ACQUISITION, MERGERS AND RESTRUCTURING STRATEGIES

Merger – is a strategy through which two firms agree to integrate their operations on a relatively co-equal
basis.

Acquisition – is a strategy through which buys a controlling or 100% interest in another firm with the
intent of making the acquired firm a subsidiary business within its portfolio.

There are three types of acquisition:

Ø Horizontal Acquisition – The acquisition of a firm competing in the same industry in which the
acquiring firm competes.

Ø Vertical Acquisition – A firm acquiring a supplier or distributor of one or more of its goods and
services.

Ø Related Acquisition – The acquisition of a firm in a highly related market

Takeover – is a special type of an acquisition strategy wherein the target firm does not solicit the
acquiring firm’s bid. (Hostile Takeover).

Reasons for Acquisition

Ø Increase Market Power

Ø Overcoming Entry Barriers

Ø Cost of New Product Development and Increase Speed of Market

Ø Low Risk Compared to Developing New Products

Ø Increased Diversification

Ø Reshaping the Firms Competitive Scope

Ø Learning and developing New capabilities

Problems in Achieving Acquisition Success

Ø Integration Difficulties

Ø Inadequate evaluation of Targets

Ø Large extraordinary debts

Ø In ability to achieve synergy

Ø Too much Diversification

Ø Managers overly focus on diversification

Ø To Large

Ø Inadequate skills to deal with diversified industry.

Effective Acquisition

Ø Complimentary Resources and Assets

Ø Conduct effective Due Diligence

Ø Acquiring has financial slack (cash or favourable debt position)

Ø Merged firms maintain low debt position

Ø Acquiring firm has consistent and sustained emphasis on R&D and innovation

Ø Acquiring firm manage change well

REENGINEERING AND RESTRUCTURING

Reengineering and Engineering

Reengineering is the fundamental rethinking and radical redesign of business processes to achieve
dramatic improvements in critical contemporary measures of performance such as:

Ø Costs

Ø Quality

Ø Service and

Ø Speed

Business Process is any activity that is vital to delivering goods and services to customers quickly or that
promotes high quality or low costs, these include:

Ø Order Process

Ø Inventory Control

Ø Product Design

Reengineering focuses on business process and not on functions, an organization that reengineers always
has to adopt a different approach to organizing its activities. That is reengineering ignores ignore
deliberately the existing arrangement of tasks, roles, and work activities.

Restructuring

Restructuring has two basic steps:

Ø The organization reduces its level of differentiation and integration by eliminating divisions,
departments or levels of hierarchy.

Ø An organization downsizes by reducing the number of employees to decrease operating costs.

The reasons for restructuring are:

Ø Shift in technology that makes a company’s product obsolete.

Ø Or a worldwide recession reduces the demand for its products

Ø A company may find itself with excess capacity because customers no longer want the goods and
services it provides, viewing them as outdated or of poor value for money.

Ø Sometimes organizations downsize because they have grown excessively tall and bureaucratic and
operating costs have skyrocketed.

Ø Companies may also restructure to improve competitive advantage.

How to Effect Change

One thing that is certain in life is change, therefore you must know how to manage it.

Change should be effected through a three step process:

Ø Unfreezing

Ø Change

Ø Re-freezing

CHAPTER # 10

MERGERS AND ACQUISITIONS

WHAT ARE MERGERS AND ACQUISITIONS?

The terms mergers and acquisitions are often used interchangeably, even though they are not synonyms.

Ø Acquisition – A firm is engaged in acquisition when it purchases a second firm. The acquiring firm
however must enough shares (51%) which will allow the acquiring firm to make all the management and
strategic decisions in the targeted firm. There are several types of acquisitions, these are:

1.​ Friendly Acquisition – This is where management of the targeted firm wants the firm to be
acquired
2.​ Unfriendly Acquisition – This is where management of the targeted firm does not want the firm
to be acquired.
3.​ Hostile takeovers – These are unfriendly acquisitions, however, in most cases the management of
the firm being acquired are not aware.

Ø Mergers – Mergers are, when the assets of two similar-sized firms are combined to form one company.
In mergers one company purchases some percentage of the second firm’s assets while the second firm
simultaneously purchases some percentage of the first firm assets. Mergers can also be friendly or
unfriendly, however, in most instances mergers will be friendly. Eg National Commercial Bank (NCB)
and Mutual Security Bank (MSB) in the mid 1990s.

