MB0052-SLM-Unit-10

Strategic Management and Business Policy Unit 10

Sikkim Manipal University Page No. 249

Unit 10 Expansion StrategiesStructure

10.1 Introduction10.2 Caselet

Objectives10.3 Ansoff Matrix10.4 Penetration Strategy for Growth in Existing Markets10.5 Product Development in Existing Markets10.6 New Product Development10.7 Market Development for Existing Products10.8 Expansion through Diversification10.9 Strategic Alliance

10.10 Joint Venture (JV)10.11 Takeover or Acquisition10.12 Merger10.13 Integration Strategy10.14 Case study10.15 Summary10.16 Glossary10.17 Terminal Questions10.18 Answers10.19 References

10.1 Introduction

Securing competitive advantage, controlling market share and generating profitare not enough. Companies have to constantly look for growth and expansionbecause only this can give long-term sustainability in terms of market leadershipor position. Growth here does not mean incremental growth or change as isunderstood in stability strategies; this should be more visible or distinct. Growthor expansion may be defined as distinct increase in sales or turnover or marketshare (and also profit). Different strategies can lead to growth or expansion.These include penetration into the existing market, product or marketdevelopment, integration and diversification. Diversification can be in terms ofstrategic alliance, merger, joint venture and takeover or acquisition. Corporate



strategists have to consider all alternative growth strategies which are availableand choose the most appropriate one based on the companys resource base,business assets and skills and the competitive environment. We shall discussthese and related issues here.

Before we proceed with the main analysis, it would be useful to definemarket penetration, product development, market development, diversificationand integration. Market penetration takes place when an organization gainsmarket share. Product development means that an organization suppliesmodified or new products to existing markets. Market development occurs whenexisting products are offered in new markets. Diversification means enteringinto new product or business and/or new markets which may also require newresources and competence. Integration takes place when a company entersinto an upstream or downstream or parallel activity in the same product line/flow. These concepts or strategies would be more clear when we discuss theirapplications later.

10.2 Caselet

In todays competitive world, introduction of new products or new productfeatures has become a main source of competitive advantage. The bestexample of this strategy is that of Pepsi Co. For decades, Pepsi Cola andCoca Cola battled for supremacy in the cola market. In 1996, it seemedthat PepsiCo had lost the cola war, and the proof was everywhere. Thecompanys profit trailed that of its rival by 47 per cent. However, losing thecola war was the best thing that ever happened to Pepsi. It prompted Pepsisleaders to look outside the confines of their battle with Coke. PepsiCoembraced bottled water and sports drinks much earlier than its rival. PepsisAquafina is the No. 1 water brand, with Cokes Dasani trailing; in sportsdrinks, Pepsis Gatorade owns 80 per cent of the market while CokesPowerade has 15 per cent.But Pepsis strongest business lies outside drinks altogether. Over the pastten years, the Frito-Lay division has become a powerhouse, controlling 60per cent of the US. snack-food market. So strong is Pepsi in this arena, infact, that many investors no longer judge it by how it stacks up againstCoke. Most people think of Pepsi and Coke fighting it out, observes EricSchoenstein, an analyst at Jensen Investment Management, which owns



shares of both. But we dont see it that way. Pepsi isnt really a beveragecompany anymore: Its a food company that also sells beverages. JohnCarey, manager of the Pioneer fund, which has 1.6 million PepsiCo shares,says he bought the stock because of Frito-Lay: Theres no Coca-Cola inthat business.Source: http://money.cnn.com/magazines/fortune/fortune_archive/2006/02/06/8367964/index.htm

ObjectivesAfter studying this unit, you should be able to:

Highlight alternative expansion strategies Analyse different diversification strategies Focus on joint venture and issues involved in it Discuss integration strategy: vertical and horizontal Analyse takeover or acquisition and post-takeover integration issues

10.3 Ansoff Matrix

We start with Ansoffs (1987) product-market expansion matrix which has beenthe basis for further research and development in growth strategies. The Ansoffmatrix is shown in Figure 10.1.

Figure 10.1 Ansoffs Product Market Expansion Matrix

As shown above, expansion strategies are always worked out in terms of productsor businessesexisting or new, and marketsexisting or new. Johnson andScholes (2005) have presented alternative expansion strategies in a morespecified form (Figure 10.2).



Figure 10.2 Alternative Product Market Expansion Matrix

Source: G Johnson, and K Scholes. Exploring Corporate Strategy, 6th ed. (PearsonEducation, 2005), 362, (Exhibit 8.1).

Self-Assessment Questions

1. Expansion strategies are always worked out in terms of _________or_________.

2. The ________ matrix has been the basis for further research anddevelopment in growth strategies.

10.4 Penetration Strategy for Growth in Existing Markets

A company has a number of ways for penetrating into the existing markets andgenerating growth. The most obvious way to grow is to increase market share.Companies like Bajaj Auto have successfully penetrated the existing marketand sustained their market share. But, this generally happens in a high growthmarket or industry (like two-wheelers). Also, one companys share gain is anothercompanys share loss. Therefore, market share battle increases competitivepressures, and, market share gain may soon be neutralized, or, in the least,may be difficult to sustain.

An alternative strategy which may pose lesser threat from competitors(and which may also ultimately lead to increase in market share) is to increasethe product usage. There are three ways to increase product usage, namely,the frequency of use, the quantity used and new applications and users. Of the



three ways, the last one, that is, new applications and users, may be the mosteffective. Cadbury had shown this. Cadbury Dairy Milk Chocolate (CDM) wasthe market leader. But, with a market share of already 70 per cent, winningaway customers from competitors in the slow-moving market was almostimpossible. Cadbury found the solution in new users among parents (elderlypeople) who were earlier keeping away from CDM.1

The best way to identify new uses or applications is to conduct marketresearch or surveys. Such research or survey would include ascertaining detailsabout applications of competing products and brands, that is, substitutes. Costof such research or studies, and, also, subsequent advertising and promotionshould be taken into consideration to determine the cost effectiveness of suchprogrammes. Investment in research should be justified by returns in terms ofresults or findings, and, applicability of the results.

