. The fastest way to achieve huge economic growth is by purchasing another organisation and acquisition is the most popular way to achieving this huge economic growth, literally acquisition can be achieved overnight. "In today's global business environment, companies may have to grow to survive, and one of the best ways to grow is by merging with another company or acquiring other companies" (Sherriton, 2007). During the 1990's the acquisition of another organisation increased by an average of 18.3% per year (Data source: Securities Data Corporation). There are a number of organizations that acquire other organisations through acquisition and alliance and their motives for this are: Speed of entry. Markets and products change so fast that Acquisition and alliance become the only door for the organisations to gain access to the markets, A competitive market can influence organisations into acquisition and alliance, With the lower levels of industry larger organisations may concentrate on supply and demand by acquiring smaller organisation either to shut them down or to consolidate their operations, to grow as a company, to achieve tax benefits advantage from cost effective acquisitions, to acquire access to new advanced technologies or anther organisations knowledge, to access well developed distribution networks, to control undervalued assets and other reasons can include obtaining proprietary rights, obtaining services or products, backing up weaknesses in essential business areas and advancing into new geographical arenas. Alliance is defined as two or more organizations which combined resources to achieve economic gain. During the 1990's alliances have increased by an average of 34.1% per year (Data source: Securities Data Corporation). Worldwide the number of acquisitions has tripled from 1991 to the year 2001. The number of acquisitions declined after 2000 but the figures still stood at $1.2 trillion. But since 2002 the number of acquisitions has risen and in 2006 the figures stood at $3.8 trillion (Johnson et al., 2008,p.357) Most acquisitions and alliances are dominant in Western Europe and North America while it is not as common in many other countries.
There are many types of acquisitions in general ranging from horizontal, vertical and consolidation. When one organization buys another organisation from the same line of business this is a horizontal acquisition. For example, Britsh Airways has reported Iberia Airways will unite by the end of 2010 (Milmo, 2009). When an organization wants to expand forwards or backwards in the direction of the raw material or towards the customer this is a vertical acquisition. An example of a vertical alliance can be seen with Google's acquisition of AdMob. Google have acquisitioned the mobile phone advert company AdMob so they can have dominance over the mobile phone advert internet market (Financial Times, 2009). A consolidation takes place when two organisations join together and create an entirely new organisation which results in the two joining organizations ceasing to exist. Another way to acquisition an organisation is to buy its voting stock. This is done by the agreement through management or by tender offer which involves the acquisitioning organisation making an offer to buy stock from the shareholders and therefore not consulting the shareholders management. A takeover is when one organisation acquires another organization and the power of control is passed to the buying organization. If a small organisation sells or starts an alliance with another organisation, this can be seen has "harvesting of the small organisation". Harvesting is a situation where the organisations owners or investors would like to release the capital locked into the organisation. Small organisations find that this can be a good way to expand, grow and compete against the larger organisations is to join forces by merging or by acquiring other small organisations. Another type of acquisition is a hostile acquisition; a hostile acquisition usually involves replacing management because of poor performance which in turn can lead to restructuring of the organisation. Hostile acquisitions mostly involve under achieving organisations in advanced markets whose directors are opposed to the sale of the organisation. In an acquisition case such as this an organisation has two available options. The first is a tender offer to buy stock and secondly, A proxy fight which involves the acquiring organisation stepping to the shareholders and trying to gain rights by getting the shareholder to vote off their shares. The acquiring organisation hopes to gain votes and therefore take control over the board of directors. The target organisations management try to resist a hostile takeover so they can generate a better price, this can be for self interests or the organisations interests. This can be achieved by the target organisation by charter amendments, board staggered techniques, a board of directors has three groups, and one group can only be elected per year. So the acquisitioning organisation may have majority ownership but doesn't have control of the board. It's only a big majority of 80% that is required for a acquisition to be approved. Other defensive tactics include unsolicited offers made directly at the target organisation but the target organisation may claim the acquiring organisation is using dirty tactics and violating the code of conduct and other laws. The target organisation may just make themselves look unattractive by reconstructing its assets and liabilities. Reconstructing involves the target organisation buying up assets to implement antitrust or assets the bidder doesn't want. Liability tactics are the issuing of shares to third parties to put off the acquiring organisation ownership or make it difficult for the acquiring organisation to have finance and transaction bliss.
