（Chapter 14) Merger and Acquisition strategies

Federal Trade Commission (FTC) Categories

• Vertical merger
• Horizontal merger
• Product extension merger
• Market extension merger
• Conglomerate merger ==  A merger between firms that are involved in totally unrelated business activities. There are two types of conglomerate mergers: pure and mixed. Pure conglomerate mergers involve firms with nothing in common, while mixed conglomerate mergers involve firms that are looking for product extensions or market extensions.
  
  Read more: http://www.investopedia.com/terms/c/conlgomeratemerger.asp#ixzz1vXqgA28E

Why are so many M & As ?

1. To ensure their survival
2. Free cash flow
3. Agency problems
4. Managerial hubris == Managerial hubris is the unrealistic belief held by managers in bidding firms that they can manage the assets of a target firm more efficiently than the target firm's current management. Managerial hubris is one reason why a manager may choose to invest in a merger that on average generates no profits. (By Wiki) 

5. Potential for profit

Implementation

==> Capstone. 

（Chapter 13) Strategic Alliance

Definition of 'Strategic Alliance'

An arrangement between two companies that have decided to share resources to undertake a specific, mutually beneficial project. A strategic alliance is less involved and less permanent than a joint venture, in which two companies typically pool resources to create a separate business entity. In a strategic alliance, each company maintains its autonomy while gaining a new opportunity. A strategic alliance could help a company develop a more effective process, expand into a new market or develop an advantage over a competitor, among other possibilities.

Strategic alliances usually make sense when the firms involved have complementary strengths.　A good strategic alliance partner will have products or services that complement your company’s products or services. One of the　fastest and most effective business growth strategies is supplying your lead generation system with a number of strategic alliances. 

Definition of 'Joint Venture - JV'

The cooperation of two or more individuals or businesses in which each agrees to share profit, loss and control in a specific enterprise.
A joint venture is a general partnership typically formed to undertake a particular business transaction or project and is intended to exist for a limited time period. Joint ventures typically exist for 5-7 years. In a joint venture, two or more "parent" companies agree to share capital, technology, human resources, risks and rewards in a formation of a new entity under shared control. A joint venture is created with a specific project in mind and generally dissolves once the project has been completed. Members of the joint venture are exposed to full legal liability. A joint venture is treated like a partnership for federal income tax purposes.

Example:

Sony-Ericsson is a joint venture by the Japanese consumer electronics　company Sony Corporation and the Swedish telecommunications company Ericsson to make mobile phones. The stated reason for this venture is to combine Sony's consumer electronics expertise with Ericsson's technological leadership in the communications sector. Both companies have stopped making their own mobile phones. 

(Chapter 12) Implementing Corporate Diversification

Agency Problem

A conflict of interest arising between creditors, shareholders and management because of differing goals.
For example, an agency problem exists when management and stockholders have conflicting ideas on how the company should be run.


Agency Costs

A type of internal cost that arises from, or must be paid to, an agent acting on behalf of a principal. Agency costs arise because of core problems such as conflicts of interest between shareholders and management. Shareholders wish for management to run the company in a way that increases shareholder value. But management may wish to grow the company in ways that maximize their personal power and wealth that may not be in the best interests of shareholders.


Organization Structure - M Form / Multidivisional Structure

Division = Strategic Business Unit (SBU) = Profit-and-loss centers

Shared Activity Managers: Support the operation of multiple divisions (bounding)

Board of Directors: Monitoring – Evaluating firm’s decision making, consistent with the interests of Equity holders.

Division General Managers: One unit is like a company but have to decide how division will corporate strategies assure strategy implementation (bounding)

(Chapter 11) Corporate strategy: Diversification

Corporate strategy: Diversification

-          New market with new products/services.

-          2 types - Related/Unrelated

-          Vertical integration – along your value chain

-          Horizontal diversification – moving into new industry

-          Geographical diversification – open up new markets

Cases:

Google acquires innovative companies to diversify Into new areas or to add value to existing technologies and services.