Arm & Hammer conducted more than 150 market research studies tosupport its programmes for development of new applications and products.Hindustan Unilever undertakes such studies for its FMCG products on a regularbasis. And, many companies have achieved results. Arm & Hammer succeededin achieving ten-fold growth in its baking soda sales by persuading people touse the product as a refrigerator deodorizer. Sales of Lipton soup increasedwhen it included recipes for new uses on packets/boxes and in ads that say:Great meals start with Liptonrecipe soup mix-soup. A chemical process usedby oil fields to separate water from oil is used by water plants to eliminateunwanted oil.


3. The most obvious way for a company to grow is to increase__________.4. An alternative strategy which may pose lesser threat from competitors

(and which may also ultimately lead to increase in market share) is toincrease the _______usage.

5. The best way to identify new uses or applications is to conduct________.6. Product usage can be increased by

(a) the frequency of use(b) the quantity used(c) new applications and users(d) All the above



10.5 Product Development in Existing Markets

Product development goes a step further than effecting increase in usage ofproducts. A simple way of product development is to make additions to productfeatures. Different variants of a particular car model (say Indica, Esteem orFord Ikon) clearly show the additional benefits of augmented features whichhelp market penetration. A company making PCs can have a built-in softwareas additional feature. A company making industrial products or inputs may adda special feature to the product or input to make it more tailor-made for certaincustomers leading to increase in sales. In services, special tour packages forindividual customers are good examples.

Another type of product development may be through product lineextensions. This may also include developing new generation products in thesame category which make the existing products obsolete in terms of technologyor usage. This happens in the electronics field almost on a regular basisbe itcomputer, CTV or cellular phone. Introduction of disposable contact lenses byHindustan Ciba-Geigy almost meant arrival of new generation products in thevisioncare market.

In product development through line extensions (additional features) ornew-generation products, some issues should be considered to make thestrategy workable or effective. First, is the companys R&D, manufacturing andmarketing functionally integrated to undertake the proposed changes? Second,is the new product line compatible with the existing product or brand? If it is not,it may almost be like new product development, and, cost and resourceimplications can be quite different. Third, can the existing assets and skills beapplied to the product line extension? If not, there can be asset-skill-productdevelopment mismatch. Philip-Morris underestimated the problems of applyingits existing marketing skills to the 7UP business and, finally gave up because oflack of success.


7. A simple way of product development is to make additions to productfeatures. (True/False)

8. Developing new generation products in the same category, making theexisting products obsolete in terms of technology or usage is a commonin the ________industry.



10.6 New Product Development

A new product adds the third or final dimension to product development.A company may use its core competence or R&D manufacturing-marketingsynergy to develop a new product which is different from the existing productlines and, generate additional sales and growth. Originally a machine toolmanufacturer, HMT developed watches as a new product line. With its corecompetence in heavy commercial vehicles (HCVs) and light commercial vehicles(LCVs), TELCO successfully added passenger cars to its product basket. Godrej,traditionally known for its locks, storewels and refrigerators, has expanded intoFMCG products including packaged tea. There are several such examples inevery country.

One good way of new product development is to use the existing brandimage or brand equity and exploit its market strength for extending it to a newproduct category. This becomes particularly useful if the company has anumbrella brand like Ford, Tata, Sony, Maruti, Godrej, etc. Duracells Durabeamflashlights, Arm & Hammers oven cleaners, Sears kiosks and storesall thrivedon existing brand names.

Marketers should ensure that the new product does not dilute or damagethe association of the brand through wrong promotions or marketing.

10.6.1 Market TestingTo ensure this, and, also, to ascertain acceptability and commercial viability of anew product, it is necessary to conduct test marketing before launching theproduct. In industrial products, test marketing may be comparatively easy andsimple because of small number of customers. If the prototype development issuccessful, the new product can be immediately launched given its cost-benefitsor cost-effectiveness. This may also be largely true of specialized serviceproducts. But, for most of the consumer goods, test marketing is generallymore complex and difficult. In a particular market segment, test marketing shouldassess the likely performance of the new product against competitive offerings(present or expected) in terms of product awareness, trial rate, repeat purchase,likely market share achievement, etc. In relation to consumer response, thereare four possible outcomes of a test market product as shown in Table 10.1.



Table 10.1 Possible Alternative Test Marketing Outcomes

Situation Trial Rate Repeat Rate Test Outcome

1 High High Successful

2 Low High Review/Improve

3 High Low Terminate

4 Low Low Rework

In situation 1, the new product can be launched almost immediately. Insituation 2 , the high repeat rate means that the product appeal is positive; butthe reason for low trial rate may be inadequate awareness. This can be rectifiedthrough increased consumer campaigns and promotional activity. Situation 3 ismore worrying. This situation indicates that having tried the product, consumersremain unconvinced about its merit or performance and, hence, the low repeatrate. The decision in this case may be to terminate the product launch planunless the company wants to make necessary changes in the product features(that is, go back to manufacturing) to make it more acceptable. In situation 4,the trial rate and repeat rate are both low, and, this should mean that the testmarketing process is incomplete. The company might not have taken it veryseriously or, there is a missing link in the test marketing process. The wholeprocess may, therefore, have to be reworked to come to clear conclusions aboutthe result of market testing.


9. Originally a machine tool manufacturer, HMT developed ______as a newproduct line.

10. To ascertain acceptability and commercial viability of a new product, it isnecessary to conduct ______before launching the product.

10.7 Market Development For Existing Products

Market development for existing products can take place in two ways; first,geographic expansion in the existing market segment(s); and second, developingnew market segments.