THE VALUE OF MERGERS AND ACQUISITION

Merger and acquisition strategies are very important strategic option open to firms pursuing
diversification and vertical integration strategies. The discussion as to how value is created through
mergers and acquisition can be divided in two areas:

Ø Mergers and Acquisition: The Unrelated Case - Please read on page (279)

Ø Mergers and Acquisitions: The Related Case

There are three types of strategic relatedness

1.​ The Federal Trade Commission categories. This includes:

1) ​ Vertical Mergers- A firm acquires former suppliers or customers

2) ​ Horizontal Mergers - A firm acquires a former competitor

3) ​ Product Extension Merger– A firm gains access to complementary products

4) ​ Market Extension Merger – A firm gains access to complementary markets through an acquisition

5) ​ Conglomerate Mergers – There is no strategic relatedness between bidding and a target market.

2.​ Potential Source of Strategic relatedness between Bidding and Target Firms:
1.​ Technical Economies – Scale economies that occur when the physical processes inside a firm are
altered so that the same amounts of input produced a higher quantity of output. Sources of
technical economies include marketing, production, experience, scheduling, banking and
compensation.
2.​ Pecunary Economies – Economies achieved by the ability of firms to dictate prices by exerting
market power.
3.​ Diversification Economies – Economies achieved by improving a firms performance relative to
its risk attributes or lowering its risk attributes relative to its performance.

3.​ Why Bidding Firms might wan to engage in mergers and acquisition strategies
1.​ To Reduce Production and Distribution Costs, through

- Through economies of scale

- Through vertical integration

- Through the adoption of more efficient production and organizational technology

- Through the increased utilization of the bidder’s management team

- Through a reduction of agency costs by bringing organization – specific assets under common
ownership.

2.​ Financial Motivation

- To gain access to underutilized Tax shields

- To avoid bankruptcy costs

- To increase leverage opportunities

- To gain other tax advantages

- To gain market power in product markets

- To eliminate inefficient target management

WHY ARE THERE SO MANY MERGERS AND ACQUISITIONS?

Ø To ensure Survival

Ø Free cash Flow

Ø Agency Problems

Ø Managerial Hubris – This is where the management of the bidding firm believe that they can better
manage the assets of the target firm more efficiently than the target firm.

Ø The potential for above-normal profits

MERGER AND ACQUISITIONS AND SUSTAINED COMPETITIVE ADVANTAGE

Ø Valuable, Rare and Private Economies of Scope

Ø Valuable, Rare and Costly-to-Imitate Economies of scope

Ø Unexpected Valuable Economies of Scope Between Bidding and Target Firms

Implications for Bidding Firm Manager

 1.​ Search for valuable and rare economies of scope
2.​ Keep information away from other bidders
3.​ Keep information away from targets
4.​ Avoid winning bidding wars
5.​ Close the deal quickly
6.​ Operate in “thinly traded” acquisition markets.

Implications for target Firms Manager

1.​ Seek information from bidder

2.​ Invite other bidders to join bidding competition
3.​ Delay, but Do Not Stop, the Acquisition

ORGANIZING TO IMPLEMENT A MERGER OR ACQUISITION

Ø Post-Merger Integration and Implementing a Diversification Strategy (refer to handout given to you in
class)

Ø Special Challenges in Post-Merger Integration (refer to handout given to you in class)

Hitt Ireland &

Diversification
A firm implements a corporate diversification strategy when it operates in multiple industries
or markets simultaneously.

There are two main types of diversification:

Ø Related Diversification- This is diversification into a new business activity that is linked to a
company’s existing business activity or activities by commonality between one or more
components of each activity’s value chain. (Usually, these linkages are based on marketing,
manufacturing and technological commonality.

Ø Unrelated Diversification – is a diversification into new business areas which has no obvious
connection with any of the company’s existing areas.

Creating Value through Diversification

There are three main ways how diversification can create value:

Ø Through Superior Internal Governance – This refers to the manner in which the top executive
of the company manages (or govern) subunits and individuals within the organization.

Ø Transferring Competencies – Companies that based their diversification strategy on

transferring competencies seek out new business related to their existing business by one or
more value creation functions (eg manufacturing, marketing and material management).
Ø Economies of Scope – The sharing of such resources such as manufacturing facilities
distribution channels, advertising campaign costs by two or more business units give rise to
economies of scope.