From 2001 to 2011 Google acquired over 100 companies based in USA, Australia, Brazil, Canada, China, Finland, Germany, Greece, Ireland, Israel, South Korea, Spain, Sweden, Switzerland, UK.

Android. Acquisition of Android, the mobile phone platform, for approximately US$ 50 million in 2005 was Google’s one of the best deal ever. Only two years after launch, Android has become the second-most-popular mobile platform in the world, with almost 25% share. Android generates revenue indirectly. Google gives the OS away, but it provides a built-in user base for mobile search and mobile advertising, which generate more than $1 billion a year.

YouTube. When Google bought the video-sharing service in 2009, YouTube was full of copyrighted content that users uploaded without permission. Google skillfully instituted a reasonable takedown policy and negotiated contracts with content owners to make YouTube safer and highly profitable.

On2. Having bought On2 video compression company for US$133 million in 2010, Google open-sourced the VP8 video codec it acquired with On2, and renamed it WebM. Google’s objective was to push WebM as a replacement for H.264, a much more widely used standard for Web video.

Slide, SocialDeck. Google bought two social gaming companies in 2010 to develop new social initiatives.

In late 1980s, Toyota , Nissan, and Honda moved into adjacent market segments. They launched luxury cars Lexus, Infinity, and Acura respectively to compete with BMW and Mercedes. The Japanese cars were priced about one-third lower and had a superior service network.  The value proposition was solid enough to win over potential and current BMW and Mercedes customers, despite the power of their brands.

(Chapter 4) Created Game board and Numbers

Sudoku development step-by-step continuing ...

Chapter 4 P73 - Created Game Board

Chapter 4 P75 - Draw numbers without game implementation
Game implementation needs quite some coding effort so I stop here and do next time. 

Chapter 4 P87 - Draw numbers with some game implementation

This with the hard coded string in PuzzleView.java
// Test string to show how numbers are allocated on the game board

private final String easyPuzzle =
    "100000000200000000300000000" +
                "400000000500000000600000000" +
    "700000000800000000900000000"; // TBD - This is not real game logic

The example application only defines 3 games. (text page 89) 

Basic of Strategic Management (NOTES from Chapter 1-9)

The following topics are picks from Chapter 1-9.

• What is Strategy?

- The theory of how to increase performance of the firm and compete successfully in the market and/or economic process.

• What is its Process?

MISSION -> OBJECTIVES
-> ANALYSIS { INTERNAL & EXTERNAL }
-> STRATEGIC CHOICE

-> IMPLEMENTATION
-> COMPETITIVE ADVANTAGE (GOAL) 

• Firm Performance and Competitive Advantage

Knowing the current status and performance is important to decide future strategy. There are useful tools for evaluation to get a certain degree of idea of firms' performance. Note that such simple methods have limitation however good to know.

1) Altman's estimated equation computes firm's Z score from simple accounting information.

The Z-score formula for predicting bankruptcy was published in 1968 by Edward I. Altman, who was, at the time, an Assistant Professor of Finance at New York University. The formula may be used to predict the probability that a firm will go into bankruptcy within two years.

Altman, Edward I. (July, 2000). ""Predicting Financial Distress of Companies"". Retrieved on September 4th, 2009 fromhttp://pages.stern.nyu.edu/~ealtman/Zscores.pdf: 15–22.

Altman, Edward I. (September, 1968). ""Financial Ratios, Discriminant Analysis and the Prediction of Corporate Bankruptcy"". Journal of Finance: 189–209.

Altman, Edward I. (May, 2002). ""Revisiting Credit Scoring Models in a Basel II Environment"". Prepared for "Credit Rating: Methodologies, Rationale, and Default Risk", London Risk Books 2002.