Geographic expansion in the same market or customer segment wouldmean graduating from a local market or, from a regional market to a nationalmarket or, from a national to an international market. Nirma started with the



western regional market but, quickly expanded to the national market achievingsignificant growth. Indica has moved from the national to the international market;so, also, many multinational brands like Ford, Honda, Peter England, LeviStrauss, Ray-Ban and service brands like KFC, McDonalds, Dominos Pizza,etc.

Expanding into new market segments is another potential avenue forgrowth. This can also be more challenging. Cadburys (CDM) rejuvenation is agood example of expanding into new market segmentfrom predominantlychild market to the market for parents and elders. Johnson & Johnsons babyshampoo was steadily losing market share till the company turned towardsadults who use shampoo more frequently. Both the Cadbury and Johnson &Johnson examples show that the most common way to expand into new marketsegments is to bring the present non-users into the fold through appropriatepromotion. Companies, should, however carefully assess market viability in termsof competing products and brands before making investment in the expansionprogramme. Federal Express (FedEx) had an unhappy experience. The companywanted to expand into the European market. But it lacked first-mover advantagein that market. DHL and some other courier companies had implemented theFedExs concept much earlier. This seriously affected FedExs competitivenessin the European market.


11. Apart from geographic expansion in the existing market segment(s),market development for existing products can take place by developing_______.

12. Cadburys rejuvenation of _____ is a good example of expanding intonew market segment.

10.8 Expansion through Diversification

Diversification, as a strategy, may generate growth in a number of ways. Productdevelopment and market development are two different methods to diversify,and, we had discussed these two methods earlier. Diversification can also takeplace through both new products and new markets. And, a diversification strategy,whether through product development, market development or both or any otherway, may, mean a new business venture of the company, a joint venture, etc.We shall discuss here the related issues of diversification and their implications.



It is useful to distinguish between related diversification and unrelateddiversification.

Related diversification means that the new business has commonalitieswith the core business or core competence of the company; and, thesecommonalities provide the basis or strength for generating synergies oreconomies of scale or higher returns by exploiting existing resources and skillsin R&D, production process, distribution process, etc. Unrelated diversification,on the other hand, is less related to the present business and skills and resources(except financial) and, may mean venturing into an entirely new area. Thecompany may have to acquire new skills and expertise for this. The main reasonor motivation for unrelated diversification may be high growth potential in termsof revenue, market share or profitability. There can be a number of other reasonsalso.

In strategic management literature, related diversification is morecommonly known as concentric diversification and unrelated diversification, asconglomerate diversification, although some analysts may like to make somedistinction between the two.

10.8.1 External Expansion or Diversification

Expansion or diversification, related or unrelated (concentric or conglomerate),into new products or businesses may be internal or external, i.e., it may takeplace within the company without involving any other company; or, it mayassociate another company as part of the expansion or diversificationprogramme. External diversification is a common characteristic of corporatestrategy in the developed countries, particularly in the US. In counties like Indiaalso, such diversification is taking place. Expansion or diversification, whichinvolves another company as part of the expansion/diversification programme,can be of four major types:

1. Strategic alliance2. Joint venture (JV)3. Takeover/acquisition4. Merger

Activity 1Carry out a desk research on the diversification strategy of ITC. Mentionthe main features of the strategy, focusing on the different products andmarkets. You may use the Internet and company literature for your research.




13. Diversification cannot take place through both new products and newmarkets. (True/False)

14. The kind of diversification in which new business has commonalities withthe core business or core competence of the company is called_______.

10.9 Strategic Alliance

Strategic alliance may be defined as cooperation between two or moreorganizations with a common objective, shared control and contributions (interms of resources, skills and capabilities) by the partners for mutual benefit.This definition can be expanded and made more comprehensive in terms ofessential features or characteristics of strategic alliance. A typical strategicalliance exhibits five essential features or characteristics:

(a) Two or more organizations join together to pursue a defined objective orgoal during a specified period, but, remain organizationally independententities;

(b) The organizations pool their resources and investments and also sharerisks for their mutual (and not individual) interest/benefit;

(c) The alliance partners contribute, on a continuing basis, in one or morestrategic areas like technology, process, product, design, etc;

(d) The relationship among the partners is reciprocal with partners sharingspecific individual strengths or capabilities to render power to the alliance;

(e) The partners jointly exercise control over the performance or progress ofthe arrangement with regard to the defined goal or objective and sharethe benefits or results collectively.

10.9.1 Objectives and Forms of Strategic AllianceThe basic objective behind all strategic alliances is to secure competitive orstrategic advantage in the market. All strategic alliances have long-term objectiveor purpose. Many companies realize that they do not possess adequateresourcesfinancial and managerialto pursue an innovation, develop a newproduct or technology. They look towards other organizations to supplement oraugment their resources or capabilities for the fulfilment of their objective. It canalso be a functional area where they have very little expertise. Different authors



have analysed the objectives or purposes or reasons for strategic alliance. Sixobjectives or purposes are more commonly observed:

(a) Development of a new product: In the pharmaceutical industry, new productdevelopment takes place on a continuous basis, and, in this, many strategicalliances are formed between pharmaceutical companies and researchlaboratories and institutions for R&D. We have already given the exampleof Boeing and their Japanese partners.

(b) Development of a new technology: Development of technology is a long-term process, and, also, many times, involves considerable cost.Collaboration leverages the resources and technical expertise of two ormore companies.

(c) Reducing manufacturing cost: Co-production, common in thepharmaceutical industry, is a good form of strategic alliance to reducemanufacturing cost through economies of scale.

(d) Entering new markets: This is often the objective in international business.Many foreign companies enter into strategic alliances with some localcompanies (host country) to enter into and establish themselves in thatcountry. Piggybacking is a common form of strategic alliance. Some ofthe Japanese electronic manufacturing companies like MatsushitaElectricals, during their initial years, had entered into strategic allianceswith some US electrical or electronic manufacturers for entering into theUS market.

