Strategic Management Quiz 6

Mergers & Acquisitions, and Global Strategy

merger

the joining of two independent companies; forms a combined entity

why would companies merge

reduction in competitive intensity (changes underlying industry structure in favor of surviving firms); lower costs (economies of scale); increased differentiation (fills product gaps)

horizontal integration

the process of merging with competitor at the same stage of the industry value chain; leads to industry consolidation

risks of merging

integration failure; reduced flexibility; increased potential for legal repercussions

acquisition

purchase of one company by another; can be friendly or unfriendly

hostile takeover

during an acquisition when the target company does not wish to be acquired

why would companies acquire other companies

to access new markets & distribution channels; to access new capabilities or competencies; to preempt rivals

acquisition premium

the difference between the price paid to acquire a company and the company’s estimated market value; (deal price - market price) / market price = acquisition premium

reasons for acquisition premium

synergy; increased market power; diversification; managers’ motives

why mergers and acquisitions can fail

executives’ pursuit of self-interests and managerial hubris; the desire to overcome competitive disadvantage; lack of superior acquisition and integration capability

goal of global strategy

to gain and sustain a competitive advantage; to compete against other foreign and domestic companies around the world

foreign direct investment (FDI)

helps develop a business when you want to globalize; takes place when an investor establishes foreign business operations or acquires foreign business assets, including establishing ownership or controlling interest in a foreign company

multinational enterprise (MNEs)

a company that deploys resources and capabilities in the procurement, product, and distribution of goods and services in at least two countries

why do companies go global

gain access to larger markets (economies of scale & scope); gain access to low-cost input factors (low-cost leadership strategy); develop new competencies (differentiation strategy; provides access to communities of learning and location economies)

risks of going global

liability of foreignness (unfamiliar environments); loss of reputation (from poor working conditions or different safety standards); loss of intellectual property (difficult to protect IP in foreign markets)

the CAGE distance framework

guides MNE decisions on which countries to enter; distance is the main cost and risk of expansion; different types of distance: Cultural, Administrative and political, Geographic, Economic

Cultural distance (CAGE)

disparity between a firm’s home country and its targeted host country (social norms and morals, beliefs, and values); Hofstede cultural dimensions (power distance, individualism-collectivistic, masculinity-feminity; uncertainty avoidance; time perspective; indulgence-restraint)

Cultural distance between two countries increases with

different languages, ethnicities, religions, social norms, and dispositions; lack of connective ethnic or social networks; lack of trust and mutual respect

Cultural distance most affects industries of products

with high linguistic content (TV); related to national and/or religious identity (foods); carrying country-specific quality associations (wines)

Administrative and political distance (CAGE)

captured in factors such as shared monetary or political associations; political hostilities; weak or strong legal and financial institutions

Barriers of administrative and political distance include

tariffs, trade quotas, FDI restrictions

Administrative and political distance between two countries increases with

absence of trading bloc; absence of shared currency, monetary or political association; absence of colonial ties; political hostilities; weak legal and financial institutions

Administrative and political distance most affects industries of products

that foreign government views as stables (electricity), as building national reputations (aerospace), or as vital to national security (telecommunications)

Geographic distance (CAGE)

does not imply only physical distance but also infrastructure; includes the following attributes: physical size, within-country distances to its borders, the country’s topography, time zones, whether the countries are contiguous to one another, access to waterways and the ocean

Geographic distance between two countries increases with

lack of common border, waterway access, adequate transportation, or communication links; physical remoteness; different climates and time zones

Geographic distance most affects industry or products

with low value-to-weight ratios (steel, cement); that are fragile or perishable (glass, meats); in which communications are vital (financial services)

Economic distance (CAGE)

Wealth and per capital income of consumers; wealthy countries tend to engage in more cross-border trade; wealthy countries trade with wealthy countries (to benefit from economies of experience, scale, scope, and standardization); economic arbitrage

economic arbitrage

when wealthy countries trade with poor countries to access low-cost input factors

Economic distance between two countries increases with

different consumer incomes; different costs and quality of natural, financial, and HR; different info or knowledge

Economic distance most affects industries or products

for which demand varies by income (cars); in which labor and other cost differences matter (textiles)

How do MNEs enter foreign markets

exporting, licensing, strategic alliances, acquisitions, Greenfield investments

Exporting

involves low expense to establish operation in host country; often involves contractual agreements; involves high transportation costs; may have some tariffs imposed; offers low control over marketing and distribution

licensing

involves low cost to expand internationally; allows licensee to absorb risks; how low control over manufacturing and marketing; offers lower potential returns (shared with licensee); involves risk of licensee imitating tech and product for own use; may have inflexible ownership arrangement

strategic alliances

involve shared risks and resources; facilitate development of core competencies; involve fewer resources and costs required for entry; may involve possible incompatibility, conflict, or lack of trust with partner; can be difficult to manage

acquisitions (global strategy how)

allow for quick access to market; involve possible integration difficulties; are costs; have complex negotiations and transaction requirements

Greenfield investments

internal investment in a foreign country; wholly-owned subsidiaries is costly, involves complex processes, allows for max control, has the highest potential returns, carries high risk

the integration-responsiveness framework

deals with the pressures an MNE faces for cost reductions and local responsiveness; four different strategies to gain and sustain competitive advantage when competing globally': international, multi-domestic, global-standardization, transnational

local responsiveness

the need to tailor product and service offerings to fit local consumer preferences

international strategy

leverages home-based core competencies; sells the same products or services in both domestic and foreign markets; limited local responsiveness

international strategy is advantageous when the MNE faces

low pressures for local responsiveness; low pressures for cost reductions

international strategy often used successfully by MNEs with

large domestic markets; strong reputations and brand names

multi-domestic strategy

used to try and maximize local responsiveness; MNEs hope that local consumers will perceive their products or services as local ones; can be costly and inefficient

multi-domestic strategy arises out of the combination of

high pressure for local responsiveness and low pressure for cost reductions

global-standardization strategy

attempts to reap significant economies of scale and local economies through global division of labor where capabilities are at the lowest cost; price becomes the main competitive weapon

global-standardization strategy arises out of the combination of

high pressure for cost reductions and low pressure for local responsiveness

transnational strategy

attempts to combine benefits of localization strategy (high local responsiveness) with global-standardization strategy (lowest-cost position available); used by MNE’s that pursue a blue ocean strategy; difficult to implement

transnational strategy arises out of the combination of

high pressure for local responsiveness and high pressure for cost reductions