Bureaucratic Costs and the Limits of Diversification

One reason for the failure of diversification to achieve its aim is that the bureaucratic costs of
diversification often exceed the value created by the strategy. The level of bureaucratic costs in
diversified organization is function of two factors.

Ø Number of businesses

Ø Coordination among businesses

Diversification that Dissipates Value

The failure of diversification to create value is due largely to the fact that company diversify for
the wrong reason. This is true of diversification that are done to

a. ​ Pool risks or – The benefits are said to come from merging imperfectly correlated income
stream to create more stable income stream.

b.​ To achieve greater growth – Diversification to create growth is not a coherent strategy as
growth on its own does not create value. Growth should be a by-products, not the objective of
the diversification strategy.

Related versus Unrelated Diversification

One issue companies must resolve is whether to diversify into totally new business or business
relating to existing business by value chain commonalties. The decision is between related and
unrelated diversification. It is said that related diversification is less risky than unrelated
diversification as top management tends to know the field that they are in. This is so because of:

Ø The number of businesses in the company’s portfolio.

Ø The extent of coordination required among the different businesses in order to realize value
from a diversified strategy.

CORPORATE DEVELOPMENT: BUILDING

AND RESTRUCTURING THE CORPORATION

Corporate Development is concerned with identifying which business opportunities a company

should pursue, how it should pursue those opportunities and how it should exit from the
business that do not fit the company’s strategic vision.

Reviewing the Corporate Portfolio

Reviewing corporate portfolio helps to identify which business the company should continue to
participate in, which it should exit from and whether the company should consider entering any
new business areas. There are two main approaches:

Ø The portfolio planning matrices – This is where there is a competitive comparison of different
businesses within the portfolio against each other on the basis of common criteria. Portfolio
planning entails:

a. Dividing the company into strategic business units (Product market)

b. Accessing the prospects of each SBU and compare them against each other by means of a
matrix. The assessing is done on two basis:

(1) Each SBU relative market share and this is the ratio of an SBU’s market share to the market
share held by the largest rival company in the industry.

(2) The growth of the SBU’s industry. The matrix is divided into four cells:

Ø Stars - The leading SBU’s in a company’s portfolio are the stars

Ø Question marks – These are SBU’s that are relatively weak in competitive terms (they have
low relative market share) but are based in high growth industries and thus are considered
opportunities. These can become stars if nurtured properly.

Ø Cash Cows – SBU.s that have high market share in low growth industry and a strong
competitive position in mature industry.

Ø Dogs – These are SBU’s that are in low growth industry and have a low market share.

c. Develop strategic objectives for each SBU.

(1) The cash surplus from any cash cows should be used to support the development of
selected question marks and nurture stars.

(2) Question Marks that are weakest and most uncertain should be divested to reduce
demands on company’s cash resources.

(3) Exit SBU’s that are dogs.

(4) If the company lacks enough stars, cash cows and question marks then it should
consider acquisition or divestments to have a balanced portfolio.
Limitations of Portfolio Planning

Ø The model is simplistic

Ø The connection between relative market share and cost savings is not as straightforward.

Ø A high market share in a low growth industry does not necessarily result in the large positive
cash flow.

Ø It does not take industry size, growth, cyclicality, competitive industry and technical
dynamism.

Chapter 7

CORPORATE DIVERSIFICATION

What is Corporate Diversification

A firm implements a corporate diversification strategy when it operates in multiple industries

or markets simultaneously.

Ø A firm is pursuing a product diversification strategy when it operates in multiple industries

simultaneously.
Ø When a firm operates in multiple geographic markets simultaneously, it is said to be
implementing a geographic market diversification.

Ø When a firm implements both types of diversification simultaneously, it is said to be

implementing a product market diversification.

Types Corporate Diversification

There are three main types of diversification, these are:

Ø Limited Corporate Diversification – A firm has implementing a strategy of Limited Corporate

Diversification when all of or most of its business activities fall within a single industry and
geographic market. Two types of firms are included in this corporate diversification category

a. ​ Single Business Firms – These are firms with greater than 95% of their total
sales is in a single product market

b.​ Dominant Business Firms – These are firms with between 70% and 95% of their
total sales in a single product market.