(e) Marketing and Sales: This is common in both national and internationalbusiness. Many manufacturers in India have marketing and salesarrangements with companies like MMTC and Tata Exports for bothdomestic and international marketing.

(f) Distribution: In pharmaceutical and other industries where distributionrepresents high fixed cost, potential competitors swap their products fordistribution in the respective markets where they have well-establisheddistribution systems. Many such alliances exist between the US andJapanese pharmaceutical companies.Strategic alliances are non-equity based, i.e., none of the parties invest

any equity capital in such alliances. But, funding is involved and funding can beby one of the parties or all of them. The nature of funding depends on the typeof strategic alliance, i.e., whether new product development, technologydevelopment or transfer, marketing or sales, etc., and also the parties involved.



For example, if research laboratories or institutions are involved, most of thefunding is done by the corporate concerned.

As mentioned above, many areas of businessfrom R&D to distributionprovide scope for strategic alliance. In the semi-conductor industry, manycompanies in the US and Japan feel short-handed in their R&D, and they swaplicences. In a multiple alliance, which includes both technology and operations,Samsung Electronics and IBM Korea have entered into an agreement to swappatents for design and manufacture of semiconductors. IBM and Apple Computer,have formed an alliance for development of hardware and software technologyfor a new generation of desktop computers. Ranbaxy has formed a strategicalliance with Eli Lilly of the US to fulfil its mission of becoming a research-basedinternational pharmaceutical company. In the telecommunication sector, anumber of strategic alliances have been formed between Indian and foreigncompanies: Crompton Greaves and Millicom; Usha Martin and Telekom Malaysia;SPIC group and Telstra, etc. A good example of synergistic benefits from astrategic alliance is that of Taj hotels and British Airways; both create mutualadvantages through complementarity of hotel and airline services. In the fieldof agricultural development, Hindustan Unilever and ICICI have entered into apartnership project for contract farming of wheat and rice in MP and Haryana.


15. Cooperation between two or more organizations with a common objective,shared control and contributions by the partners for mutual benefit is called_________.

16. The basic objective behind all strategic alliances is to secure______or_______advantage in the market.

10.10 Joint Venture (JV)

If a strategic alliance involves equity participation by both (or all) the parties, itbecomes a joint venture. A joint venture may be defined as a business venturein which two or more independent companies join together, contribute to equitycapital in equal or agreed proportion and establish a new company. JVs arelong-turn ventures formed for an indefinite period. Some JVs can also becontractual, that is, formed for a fixed period of time and dissolved at a specifieddate. Contractual JVs are non-equity based. They are recommended or areuseful under five conditions:



The new business is uneconomical for a single organization to undertake; The risk of the business should be distributed or shared, and, therefore,

there is need for more than one participating company; The technology for the new business can be shared only through a joint

venture, or, there exists a need to introduce a new technology quickly; Competence or capabilities of two or three companies can be brought

together to produce synergy for better market impact, competitivenessand success of business;

A joint venture is the only way to gain entry into a foreign market, particularlyif the foreign government requires that, for entry into that market, a localpartner has to be chosen (OTIS and Mitsubishi elevators in China).

All joint ventures, formed under any of the conditions mentioned above, exhibitsome common or essential characteristics. Five important characteristics are:

An agreement between the parties for common long-term businessobjectives such as production, marketing/sales, research cooperation,financing, etc. Production joint ventures are more common;

Pooling of assets and resources, like plant, machinery, equipment, finance,management know-how, intellectual property rights, etc., by the partiesfor achievement of the agreed objectives;

Characteristics of the pooled assets and resources as contributions bythe respective parties;

Pursuance of the agreed objective through a new management systemor structure, which is separate from the existing management systems ofthe parties;

Sharing of profits from the joint venture between the parties usually inproportion to their capital (equity) contributions. The liabilities of the partiesare also normally linked to their capital contributions.2

Joint ventures are commonly formed within the same industry. But, JVs cantake place across industries also. Joint ventures can take place within the samecountry or between companies in two countries, or, sometimes, even more thantwo countries. Classified this way, five types or forms of joint ventures arepossible:

Between two (or more) companies in the same industry; Between two (or more) companies across different industries;



Between a local company and a foreign company with technologicalcapability in the home country (Maruti Udyog -Maruti Suzuki, Hero Honda-Kinetic Honda)

Between a local company (home country) and a foreign company in theforeign country (host country);

Between a local company (home country) and a foreign company in athird country.3

10.10.1 JVs in Practice

If we analyse various JVs in operation in different countries, we can classifythem into three major categories:

1. JVs within the same country and within the same industry or relatedindustries;

2. JVs between the domestic companies and foreign companies in foreigncountries in the same industry or related industries;

3. JVs between the foreign companies and local companies in the domesticcountry in the same or related industries.JVs in the first category are very few. Most of the operating JVs are in

Category 2 or Category 3. In developed countries, majority of the JVs are inCategory 3.

JVs between Indian companies: IPITATA Sponge Iron Ltda JV betweenTISCO (now Tata Steel) and IPICOL, a wholly owned company of theGovernment of Orissa.

Neelanchal Ispata JV between MMTC and Orissa Mining Corporationfor manufacturing steel; Metal Junctiona JV between SAIL and TISCO foronline (Internet) trading of steel and steel scrap. There are other examplesalso.

JVs between Indian companies and foreign companies in foreign countries:Aditya Birla Group companies in Malaysia, Indonesia, Thailand and othercountries for textiles, sugar and viscose staple fibre; Tata group companies inUK, Germany, and other countries in commercial vehicles, cars and hotels;Kirloskars in Malayasia and other countries for compressors and otherengineering products; Oberois in Australia and other countries for hotels andothers.