Formula to calculate Altman's Z-Score: z-score = 1.2 a + 1.4 b + 3.3 c + d     +    .6 f                       e                                 g where :  a = working capital, b = retained earnings,  c = operating income, d = sales, e = total assets, f = net worth and g = total debt    Altman z-score definition and explanation: The Altman z-score is a bankruptcy prediction calculation. The z-score measures the probability of insolvency (inability to pay debts as they become due). 1.8 or less indicates a very high probability of insolvency. 1.8 to 2.7 indicates a high probability of insolvency. 2.7 to 3.0 indicates possible insolvency. 3.0 or higher indicates that insolvency is not likely.   Z score calculator:

http://www.ironwoodadvisory.com/zscore.htm

http://www.actioncoach.com/free-business-calculator-z-score

2) Ratio analysis


Profitability

ROA
ROE
Gross Profit Margin
Earnings Per Share (EPS)
Price Earning (P/E)
Cash Flow Per Share

Liquidity 

Current Ratio
Quick Ratio

Leverage

Debt to Asset
Debt to Equity
Times Interest Earned

Activity

Inventory Turnover
Accounts Receivable Turnover
Average Collection Period

• Environmental Threats

EVALUATION TOOL: Five Forces Model

Threat of entry

Threat of rivalry

Threat of powerful suppliers

Threat of powerful buyers

Threat of substitutes

            |

           V

Level of threat in an industry 

• Opportunities

From Five Forces Model, firms know the threats. By the threads analysis, firms also can find the opportunities to neutralize the threads. ==> "Threats as Opportunities"

Entry -> Erect barriers to entry

Rivalry -> Compete on dimensions besides price

Substitutes -> Improve products

Suppliers -> Reduce supplier uniqueness i.e. Backward vertical integration

Buyers -> Reduce buyer uniqueness i.e. Forward vertical integration, additional customers, product differentiation 

• Strength and Weakness - Resource based view 

Applying the VRIO Framework The VRIO framework can be used to assess the future success of a firm’s current resources and capabilities as well as assessing the success of potential changes to the firm. The easiest way of applying the VRIO framework is go through each question in order to assess the competitive implications and economic implications.

The Question of Value: "Is the firm able to exploit an opportunity or neutralize an external threat with the resource/capability?"

The Question of Rarity: "Is control of the resource/capability in the hands of a relative few?"  “Is a resource currently controlled by only a small number of competing firms?

The Question of Inimitability: "Is it difficult to imitate, and will there be significant cost disadvantage to a firm trying to obtain, develop, or duplicate the resource/capability?"

The Question of Organization: "Is the firm organized, ready, and able to exploit the resource/capability?"

Summary of VRIO, Competitive Implications, and Economic Implications
Valuable?	Rare?	Costly to Imitate?	Organized Properly?	Competitive Implications	Economic Implications
No			No	Disadvantage	Below Normal
Yes	No			Parity	Normal
Yes	Yes	No		Temporary Advantage	Above Normal (at least for some amount of time)
Yes	Yes	Yes	Yes	Sustained Advantage	Above Normal

• Cost Leadership 

 == Business strategy which reduces cost of products compare to its competitors and gain advantage. 


i.e. Cost $ vs Volume of production ==> The economics of scale curve 

Wal-Mart

Wal-Mart Stores Inc. has been successful using its strategy of everyday low prices to attract customers. The idea of everyday low prices is to offer products at a cheaper rate than competitors on a consistent basis, rather than relying on sales. Wal-Mart is able to achieve this due to its large scale and efficient supply chain. They source products from cheap domestic suppliers and from low-wage foreign markets. This allows the company to sell their items at low prices and to profit off thin margins at a high volume.

McDonald's

The restaurant industry is known for yielding low margins that can make it difficult to compete with a cost leadership marketing strategy. McDonald's has been extremely successful with this strategy by offering basic fast-food meals at low prices. They are able to keep prices low through a division of labor that allows it to hire and train inexperienced employees rather than trained cooks. It also relies on few managers who typically earn higher wages. These staff savings allow the company to offer its foods for bargain prices.

Ikea

The Swedish furniture retailer Ikea revolutionized the furniture industry by offering cheap but stylish furniture. Ikea is able to keep its prices low by sourcing its products in low-wage countries and by offering a very basic level of service. Ikea does not assemble or deliver furniture; customers must collect the furniture in the warehouse and assemble at home themselves. While this is less convenient than traditional retailers, it allows Ikea to offer lower prices that attract customers.