Ø Related Corporate Diversification – A firm is engaged in Related Corporate Diversification

when less than 70% of a firms revenue comes from a single product market and these multiple
lines of business are linked. The multiple business that a diversified firm pursue can be related
in two ways:
 1.​ Related Constrained – This is where, if all the business in which a firm operates share a
significant number of inputs, production technologies, distribution channels and similar
customers. Example PepsiCo, although Pepsi operates in multiple business around the
world, all its businesses focus on snack type products, either food or beverages.

2.​ Related Linked – Related Link exist if the different businesses that a single firm pursues
are linked on only a couple of dimensions.

Ø Unrelated Corporate Diversification - This is where a firm pursues numerous different

businesses and there are no linkages among them.

The Value of Corporate Diversification

For corporation diversification to be economically valuable, two condition must hold.

These are:

Ø First there must be some valuable economy of scope among multiple businesses in which a
firm is operating.

Ø Second it must be less costly for managers in a firm to realize these economies of scope than
for outside equity holders on their own.

What are Valuable Economics of Scope?

Economics of scope exist in a firm when the value of the products or services it sells increases
as a function of the number of businesses in which a firm operates. Economies of scope are
valuable to the extent that they increase a firm’s revenue or decrease its costs, compared to
what would be the case if these economies of scope were not exploited. There are different
types of economies of scope these are:

Ø Operational Economies of Scope

1.​ Shared Activities – The value chain analysis can be used to describe business activities
that may be shared across several different businesses within diversified firms.

2.​ Core competencies – is defined as the collective learning in the organization, especially
how to coordinate diverse production skills and integrate multiple streams of
technologies.

Ø Financial Economies of Scope

1.​ Internal Capital Allocation - Capital can allocated to business in one of two ways. First,
business operating as independent entities can compete for capital in external capital
market.

2.​ Risk Reduction - The riskiness of the cash flows of diversified firms is lower than the
riskiness of the cash flows of undiversified firms. (All the business will not be doing badly
at the same time.

3.​ Tax Advantages -

Ø Anti-competitive Economies of Scope

 1.​ Multipoint competition – Multipoint competition exists when two or more diversified firms
simultaneously compete in multiple markets. Example HP and Dell compete in both the
personal computer market and the market for computer printers.

2.​ Exploiting Market Power – International allocation of capital among a diversified firm’s
businesses may enable in some of the businesses the market power advantages it
enjoys in other of its business.

Ø Employee and Stakeholders Incentive for Diversification

1.​ maximizing management compensation

Corporate Diversification and Sustained Competitive Advantage

In order for diversification to be a source of competitive advantage it must not only be valuable,
but also rare and costly to imitate and a firm must be organized to implement this strategy.

Ø Rarity of Diversification – The rarity of diversification depends not on diversification per se but
on how rare the particular economies of scope associated with that diversification are. If only
few competing firms have exploited a particular economy of scope, that economy of scope can
be rare. If numerous firms have done so, it would be common and not a source of competitive
advantage.

Ø The Inability of Diversification – both forms of imitation, direct duplication and substitution are
relevant in evaluating the ability of diversification strategies to generate sustained competitive
advantage, even if the economy of scope that they generate is rare.
Chapter 8

ORGANIZING TO IMPLEMENT CORPORATE DIVERSIFICATION

Organizational Structure and Implementing Corporate diversification

The most common organizational structure for implementing corporate diversification strategy is
the Multidivisional structure (M-form). In the multiple divisional structures each firm is managed
through a division. (See organizational chart on page 222).

The M –form structure is designed to create checks and balances for managers that increase
the probability that a diversified firm will be managed in ways consistent with the interest of the
equity holders.

The Board of Directors

One of the major components of an M-form organization is a firm’s Board of Directors. In

principle, all the firm’s senior managers reported to the Board. A Board of Directors typically
consist of 10-15 individuals drawn from individual outside the firm.
The firm’s Senior Executives such as the CEO, CFO are usually on the board. The Board of
directors are typically organized into several committees such as:

Ø Audit Committee

Ø Finance Committee

Ø Nominating Committee

Ø Personal and Compensation Committee

Institutional Owners

Institutional Owners are can be a single investor or it can be small blocks of millions of
investors.

Institutional owners usually include:

Ø Pension Funds

Ø Mutual funds

Ø Insurance Companies

Ø Other group of individual investors who joined together to manage their portfolio.

The Senior Executives

The Senior Executives are responsible for the following:

Ø Strategy Formulation – Strategy formulation entails deciding which set of businesses a

diversified firm will operate in.