Acquisitions and alliances are sometimes taxable or tax-free. A Transactions tax status can affect the buyer and the seller from the value view point. The selling organisations assets are devalued in a taxable acquisition and therefore tax deductions will arise. The selling organisation will have to pay capital gains tax so in turn they will want more money for their assets. Some stock exchanges are tax-free; this allows stock owners to exchange stock tax free. Stockholders which receive stock from the acquiring organisation don't have to pay tax straight away; tax will have to be paid only when the stock has been sold, but if cash has been included in any transaction this will be taxed upon as it is seen as a gain in stock sales. Acquisitions and alliances can be motivated by tax losses. An organisation that increased its profits can gain value in tax losses from the target organisation; this may be used in offsetting income it wants to earn. Another advantage from tax is when the acquisition organisation carries the acquisitioned organisations assets on the accounting books which are below market value. The assets for tax reasons are valuable more if owned by another organisation which in turn can increase its tax basis after the acquisition. Debt interest payments are a tax deductable, but payments for acquisition ownership are not. The tax advantage of debt gives an organisation greater incentive to use debt but saying this, an organisation that doesn't use its debt capacity can become an easy target for acquisition (Johnson et al., 2008)
Acquisitions and alliances use two kinds of accounting methods which are; one, the pool of interest method and two the purchasing method. The pool of interests method uses the assumption the transaction is a simple exchange and this making the target organisations account stock eliminated. The final result of pool of interests is that both organisations assets are equal to the combined organisation assets but this kind of accounting method would generally be a tax-free acquisition. The purchasing method of accounting uses liabilities and assets shown on the acquisitions organisations market from the acquisition date. The method is to show results and values that should show market values which where bartered for in the acquisition process. Liability totals equal the value of both organisations individual liabilities. The value of the acquiring firm has increased by adding the purchase price to its total assets. Accounting costs from fair trade of the net assets applies in purchasing accounts. The access is known as good will; the asset against income is amortized over many years but can't exceed four decades. Purchasing accounts can have increased charges due to the asset value to book this is because assets lose value due to inflation. Accounting should not affect the value of an acquisition because good will has been created which is amortized over many years. Hostile takeovers can't be associated with private owned organisation. A public organisation goes private when all its stock has been bought up this is generally done by the management of the public organisation. This kind of takeover in known as Leveraged Buyout (LBO'S) this can be financed by debt assets by the target organisations (Johnson et al., 2008)
For an acquisition to be a success or even a failure there is a basic agenda with for key points that need to be adhered to.
For an alliance to be successful it depends on how the alliance is managed, many alliances tend to expand and evolve over time therefore new and complex opportunities may arise. There are three basic factors that need to be adhered to for a successful alliance.
The strengths that can be seen from acquisition and alliances can result in lower taxes, enhanced revenues, capital costs, changes of capital requirements, cost reduction. An example of a successful alliance can be seen with Cadbury Schweppes in 1969. Since the alliance Cadbury Schweppes has expanded into one of the leading confectionery and beverage organisation, which sells products in almost every country on the earth (The Times, 2009). Higher revenues can emerge from strategic benefits such as entering into new businesses. Cisco entered into a new line of business delivering TelePresence in 2006 which has become successful (Economist, 2009) Organisation can operate more efficiently that two small companies; this in turn can reduce operation costs. Alliances of a horizontal nature will create organisations of some scale this in turn will reduce the average production costs and increase production volumes. A successful acquisition can be assessed by two ways. First, shareholder values, evidence from the UK and USA suggest acquisitions produce wealth for acquiring organisation (Sudaranam, 1995) Secondly, the organisations profit performance measured in market shares (Angwin, 1999). An acquisition of an organisation with a good past history performance track record tends to be the successful acquisitions. An example of a successful alliance can be seen with Boots Group plc and UniChem plc in July 2006.Both organisations joined together and created a new international pharmacy (Johnson et al., 2008). Acquisitions are an important vehicle for corporate strategic redirection and renewal (Jemison and Sitkin, 1986). Alliances have become a proven and significant increasing popular method for a company to grow but this depends on planning strategies and managerial skills (Blake and Mouton 1984)
Acquisition and alliance could be very risky for an organisation because there are a number of things that could go wrong. For instance, cultural clashes, top employees may resign, post administrative problems may arise, over optimistic managers, an organisation's assets may not be as valuable as initially perceived and costs may increase and production may fall. A case in point is Morrison, the UK supermarket giant's acquisition of Safeway in 2004. The problem was Morrison's tried to adapt and join together both computer systems from Morrison's and Safeway but abandoned it after one year of trying this in turn Morrison's gained great financial losses due to this acquisition (Johnson et al., 2008). Evidence suggests from the UK and the USA that acquisitioning a company may not lead to profitable gain for some years due to stock prices and shareholders (Hall and Norburn, 1987). "Typically strategic alliances have been characterized as inherently instable." (Anand and Khanna, 2000). An example of acquisition loses can be seen when in 2001 AOL merged with Time Warner. Time Warner at the time of the merge had shares valued at $90 billion, three years later the shares had losses of over $50 billion and now where worth $36 billion (Johnson et al., 2008). So you can see acquisitions do not guarantee success in the financial department. Over 70% of acquisitions report lower turnover for the organisation and shareholders. The biggest mistake an organisation makes when acquiring another organisation is they pay too much money, this could be down to the lack of experience or simply from poor advice from the financial adviser.