JVs between Indian companies and foreign companies in India: MarutiUdyoga JV between Government of India and Suzuki of Japan; Hero BMWbetween Hero Motors and BMW, AG, Germany for assembling BMW cars; HeroHondabetween Hero group and Honda Motors for two wheelers; Thermax-Fujibetween Thermax Ltd and Fuji Electric Company of Japan for manufactureof industrial boilers; HCL HPbetween Hindustan Computers (HCL) andHewlett-Packard, US for PCs; Tata Information Systemsbetween IBM World.

Trade Corporation and Tata Industries Ltdfor development of informationtechnology.

Reliance Industries and Nynex Corporation, A V Birla Group and AT&T,Tata Industries and Bell Canada, Ashok Leyland and Singapore Telecom fordevelopment of telecommunication; and others.

We have given many examples of JVs which are in operation and havebeen working satisfactorily. But, there are many JVs which have not workedwell and have resulted in failure. Several studies have found a failure rate of 30per cent for joint ventures in developed countries and 4550 per cent indeveloping countries. Most of these JVs are between companies in two differentcountries, i.e., a foreign company and a local partner (Category C).

There can be many reasons for the failure of a JV. One of the commonreasons is that foreign companies set up their fully owned subsidiaries and,either withdraw from the JVs or the subsidiaries run parallel to the JVs affectingtheir performance. Japanese automakers like Honda, Toyota and Nissan haveabandoned their European distribution partners and set up their own dealernetwork. BMW has done the same in Japan. In India, a number of foreignmultinationals, like Pfizer, Honda Motors and ABB have established fully ownedsubsidiaries in addition to being JV partners. In such cases, the subsidiariesusually get more attention, including latest technology and the JVs suffer. Anothervery common reason for failure of JVs is conflicts between foreign and domesticpartners. Conflicts can arise on many issues: sourcing of raw material inputs orcomponents, operating procedures and controls, domestic sales versus export,etc. Some of the examples are: Tata Unysis (between Tatas and Unysis); Procter& Gamble-Godrej India (between P&G and Godrej); TDT Copper (betweenTomen Corporation, Japan, Delton Cables, India and Taihan Corporation, SouthKorea).




17. A strategic alliance that involves equity participation by both (or all) theparties is called a_________.

18. Joint ventures are short-term ventures formed for an definite period.(True/False)

10.11 Takeover or Acquisition

In takeover or acquisition, one company takes over another organization itsresources, management and control. Another way to define or describeacquisition is that an organization develops its resources and competence bytaking over another organization. Takeover or acquisition can be friendly orhostile. If the takeover is through mutual agreement between the acquiring andthe acquired company, it is friendly acquisition; but, if the takeover/acquisition isthrough stock market operations or financial institutions against the wishes ofthe company, it becomes a hostile takeover.

Some have suggested that takeover should be a systematic process,and the company seeking acquisition should follow a prescribed course. A six-step procedure has been recommended:

Spell out the objective or reason for takeover Work out or specify how the objectives would be fulfilled Assess management quality of the prospect Check the compatibility of business styles of the two companies Anticipate and solve takeover problems promptly so that

complications do not prolong the process Treat people with care during the period of takeover.4

In reality, however, many companies do not follow a prescribed or asystematic course, particularly in cases of hostile takeover. The NEPC takeoverbid for Modiluft is a good example of non-systematic hostile takeover. In thiscase, Modiluft management got the news of takeover from leading dailies. Thetakeover attempt finally got mired in controversy. Several similar takeovers Indiahave been controversial. Peaceful or friendly takeovers are normally systematicand follow a more rational path. Some examples of friendly takeovers are givenin Table 10.2.



Table 10.2 Selected Acquisitions by Indian CompaniesAcquiring company Acquired company Hindustan Unilever TOMCO Tata Tea Consolidated Coffee Tata Tea Asian Coffee TISCO (Tata Steel) Metal Box (Bearing Unit) Deepak Nitrite Mafatlal (Dyestaff Unit) ICICI ITC Classic Finance ICICI Anagram Finance India Cement Visaka Cement R.P. Goenka group Ceat Tyres R.P. Goenka group Calcutta Electric Supply Corporation (CESC)

Some of the more recent acquisitions in Indian are Sahara Airlines by Jet Airand Air Deccan by Kingfisher Airlines.

Many acquisitions also take place at international level. A select list ofacquisitions among foreign companies and international acquisitions is given inTable 10.3.

Table 10.3 Selected Foreign and International AcquisitionsAcquiring company Acquired company

Hewlett-Packard Compaq Computer

Pepsico Quaker Oats

Daimler-Benz Chrysler Corporation

BMW Rolls Royce (Car Division) Ford Volvo (Auto Division) Procter & Gamble Clairol (Bristol-Myers Squibb) Japan Airlines Japan Air System

Volvo Renault (Truck Division) Ford BMW (Rover) eBay HomesDirect

Tata steel Corus

Mittal Steel Arcelor

10.11.1 Post-takeover IntegrationIn takeover or acquisition, post-takeover action or management becomes animportant issue. This is primarily the problem of integrationintegrating theacquirer and the acquired company. Integration may take place in two ways:merging the two companies or keeping the acquired company independent andintegrating it with the organizational culture, structure and functioning of the



present company. Merger after acquisition is appropriate or recommended if itproduces synergy. Majority of the friendly takeovers can lead to mergers exceptfor strategic reasons. Some of the good examples of acquisitions (shown inTable 10.3) resulting in mergers are: ICICIITC Classic Finance and AnagramFinance for diversification in retail financing; Tata-TeaConsolidated Coffee andAsian Coffee for consolidation of tea and coffee business; Hindustan Unileverand TOMCO to strengthen consumer goods business.

But, in many acquisitions, such synergy may not exist or may not beavailable or the two companies may be kept separate for strategic reasons,and, those have to be managed as independent entities. In such cases, theprocess of integration becomes more difficult. Ghoshal (1999) has suggestedsome measuresstepwise processfor integrating the acquired company withthe existing organization.