Ø Strategy Implementation – Strategy implementation focuses on encouraging behaviour in a

firm that is consistent with this strategy.

Corporate Staff

The primary responsibility of Corporate Staff is to provide information about the firms’ external
and internal environment to the senior executives. This information is vital for both the strategy
formulation and implementation.

Divisional General Manager

Divisional General Manager in a Multidivisional Firm has primary responsibilities for managing
the firms business from day to day. Divisional General Managers have full profit-and- loss
responsibility and typically have multiple functional managers reporting to them.

Shared Activity Manager

Shared activities managers create economy of scope when one or more of the stages in their
value chain are managed in common. Eg two or more division in a multidivisional firm including
common sales forces, common distribution system, common manufacturing facilities and
common research and development effort share the same manager. The primary responsibility
of the individual who manage the shared activities is to support the operation of the division that
share the activity. This include
Ø Shared Activity and Cost centre – Shared Activities are often managed as cost centres in an
M-form structure, ie rather than having profit an loss responsibility, cost centre are assigned a
budget and manage their operation to that budget.

Ø Shared Activity and Profit Centre – Some diversified firms are beginning to manage shared
activities as profit centres rather than cost centres. Rather than requiring division to use the
services of shared activities, instead the division have to purchase the services of internal
shared activities.

Management Controls and Implementing Corporate Diversification

The most important management controls structure includes:

Ø Evaluating Divisional Performance – This is done in terms of the division profitability or if the
division is making a loss. The questions are (1) how should division profitability be measured?
(2) How should economy of scope linkages between divisions be factored into divisional
performance measures? The measures used to measure performance are:

1.​ Accounting Measures and Divisional Performance

2.​ Economic Measures and Divisional Performance (EVA)

Ø Allocating Corporate Capital – Budgeting with special emphasis on Zero Based Budgeting.
This is where corporate executive create a list of all capital allocation request from all divisions
in the firm, then rank them from most important to least important and then allocate the funds
accordingly.
Ø Transferring Intermediate Products – Intermediate products or services are those product or
services produced in one division are used as input for products produced in a second division.
This is usually managed through a transfer pricing system. This is where one division “sells”
the intermediate product or services to the second department at a transfer price.

DESIGNING ORGANIZATIONAL
STRUCTURE
Building Blocks of Organizational
Structure

The basic building blocks of organizational structure are differentiation and integration.

Ø Differentiation is the way a company allocates people and resources to organizational tasks in order to
create value. There are two types of differentiation:

1.​ Horizontal Differentiation – is how managers divide people and tasks into functions and divisions
to increase their ability to create value.
2.​ Vertical Differentiation – is the distribution of decision-making authority within the organization
to control value creation activities.

Ø Integration – This is how the organization seeks to coordinate people and functions to accomplish
organizational tasks.

Differentiation Integration and

Bureaucratic Costs

The costs of operating organizational structure and control systems are known as Bureaucratic costs. The
more the company differentiate the more specialized manager it will need which is very costly.
Conversely the more Integrated a company is the more managerial time that will be spent with employees
and this can be very costly.

Vertical Differentiation

The aim of vertical differentiation is to specify the reporting relationship that links people, tasks and
functions at all level of the organization. This entails:
Ø Span of controls

Ø Flat structure

Ø Tall structure

Centralization – this is where decision making authority is held by top management.

Decentralization – is where decision making authority is given to individual unit managers.

Controlled Decentralization -

Horizontal Differentiation

Horizontal differentiation focuses on the division and grouping of tasks to meet the objectives of the
business.

Ø Simple Structure – The simple structure is normally used by small entrepreneurial company
producing a single product or few related ones for a specific market segment.

Ø Functional Structure – This is where people are grouped by their common expertise and experience
or because they use the same resources. These functions includes:

1.​ Research and Development

2.​ Sales and Marketing
3.​ Manufacturing
4.​ Material Management
5.​ Engineering

Advantages of Functional Structures

Ø Synergistic effects of people working together

Ø People working together can monitor each other to ensure that they are all performing their tasks
effectively.

Ø Managers will have greater control of organizational activities.

Disadvantages of Functional Structures

Ø Communication Problems

Ø Measurement Problems

Ø Location Problems

Ø Strategic Problems

Ø Multi Divisional Structures – The Multidivisional structure possesses two main innovation over a
functional structure, innovation that let the company grow and diversify yet overcome problems that
stems from loss of control.

