Example Business Essay:Tactics which can support a strategy of growth

Example Business Essay:Tactics which can support a strategy of growth
There are three tactics which can support a strategy of growth. First a firm can adopt internal or organic development. For example Glaxo Smith Klein (GSK) a large UK drugs business reorganised its research and development (R&D) operations to improve expansion. Second, another UK pharmaceutical company AstraZeneca carried out takeovers of bio-science firms (mergers and acquisitions M&A). Compare and contrast these two approaches to growth by discussing their relative advantages and disadvantages. Use examples from any relevant sector, not just "Big Pharma".
The paper presents a contrast between conservative and aggressive growth options. It discusses mergers and acquisitions, organic growth and alliances using examples from a range of industries which include online businesses, brewery firms, soft drink giants and also a major pharmaceutical industry merger. In examining the interface between the different growth options the paper posits that they are not mutually exclusive and one may lead to the other, whereas a portfolio of growth options is strategically astute to have. The advantages, disadvantages and issues surrounding the growth options suggest that it is a risk-benefit premise that underpins the value perceptions from a chosen growth route. Competitive situations and resourcing s aspects also govern the choice a chosen route.

1. Introduction

This paper discusses the different routes to growth that an enterprise might take. Given the growing popularity and mixed success of aggressive growth option of mergers and acquisitions, the paper compares and contrasts them with more conservative options like organic growth and alliances. It first presents the interface between the different routes and then focuses on their relative advantages and disadvantages. The contrast is also brought out in discussing needs, and in highlighting the issue of achieving synergies for delivering greater value under the different growth routes. The paper focuses on organic growth and mergers and acquisitions in the main, with some development of the context of alliancing in comparing the two. It closes with some strategic highlights from the discussion.

2. The Interface and Non-Exclusive Nature of the Growth Options

Strategic growth options for a firm usually take three forms. These are growth through alliances with other firms in different areas ranging from R&D to distribution and other forms of joint ventures; growth thorough mergers or acquisitions (M&A) – that implies creating a new entity through a merger or an expanded firms through an alliance and; organic development that is essentially about growing as an organism through overtime development using investment from surpluses the firm creates from its operations to acquire more assets, personnel and diversify or expand into business areas (Sudarsanam, 2003, p. 70).

While these are different options they are not necessarily mutually exclusive. An organisation can follow one option or the other simultaneously. For example a global firm can alliance with another in a new market for purposes of accessing its distribution network while continue to grow organically in another market it has a very entrenched position in. In still another market where competition is intense and competitors are vying for key suppliers it may engage in vertical integration with acquisitions along the supply chain. The example of Pepsi is a validation of such simultaneous occurrence. It acquired key bottling firms in Mexico at three times the price they were worth in early 1980s; this affected the growth of its competitor Coca-Cola very adversely. Similarly Pepsi tied up with Thumps-Up the Indian soft drink brand to penetrate the market before making an offer of acquisition that Thumps-UP could not refuse (Weston et al., 2003). This synergetic and partnered penetration also worked well with making a foreign brand get acceptance in India, which had traditionally been very resistance to foreign brands. In the mean time of course Pepsi continued to grow organically in other markets and later in the markets it thus entered through more externally oriented growth options i.e. alliances and mergers and acquisitions.

This example opens up one more dimension of the interface between the different strategic options. This is about one leading to the other. The most familiar one is the alliance option leading to a merger or acquisition- where the former is essentially a taster that builds confidence in the merger. After merger or acquisition the strategising for organic development becomes very crucial, because two different legacies come into play – moving forward as one firm is bereft with challenges (Datta, 1991; Mintzberg et al., 2003, p. 129).

The following figure captures this interface. Organic development is a stable option while an alliance is an option with an external locus that can (but not necessarily will) lead to an M&A, while M&A itself is a function of further and focussed organic development. Alliances can also result in further progress along the partnership trajectory or withdrawal, contingent on how the issue of mutual benefits and over time trust shapes up. An M&A in contrast – if it fails can also lead to disposal or a de-merger as is sometimes called, which is very difficult and costly to do (DePamphilis, 2008, p. 531). It can also require organic development that is not – normal but calls for restructuring as well to co-opt the new organisation that comes into being requiring a merger of two legacies.

Figure 1: Interface and Non-Exclusive nature of the Growth Options
3. Advantages and Disadvantages of the Growth Options

This section extends the contrasts the organic development and the mergers and acquisitions option, building on the prior section that outlines there nature and mutual interface. In doing so it also invariably engages a comparison with the ‘alliances’ perspective which is the third and arguably the midway perspective intertwined with the other two as explained in the preceding section. The disadvantages and advantages of the growth options are discussed and then summarised.