One of the important issues in post-acquisition integration is cultural fit.There are three approaches to the post-acquisition cultural fit. First isassimiliation; the parents (acquiring companys) culture will remain and effortwill be made for assimilating the joiner into that culture. Second is to build ahybrid culture which should combine the features of both the organizations.This is the most difficult thing to do. Third is to keep the cultures of the twoorganizations separate. This is more appropriate when the reason for acquisitionis financial rather than strategic, and integration of cultures and activities maynot be so vital.5

There may be number of other operational problems also in post-acquisition integration. Many times, benefits of synergy may not be realizedbecause the process of integrating the new company into the activities andmanagement style of the existing company may not be very successful becausehuman values are involved. This actually centres around the problem of culturalfit. In cases where acquisition is used to acquire new competences, clash ofcultures may be more dominant; and, consequently, the acquirer may not beable to add sufficient value to the acquisition. This is the issue of corporateparenting (discussed in Unit 8).

Many acquisitions are intended to produce financial synergy or improvefinancial gain or performance. Company experiences show that acquisition isnot an easy or guaranteed strategy for improving financial performance. It maytake considerable time for the acquiring company to secure any significantfinancial benefits from acquisition. Research reveals that as as much as 70 percent of acquisitions end up with lower returns to shareholders of both theorganizations.6




19. In________ or _______, one company takes over another organizationits presources, management and control.

20. Takeovers always tend to be unsystematic and hostile. (True/False)

10.12 Merger

A merger is a combination of two or more organizations, in which one acquiresthe assets and liabilities of the other in exchange for shares or cash, or theorganizations are dissolved, and a new company is formed, which takes overthe assets and liabilities of the dissolved organizations and new shares areissued. So, combination or merger takes place, either through acquisition oramalgamation or consolidation. For the company which acquires anothercompany, it is acquisition; for the company which is acquired, it is a merger. Ifboth or more organizations dissolve themselves and form a new organization, itis amalgamation or consolidation. More common forms of mergers are throughacquisition. There are many reasons why two or more organizations like tomerge. There are reasons for buyer organization; there are reasons for theseller organization. Glueck and Jauch (1984) have identified several reasonsboth for the buyer and the seller:

Why the buyer wishes to merge:(a) To increase value of the companys stock;(b) To make profitable investment and increase the growth rate;(c) To balance, complete or diversify product line;(d) To improve stability of sales and earnings;(e) To reduce or eliminate competition;(f) To acquire resources quickly;(g) To avail tax concessions/benefits;h. To take advantage of synergy.

Why the seller wishes to merge:(a) To increase the value of investment and stock(b) To increase revenue and growth rate(c) To acquire resources to stabilize operations



(d) To benefit from tax legislation(e) To deal with top management succession problems(f) To take advantage of synergy7

10.12.1 Types of MergersMergers can be differentiated on the basis of activities or businesses currentlypursued by the merger partners, and, also, the nature of activity or business tobe added during the process of merger. Based on these, four major types ofmergers may be distinguished:

1. Horizontal merger2. Vertical merger3. Concentric merger4. Conglomerate merger

Horizontal merger takes place when there is a combination of two or morecompanies in the same business or product group or product. For example, acement company combines with another cement company or a pharmaceuticalcompany merges with another pharmaceutical company and so on.

Vertical merger takes place when there is a combination of two or morecompanies which are not in the same business but in related businesses orproducts. The combination or merger takes place to create complementarity ofbusinesses or products. For example, a refrigerator-manufacturing companycombines with a compressor-manufacturing company.

Concentric merger takes place when there is a combination of two ormore companies related to each other in terms of production process, technologyor market. For example, a leather shoe-manufacturing company combines witha leather goods company making purses, handbags, jackets, etc.

Conglomerate merger takes place when there is a combination or two ormore companies which are not related to each other in terms of productionprocess, technology or market. For example, a shoe manufacturing companymerges with a pharmaceutical company or an FMCG company.

As mentioned above, one of the major objectives of merger is to obtainadvantages of synergy.

A study has analysed synergistic benefits in different functional areasaccruing from different types of mergers8 (Table 10.4).



Table 10.4 Synergistic Advantages under Different Types of MergerAreas of synergy (in percentage)

Type of merger Finance Marketing Technology

Production

Conglomerate Concentric-technology Concentric-marketing Horizontal All categories

100 100 100 96 100

58 72 100 100 74

20 72 57 41 33

32 57 72 29 36

Source: J Kitching, Why do Mergers Miscarry? Harvard Business Review, November-December, 1967.

We had mentioned earlier that common forms of mergers are throughacquisition. We had given examples of such mergers in Table 10.2 (mergers inIndia) and Table 10.3 (mergers in foreign countries including internationalmergers). Some more examples of mergers through acquisition are: TVSWhirlpool Ltd with Whirlpool of India Ltd; Sandoz (India) Ltd with HindustanCiba Geigy Ltd and Polyolifin Industries with NOCIL.

Mergers through amalgamation or consolidation are less common thanthrough acquisitions.

Some examples are: Nirma Detergents Ltd, Nirma Soaps and DetergenetsLtd, and Shiva Soaps and Detergents Ltd into Nirma Ltd; Hi Beam Electronicsand other two companies formed Tristar Electronics subsequently named asSolidaire India Ltd; British Motor Corporation and Leyland Motors into BritishLeyland Motors (in UK); likely amalgamation/consolidation: United Airlines andUS Airways; Delta Airlines and Continental Airlines.

As mergers take place, demergers (merger in reverse) also take place,although they are not very common. Demerger means Spinning of an unrelatedbusiness/division in a diversified company into a stand-alone company alongwith a free distribution of its shares to the existing shareholders of that originalcompany.9 Some examples of demergers are: Sandoz India from Sandozrenamed as Clariant India; Ciba Speciality from Ciba India and Aptech fromApple Industries.