First each distinctive product line of business unit is placed in its own self-contained unit or
division with all support functions.

Second the office of corporate headquarters staff is created to monitor divisional activities and to exercise
financial controls over each of the division.

Advantages of Multi Divisional Structures

Ø Enhance Corporate Financial Controls

Ø Enhance Strategic Controls

Ø Growth

Ø Stronger Pursuit of Internal Efficiency

Disadvantages of Multi Divisional Structures

Ø Establishing the Divisional-Corporate Relationship

Ø Distortion of Information

Ø Competition for Resources

Ø Transfer Pricing

Ø Short-term Research and Development Focus

Ø Bureaucratic Costs

Matrix Structure​

Matrix structure differs from the other two structures in that it is based on two forms of horizontal
differentiation instead of one as in the functional structure.

In the matrix design activities on the vertical axis are grouped by function, so that there is a familiar
differentiation of tasks into function such as engineering, sales and marketing and research and
development. In addition, superimposed on the vertical pattern is a horizontal pattern based on
differentiation by product or project.

Advantages

Ø Flexible operations

Ø Minimum directions needed

Ø Synergy from working in team

Ø Employees in this structure tends to be highly qualified and professional

Ø Flexible working conditions

Disadvantages

Ø Bureaucratic costs

Ø Having more than one bosses

Ø These employees salary are usually high.

Ø Constant movement of employees around means time and money

DESINING STRATEGIC CONTROL

SYSTEM

Strategic Control is the process by which managers monitor the ongoing activities of the organization
and its staff to evaluate whether activities are being performed efficiently and effectively.
The Importance of Strategic Controls

Ø Control of Efficiency – This is to determine how efficiently the organization is using its resources. To
do this managers must be able to measure units of input (raw material, human resources ect.) are being
used to produce output.

Ø Control and Quality – There must be control systems to measure quality within the organization.

Ø Control and Innovation – Strategic controls can help to increase the level of innovation within the
organization by empowering employees to take decisions at all levels.

Ø Control and Responsiveness of Customers – This is where there are control systems that allows the
organization to measure the level and quality of service that the customers are receiving.

A Balanced Scorecard Approach to Strategic Control

The balance scorecard is a tool that is used to measure

Ø Efficiency

Ø Quality

Ø Innovation

Ø Responsiveness to customer (see figure 12.1)

Strategic Control System

Strategic control systems are the formal target setting measures and feedback systems that allows strategic
managers to evaluate whether or not a company is achieving superior quality, efficiency and customer
responsiveness and implementing its strategies successfully. An effective control system should have the
following characteristics:

Ø Flexible
Ø It should provide accurate information

Ø It must be timely

Designing and Effective Strategic Control System involves 4 steps:

Ø Establish the standards and targets against which performance is to be evaluated.

Ø Create measuring and monitoring systems

Ø Compare actual performance against the established targets

Ø Initiate corrective Actions when it us decided that the standards and targets are not being achieved.

Levels of Strategic Controls

Ø Corporate level mangers

Ø Divisional level managers

Ø Functional Level managers

Ø First level managers

Financial Controls

Ø Stock Price

Ø Returns on Investments

Ø Profitability
Output Controls

Output controls is a system of control in which strategic managers estimate or forecast appropriate
performance goals for each division, department and employees and then measure actual performance
relative to those goals. Output controls are subdivided into:

Ø Divisional Goals

Ø Functional and

Ø Individual Goals

Management by Objectives

Management by Objectives (MBO) is a system of evaluating managers by their ability to achieve specific
organizational goals or performance standards and to meet their operating budget. Management by
objective system requires these steps:

Ø Establish specific goals and objective at each level of the organization

Ø Making goal setting a participatory process.