Before any manager commits to an acquisition or alliance they needs to address the uncertainty and risk which can be broken into two parts. Firstly, products and technologies that are being discusses must be evaluated rigorously and answer some basic questions, does the product work? Will make a profit? Is the product or technology superior to its market? Secondly, the customers need to be assessed, will the product or technology be accepted worldwide and what time scale will this take? After the assessment organisations can judge their uncertainty that over shadows the acquisition or alliance (Entrepreneur, 2009).
Many critics suggest the acquisition and alliance model is the start of the demise for one company and the start of growth for another (Prashant et al., 2009). Critics also suggest that the parent organisation of the acquired organisation lay new values down with a fresh new start but leave the acquisitioned organisation to carry these tasks out. Acquisitions by businesses are often unsuccessful (Porter, 1987). It argued by academics and the business press that organisations with no acquisition experience don't do that well compared with organisations that have acquisition experience (Lubatkin, 1983). Some organisations believe acquisitions to be superior vehicle for investment but some research suggests different and states acquisitions can be a risky business if you don't have the right strategy planning (Pablo, 1994). Klien(1995) claimed that acquisitions and mergers are about greed for financial capital he uses the example of the New York investment banking firm Kohlberg Kravis Roberts & Co in 1989 who he says shocked the world with its acquiring of RJR-Nabisco, the cigarette and food retailers which was nineteenth in the fortune five hundred with over $17 billion in yearly sales, which he states is the largest some of money ever paid by one organisation in acquiring another. He states during the decade of 1990 it was the decade of greed.
In conclusion we have seen how nowadays businesses have become more competitive and these days it's necessary for a business to define its business direction using strategic management to analyzing its environment internal and external factors of the organisation. We used basic strategic management models from conceptual models that might help a senior manager deal with the challenges that face them. The Industry Life Cycle (ILC) model which aims at integrating technological and industrial evaluations in terms of trajectories and outcomes which will be observed to help with decision making. The Scenario planning model which is used to improve decision making by implementing games and simulations which is faster than reality of life hence, decision makers can experience many years of decision making in a short period of time. The Value chain model which is used for a product to gain value through a chain of activities we used the example of a diamond cutter to show the chain of events. The (SWOT) Strength, weakness, opportunity and threat analysis model this is used to aid managers in identifying internal and external strategy factors which are important to achieving the organizations objectives. We stated how all these strategic management models help managers deal with challenges that face them every day ranging from models that assist a manager to know if the organisation is on the right track, modules give a manager analyse recourses and also models help managers identify strategic factors through analysis.
In some detail we have seen how acquisition and alliance can be used in strategic management models. We first defined that Acquisition is the purchase of an organisation by another (Johnson et al., 2008) and that Alliance is defined as two or more organizations which combined resources to achieve economic gain. We discussed that there are many types of acquisitions in general ranging from horizontal, vertical and consolidation. When an organization buys another organisation from the same line of business this is a horizontal acquisition. When an organization wants to expand forwards or backwards in the direction of the raw material or towards the customer this is a vertical acquisition and a consolidation takes place when two organisations join together and create an entirely new organisation which results in the two joining organizations ceasing to exist. We then proceeded with hostile acquisitions and stated a hostile acquisition usually involves replacing management because of poor performance which in turn can lead to restructuring of the organisation. We then stepped onto saying acquisitions and alliances are sometimes taxable or tax-free. We discussed in detail taxable acquisition and non taxable acquisitions. Then continue onto accounting methods which are firstly; the pool of interest method and secondly the purchasing method. We stated that the pool of interest's method uses the assumption the transaction is a simple exchange and this making the target organisations account stock eliminated. The pool of interests is that both organisations assets are equal to the combined organisation assets but this kind of accounting method would generally be a tax-free acquisition. Then, for an acquisition to be a success or even a failure there is a basic agenda with four key points that need to be adhered to which are added value, commitment, and synergies plus cultural fit. There three basic factors that need to be adhered to for a successful alliance which are strategic Purpose, expectations and benefits of the alliance and alliance relationships. We then went onto the strengths that can be seen from acquisition and alliances which can result in lower taxes, enhanced revenues, capital costs, changes of capital requirements and cost reduction. Then the risk of acquisition and alliance for instance, cultural clashes, top employees may resign, post administrative problems may arise, over optimistic managers, an organisation's assets may not be as valuable as initially perceived and costs may increase and production may fall. Finally we use critic view points of the acquisition and alliance model with many of the critics suggesting that acquisition and alliance is the start of the demise for one company and the start of growth for another (Prashant et al., 2009).