21. A _________ is a combination of two or more organizations, in which oneacquires the assets and liabilities of the other in exchange for shares orcash, or the organizations are dissolved, and a new company is formed.



22. When there is a combination of two or more companies in the samebusiness or product group or product, it is called _________.

23. When there is a combination or two or more companies which are notrelated to each other in terms of production process, technology or market,the merger is called__________.

24. Which of these mergers involves a combination of two or more companieswhich are not in the same business but in related businesses or products?

(a) Vertical merger(b) Horizontal merger(c) Concentric merger(d) Conglomerate merger

10.13 Integration Strategy

Integrationforward, backward and also horizontalcan be used as a strategyfor growth. Forward integration takes place when a company enters into adownstream activity with respect to the same product line/flowfor example, agarment manufacturer starts its own retail chain.

Backward integration means moving upstreamthe same garmentmanufacturer enters into fabric production. Both backward and forwardintegration are vertical integration strategies involving a value chain. Horizontalintegration takes place when a company acquires a competing business or twoor more companies in competing businesses merge (Figure 10.3).

Figure 10.3 Vertical and Horizontal Integrations



A number of factors or considerations govern the decision for diversificationthrough integration. We can also call them integration benefits. Some of themajor factors or considerations are:

Improving supply chain Better control over raw material supply Strengthening marketing/distribution Operating economies Diversifying product portfolio Direct access to demand or customers Cost effectiveness

Decision for integration or adoption of integration strategy can also be analysedin terms of transaction cost economics. According to transaction cost analysis,a company should take a make or buy decision during procurement of inputsand sale directly or through others for sales of finished products. Relative costsof these alternatives should be evaluated, and a decision should be taken onbackward or forward integration. If, for example, the cost of making a product(input) is less than the cost of procuring it from the supplier, the company shouldmove up the value chain and manufacture the product itself. Similarly, if thecost of selling the finished product directly is less than the price paid to othersellers to do the same thing, then, it is profitable for the company to move downin the value chain and perform the selling operation itself. In both these cases,the company is adopting an integration strategyin the former case, it isbackward integration and in the latter case, it is forward integration.

Companies have gained advantages through both backward and forwardintegrators. Hewlett- Packard lost vital time in supplying workstations to themarket because a key supplier of chips delayed delivery by six months, whereasIBM, with integrated sources was on time, and, therefore, enjoyed a clearcompetitive advantage. To establish upstream linkages, Japanese automobilemanufacturers like, Honda and Toyota participated in equity capital, and, also inthe management of some of the ancillary units. To gain access to majorcustomers, American car manufacturers, as an integration move, invested incar rental companiesFord invested in Hertz and Budget, General Motors inAvis and National, and, Chrysler owns Thrify and Snappy. In India, ModernSuitings went for both backward and forward integrationintegrating backwardin the wool processing and integrating forward by diversifying into worstedsuitings.



Experience of companies shows that vertical integrationwhetherbackward or forward can be profitable. Buzzell (1983) analysed about 1650businesses in the PIMS (Profit Impact of Marketing Strategy) database toascertain the impact of vertical integration on profitability. In the study, verticalintegration has been defined in terms of value addition as percentage of sales.The analysis shows that net profit (PAT), as percentage of sales, increases withvertical integration, but, net profit as percentage of investment or return oninvestment (ROI) does not.

Activity 2Choose a company either Tata or Godrej and analyse the integrationprocess, either forward or backward or both.


25. _________ integration takes place when a company enters into adownstream activity with respect to the same product line/flowforexample, a garment manufacturer starts its own retail chain.

26. _______integration means moving upstreamthe same garmentmanufacturer enters into fabric production.

10.14 Case Study

Tata Steels Acquisition of CorusTata Steel realized that success in the global market was not possible withgreenfield plants or projects. More recently, Tata Steel showed its renewedinterest in overseas acquisitions, particularly in Europe and in USA. Corus,the second largest steel producer of Europe and the fifth largest in theworld, gave an inviting signal. Corus expressed its interest in China, Braziland India for cheaper steel. This induced Tata Steel to cash in on theopportunity and decided to make a bid for Corus. Corus was also interestedin setting up a modern steel distribution network in India. Tata Steel decidedto leave no stone unturned to mark its European presence.Tata Steels audacious, but successful bid for Corus at an enterprise valueof 6.7 billion, gives it a capacity of 28 million tonnes, including 8.7 milliontonnes of its own. But, the immediate stock market reaction to Tata Steelalmost running away with Corus in a head-to-head bidding with Brazils



CSN was negative. Market participants thought Corus at 608 pence,representing a premium of 153 pence on the opening offer, was an expensivebuy. Whether the Tatas were paying an inflated price for Corus would remaina subject of debate for some time. Ratan Tata was emphatic that he wasnot paying anything that was beyond prudence. It might not have looked soat that point, but the acquisition cost for the Tatas would be justified, as thevaluation of steel assets around the world would keep on rising. Tata Steelfinally acquired Corus in 2006, scoring over Brazils CSN at $12.15 billion(around `55,000 crore) in cash and made it the largest acquisition by anIndian company and the second largest in the industry after Mittal Steels$38.3 billion acquisition of Arcelor.

The acquisition of Corus by Tata Steel is consistent with Tata Steels statedobjective of growth and globalization. Tata Steel has identified a number ofspecific benefits that it sees from a combination with Corus. Enhanced scalewill position the combined group as the fifth largest steel company in theworld by production, with a meaningful presence in both Europe and Asia.The powerful combination of lowcost upstream production in India with thehigh-end downstream processing facilities of Corus will improve thecompetitiveness of the European operations of Corus significantly. Thecombination will also allow the crossfertilization of research and developmentcapabilities in the automotive, packaging and construction sectors, and therewill be a transfer of technology, best practices and expertise of senior Corusmanagement from Europe to India.Tata Steel also believes that between the two companies, there exists a highdegree of cultural compatibility which would facilitate an effective integrationof the businesses over time. Tata Steel expects to lead the enlarged groupwith a combined management team. The acquisition process shows thatTata Steel has largely taken care of strategic fit, organizational fit and post-integration management issues and economics of the acquisition.