Southwest Airlines

The airline industry has typically been an industry where profits are hard to come by without charging high ticket prices. Southwest Airlines challenged this concept by marketing itself as a cost leader. Southwest attempts to offer the lowest prices possible by being more efficient than traditional airlines. They minimize the time that their planes spend on the tarmac in order to keep them flying and to keep profits up. They also offer little in the way of additional thrills to customers, but pass the cost savings on to them.

• Product Differentiation 

Product differentiation is changing a certain feature, character,  or design of the products compare to the other similar products and adding diversity in the market. This could be advantage for not only the customers but also firms.

Areas of Product differentiation (Page 182)

1.       Feature

2.       Complexity

3.       Timing of introduction to the market

4.       Customization

5.       Advertisement and Marketing target**

6.       Reputation

7.       Distribution channel

8.       Service and support

Advantage

Customers have more choices to fulfill their demand.

By adding attraction and uniqueness to the products, firms can gain competitive advantage against the similar products from other companies.

Example:

**Mountain Dew initially advertized as fruity light drink for family but now targeting young sports males.
Cameras have variety of kinds based on the users’ purposes.

Coca Cola and Pepsi – in packaging, similar but different tastes

Barger King against MacDonald’s – Packaging, tastes, added onion ring

MacDonald’s against Barger King – Added healthy menu, ice coffee.

Implementation:
Keys to the strategic success for firms

Advertizing is important so the customers know the difference.

Firms need to research what customers want.  i.e. Innovation

• Under Risk and Uncertainty

Uncertainty and Risk can slow down the management decision and causes to lose the timing for the good opportunity. For organization it is mandatory to gain flexibility with low cost.

FIGURE   Relation between the demands of the market and the responsiveness of organization

Managing uncertainty has become a core requirement for successful

organizations – it is the unanticipated that we have to prepare our

organizations for. One way a firm can respond is by building up strategic flexibility.

Strategic Flexibility requires that companies:

—  Anticipate multiple scenarios; 

—  Formulate strategies for each; 

—  Acquire the capabilities to execute those strategies; 

—  Execute the "most likely" strategy; 

—  Be prepared to rapidly adopt one of the alternatives if market forces dictate. 

Tips for managing under uncertainty (From HBS)

http://blogs.hbr.org/kanter/2011/07/five-tips-for-coping-with-unce.html

1.       We do not have info now (uncertain), but we can provide when info becomes available.

2.       While we cannot proceed on the things due to uncertainty, there would be other things to keep maintain. Work on them and improve.

3.       Open brainstorming

4.       Showing appreciation to valued customers

5.       Think long term. Not just today’s trouble

• Tacit Collusion 

What is Tacit Collusion?

When firms are acting as if there are certain rules or coordination to reduce the competition then achieve optimal benefit without any formal agreement or contracts (not thru direct communication), it called Tacit Collusion. Tacit Collusion usually happens for pricing agreement.

Tacit Collusion is a business strategy. It is good for firms but not good for customers. If this kind of agreement is done directly (thru real communication), then it could become illegal. (collusive agreement / explicit collusion)

i.e. Article 81 of the EC Treaty (ex Article 85)

http://ec.europa.eu/competition/legislation/treaties/ec/art81_en.html

Tacit Collusion strategy is facing the risk that a firm can disagree collusion at any time. 

i.e. A firm can set a cheaper price than cost leader at any time

Why firms are creating Tacit Collusion?

Strategy for the classic prisoners' dilemma

The normal game is shown below:

FIGURE Classis Prisoners’ Dilemma Problem

Dilemma: If cooperates, members will get the optimum result. However, members tend to choose defects in the above scenario.

Example in economic situation: Without enforceable agreements, members of a cartel are also involved in a (multi-player) prisoners' dilemma. 'Cooperating' typically means keeping prices at a pre-agreed minimum level. 'Defecting' means selling under this minimum level, instantly stealing business (and profits) from other cartel members.

• 和訳は暗黙的談合、暗黙の了解？