Because of its internal locus of control organic development is easier to control. It is an incremental growth option which builds on core competencies and feeds on rents the firm draws from its operations to fuel expansion. To this extent while it is slower relative to other options it also entails lower risk. Even if debt financing is subscribed to – it is leveraged on current operational throughput and not on future estimates as in mergers and acquisitions, where such estimates are highly contingent on the success of a complex post merger acquisition process (Ghoshal and Gratton, 2002, p. 34). The organics growth option often involves more upfront revenue costs even if debt financing is subscribed to. Furthermore its value in terms of surprising competition because of its slow trajectory is low. Competition is likely to predict the outcomes and resultant value a firm will draw from its investments in organic growth.

Alliances and Joint Ventures are a step up from the mergers and acquisition process they transcend limited competencies by alliancing and drawing the resources of the partner. In many cases such alliances lead to much superior value than would be possible given the constrained and limited scope of one enterprise’s resources and capabilities. This unlike organic development moves can usually surprise competitors but can also crumble easily because it is a partnership based on a perception of mutual benefit. Only when it goes beyond benefits to trust can it be rather stable. It does not give real control to anyone enterprise and usually each tries to get more value out than the other. Relative dominance of collaborators may shape an alliance that is not only stressful but is likely to sometimes result in sub-optimal value for both parties. However, when it transcends the benefit harnessing premise to trust between partners it can sometimes sow the seeds for a rather amicable merger and acquisition (DePamphilis, 2008, p. 539).

Mergers and acquisitions do not usually arrive by joint ventures but independent of it. They are closely guarded secrets even if deliberated for considerable period of time. When they occur and/or are announced they can cause a ripple in the industry and also surprise competition. Mergers and acquisitions fundamentally extend competencies by integrating new ones provided these new ones do not conflict with the old ones/ the other set of competencies, but act as complements. The economies scale and scope in production and in reach to markets also stands extended if there is not much duplication or conflict in drawing synergies (Harrison, 1991, p. 178; Sirower, 1997, p. 17). In essence the search for parties with true complementary resources is critical for drawing synergies for benefits from an M&A. Not only the merger and acquisition costly but it hits profits in the short run due to market uncertainty in the short run and also focus on integration than operational excellence that is required in the immediate aftermath. This aftermath can extend to several years as in the case of GlaxoSmithKline (GSK) than came together as a consequence of the merger between GlaxoWellcome and SmithKlineBeecham in 2000. The post merger integration activities continued for almost the next few years. For instance, the post merger integration of project practices was rolled out after initial smoothening and alignment of resources only in 2003 and then took another few years of refinement based on feedback to get firmly in place. Though this was a successful merger the process itself was costly in terms of resource commitment (Weston et al., 2003, p. 151).

Similarly the dilemma faced by AmBev the merged entity from the coming together of Anthartica and Brahma took even longer to stabilise because of fundamental nature of the business of these two Brazilian brewery firms. One was conservative and the other rather ambitious in terms of marketing and product selection. This impacted some incongruence in how the combined top leadership made strategic decisions post merger. Another important thing to note is that in the rushed market manoeuvres of the 1990s it was always an explicit dilemma – whether to focus on integration or go for more mergers and acquisitions. Though AmBev opted for the latter and was successful- it was a risky manoeuvre to invest in M&As without realising true synergies from past M&As (Mintzberg et al., 2003, p. 130). This also brings forth another aspect of managerial hubris that can be fuelled by successful M&As initially and making the top leadership run on this trajectory of high risk for very long periods. The case of Saatchi and Saatchi that found this to be its nemesis is aft cited as an example of M&A moves that went on for too long, were led by managerial hubris and eventually led to organisational decline, because synergies were not appropriated (Minztberg et al., 2003, Haleblian et al., 2009).

The risk mergers and acquisitions entail puts an argumentative quotient to their speed. They are not really fast if one were to look at the time it takes to draw synergy, and if done careful require more time than usually appreciated to scope a relationship like in an alliancing arrangement. As Faulkner and Bowman (quoted in: Gaughan, 1994) say: “Of the various opportunities to growth which may exist, the option of acquisition [and merger!] is by far the riskiest, unless pursued after an extended period of close collaboration with the target company [between the target companies] as a partner”

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