10.15 Summary

Let us recapitulate the important concepts discussed in this unit: Different strategies can lead to growth. These include market penetration,

product or market development, diversification, integration, etc. Marketershave to decide on the most appropriate one based on resources, businessassets and skills and the environment.

Diversification, as a strategy, can generate growth in a number of waysproduct development, market development, both product and marketdevelopment or any other. Diversification may take the form of either anew business venture of the company or strategic alliance or joint ventureor acquisition or merger.

Strategic alliance is cooperation between two or more organizations witha common objective, shared control and resource contributions by thepartners. Strategic alliances, like all partnerships, are delicate to manage,and, alliance partners have to share their responsibilities for smoothoperation of the alliance.

If a strategic alliance involves equity participation by both (or all) the parties,it becomes a joint venture (JV). The JVs are long-term ventures unlikestrategic alliances which are short-term for a fixed period.

Takeover or acquisition means that one company takes over anothercompanyits resources, management and control, it can be friendly orhostile.

A merger is a combination of two or more organizations either throughacquisition or amalgamation or consolidation.

Integration, both forward and backward, can be used as a strategy forgrowth.

10.16 Glossary

Diversification: A growth strategy through new products and new markets. Strategic alliance: Cooperation between two or more organizations with

a common objective, shared control and contributions (in terms ofresources, skills and capabilities) by the partners for mutual benefit.

Joint venture: A strategic alliance involving equity participation by both(or all) the parties.



Takeover: (also called acquisition) when one company takes over anotherorganization its resources, management and control.

10.17 Terminal Questions

1. What is Ansoff Matrix? Explain with the help of a diagram.2. Distinguish between related or concentric diversification and unrelated or

conglomerate diversification. Give some examples.3. Define strategic alliance. Discuss the different forms of strategic alliance.4. What is a joint venture? Give some examples of joint ventures between

Indian companies and foreign companies in India.5. Define takeover or acquisition and distinguish between friendly and hostile

takeovers. Discuss the main issues in post-takeover integration.6. Define merger and distinguish between acquisition and amalgamation.

Discuss the main issues in managing a merger.7. What is integration strategy? Explain forward integration and backward

integration with examples.

10.18 AnswersAnswers to Self-Assessment Questions

1. Products, businesses2. Ansoff3. market share4. product5. market research or surveys6. (d) all the above7. True8. Electronics9. watches

10. test marketing11. new market segments12. Dairy Milk



13. False14. Related diversification15. Strategic alliance16. Competitive, strategic17. Joint venture18. False19. Takeover, acquisition20. False21. Merger22. Horizontal merger23. Conglomerate merger24. (a) Vertical merger25. Forward26. Backward

Answers to Terminal Questions

1. Ansoffs (1987) product-market expansion matrix has been the basis forfurther research and development in growth strategies. Refer to Section10.3 for further details.

2. Related diversification means that the new business has commonalitieswith the core business or core competence of the company. Refer toSection 10.8 for further details.

3. Strategic alliance is cooperation between two or more organizations witha common objective, shared control and resource contributions by thepartners. Refer to Section 10.9 for further details.

4. If a strategic alliance involves equity participation by both (or all) the parties,it becomes a joint venture (JV). Refer to Section 10.10 and 10.10.2 forfurther details.

5. Takeover or acquisition means that one company takes over anothercompanyits resources, management and control. Refer to Section 10.11and 10.11.2 for further details.



6. A merger is a combination of two or more organizations either throughacquisition or amalgamation or consolidation. Refer to Section 10.12 and10.12.2 for further details.

7. Integration, both forward and backward, can be used as a strategy forgrowth. Refer to Section 10.13 for further details.

10.19 References

1. Ansoff, H I. 1987. Corporate Strategy. Harmondsworth: Penguin.2. Buzzell, R D. Is Vertical Integration Profitable? Harvard Business Review,

JanuaryFebruary, 1983.3. Ghoshal, S. Integrating Acquisitions. Economic Times (Corporate

Dossier), January 1, 1999.4. Glueck, W F, and Jauch, L R. 1984. Business Policy and Strategic

Management. 4th ed. New York: McGraw Hill.5. Johnson, G, and K Scholes. 2002. Exploring Corporate Strategy. 6th ed.

London: Prentice Hall.6. Porter, M E. 1980.Competitive Strategy. New York: The Free Press.

Endnotes1 Cadburys rejuvenation of its Dairy Milk chocolate (CDM) in the Indian market during

199394 makes a very interesting story. Refer to A Nag, Strategic Marketing, 2nd ed.(New Delhi: Macmillan India, 2006), Ch. 9.

2 M B Rao, Joint Venture: International Business with Developing Countries (New Delhi:Vikas Publishing House, 1999), 2-3.

3 A Kazmi, Business Policy and Strategic Management, 2nd ed. (New Delhi: Tata McGrawHill Publishing Co., 2002), 189.

4 P Chandra, Financial ManagementTheory and Practice (New Delhi: Tata McGraw Hill,1987), 660-61.

5 G Johnson, and K Scholes (2005), 377.6 G Johnson, and K Scholes (2005), 377.7 W F Glueck, and L R Jauch, Business Policy and Strategies Management, 4th ed. (New

York: McGraw Hill, 1984), 224.8 J Kitching, Why do Mergers Miscarry, Harvard Business Review (NovDec, 1967).9 N Venkiteswaran, Restructuring of Corporate India: The Emerging Scenario, Vikalpa

(22) 3 : 7.

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