Ø Predict review of process towards meeting goals

Behavior Controls

Behavior Control is control through establishment of a comprehensive set of rules and procedures to
direct the action or behavior of division function or individuals. These includes:

Ø Operating Budgets – This is a blueprint that states how managers intend to use organizational resources
most efficiently.
Ø Standardization – refers to the degree to which a company specifies how decisions are to be made so
that employee’s behavior becomes predictable. There are three things that can be standardize, these are:

1.​ Input
2.​ Conversion
3.​ Output

d. Rules and Procedures

STRATEGIC ALLIANCES

Strategic alliances are cooperative strategies between firms whereby resources and capabilities are
combined to create a competitive advantage. All strategic alliances require firms to exchange and share
resources and capabilities to co-develop or distribute goods or services.
The three basic types of strategic alliances are:

Ø Joint Ventures, where a legally independent company is created by at least two other firms, with each
firm usually owning an equal percentage of the new company;

Ø Equity Strategic Alliances, whereby partners own different percentages of equity in the new company
they have formed;

Ø Nonequity Strategic Alliances, which are contractual relationships between firms to share some of their
resources and capabilities. The firms do not establish a separate organization, nor do they take an equity
position. Because of this, nonequity strategic alliances are less formal and demand fewer partner
commitments than joint ventures and equity strategic alliances. Typical forms are licensing agreements,
distribution agreements and supply contracts.

STRATEGIC ALLIANCES

A strategic alliance is a cooperative strategy in which firms combine some of their resources and
capabilities to create a competitive advantage. Strategic alliances involve firms with some degree of
exchange and sharing of resources and capabilities to co-develop, sell, and service goods or services.

Strategic alliances allow firms to leverage their existing resources and capabilities while working with
partners to develop additional resources and capabilities as the foundation for new competitive
advantages.
Three Types of Strategic Alliances

The three major types of strategic alliances include:

1. Joint Venture - A joint venture is a strategic alliance in which two or more firms create a legally
independent company to share some of their resources and capabilities to develop a competitive
advantage.

Joint ventures, which are often formed to improve firms’ abilities to compete in uncertain competitive
environments, are effective in establishing long-term relationships and in transferring tacit knowledge.
Because it can’t be codified, tacit knowledge is learned through experiences such as those taking place
when people from partner firms work together in a joint venture. Typically, partners in a joint venture own
equal percentages and contribute equally to the venture’s operations. Germany’s Siemens AG and Japan’s
Fujitsu Ltd. equally own the joint venture Fujitsu Siemens Computers. Although the joint venture has
been losing money, Fujitsu has decided that it wants to increase its market share from 4 to 10 percent, so
it is taking over the joint venture. The new entity will be called Fujitsu Technology Solutions. Overall,
evidence suggests that a joint venture may be the optimal type of cooperative arrangement when firms
need to combine their resources and capabilities to create a competitive advantage that is substantially
different from any they possess individually and when the partners intend to enter highly uncertain
markets.

2. Equity Strategic Alliance,

3. An equity strategic alliance is an alliance in which two or more firms own different percentages of the
company they have formed by combining some of their resources and capabilities to create a competitive
advantage.

1. Nonequity Strategic Alliance.

A nonequity strategic alliance is an alliance in which two or more firms develop a contractual relationship
to share some of their unique resources and capabilities to create a competitive advantage. The relative
informality and lower commitment levels characterizing nonequity strategic alliances make them
unsuitable for complex projects where success requires effective transfers of tacit knowledge between
partners. Forms of nonequity strategic alliances include licensing agreements, distribution agreements,
and supply contracts.

Hewlett-Packard (HP), which actively “partners to create new markets Slow-Cycle Markets Firms in
slow-cycle markets often use strategic alliances to enter restricted markets or to establish franchises in
new markets. pace will increase. The truth of the matter is that slow-cycle markets are becoming rare in
the twenty first century competitive landscape for several reasons, including the privatization of industries
and economies, the rapid expansion of the Internet’s capabilities for the quick dissemination of
information, and the speed with which advancing technologies make quickly imitating even complex
products possible.45 Firms competing in slow-cycle markets, including steel manufacturers, should
recognize the future likelihood that they’ll encounter situations in which their competitive advantages
become partially sustainable (in the instance of a standard-cycle market) or unsustainable (in the case of a
fast-cycle Market Reason Slow-Cycle • Gain access to a restricted market • Establish a franchise in a new
market • Maintain market stability (e.g., establishing standards) Fast-Cycle • Speed up development of
new goods or services • Speed up new market entry • Maintain market leadership • Form an industry
technology standard • Share risky R&D expenses • Overcome uncertainty Standard-Cycle • Gain market
power (reduce industry overcapacity) • Gain access to complementary resources • Establish better
economies of scale • Overcome trade barriers • Meet competitive challenges from other competitors •
Pool resources for very large capital projects • Learn new business techniques Tity from another firm.)
Dell Inc.