MB0052 SLM Unit 10

Strategic Management and Business Policy
Unit 10
Unit 10
Expansion Strategies
Structure
10.1 Introduction
10.2 Caselet
Objectives
10.3 Ansoff Matrix
10.4 Penetration Strategy for Growth in Existing Markets
10.5 Product Development in Existing Markets
10.6 New Product Development
10.7 Market Development for Existing Products
10.8 Expansion through Diversification
10.9 Strategic Alliance
10.10 Joint Venture (JV)
10.11 Takeover or Acquisition
10.12 Merger
10.13 Integration Strategy
10.14 Case study
10.15 Summary
10.16 Glossary
10.17 Terminal Questions
10.18 Answers
10.19 References
10.1 Introduction
Securing competitive advantage, controlling market share and generating profit
are not enough. Companies have to constantly look for growth and expansion
because only this can give long-term sustainability in terms of market leadership
or position. Growth here does not mean incremental growth or change as is
understood in stability strategies; this should be more visible or distinct. Growth
or expansion may be defined as distinct increase in sales or turnover or market
share (and also profit). Different strategies can lead to growth or expansion.
These include penetration into the existing market, product or market
development, integration and diversification. Diversification can be in terms of
strategic alliance, merger, joint venture and takeover or acquisition. Corporate
Sikkim Manipal University
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strategists have to consider all alternative growth strategies which are available
and choose the most appropriate one based on the companys resource base,
business assets and skills and the competitive environment. We shall discuss
these and related issues here.
Before we proceed with the main analysis, it would be useful to define
market penetration, product development, market development, diversification
and integration. Market penetration takes place when an organization gains
market share. Product development means that an organization supplies
modified or new products to existing markets. Market development occurs when
existing products are offered in new markets. Diversification means entering
into new product or business and/or new markets which may also require new
resources and competence. Integration takes place when a company enters
into an upstream or downstream or parallel activity in the same product line/
flow. These concepts or strategies would be more clear when we discuss their
applications later.
10.2 Caselet
In todays competitive world, introduction of new products or new product
features has become a main source of competitive advantage. The best
example of this strategy is that of Pepsi Co. For decades, Pepsi Cola and
Coca Cola battled for supremacy in the cola market. In 1996, it seemed
that PepsiCo had lost the cola war, and the proof was everywhere. The
companys profit trailed that of its rival by 47 per cent. However, losing the
cola war was the best thing that ever happened to Pepsi. It prompted Pepsis
leaders to look outside the confines of their battle with Coke. PepsiCo
embraced bottled water and sports drinks much earlier than its rival. Pepsis
Aquafina is the No. 1 water brand, with Cokes Dasani trailing; in sports
drinks, Pepsis Gatorade owns 80 per cent of the market while Cokes
Powerade has 15 per cent.
But Pepsis strongest business lies outside drinks altogether. Over the past
ten years, the Frito-Lay division has become a powerhouse, controlling 60
per cent of the US. snack-food market. So strong is Pepsi in this arena, in
fact, that many investors no longer judge it by how it stacks up against
Coke. Most people think of Pepsi and Coke fighting it out, observes Eric
Schoenstein, an analyst at Jensen Investment Management, which owns
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shares of both. But we dont see it that way. Pepsi isnt really a beverage
company anymore: Its a food company that also sells beverages. John
Carey, 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 in
that business.
Source: http://money.cnn.com/magazines/fortune/fortune_archive/2006/02/06/
8367964/index.htm
Objectives
After 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 been
the basis for further research and development in growth strategies. The Ansoff
matrix 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 products
or businessesexisting or new, and marketsexisting or new. Johnson and
Scholes (2005) have presented alternative expansion strategies in a more
specified form (Figure 10.2).
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Figure 10.2 Alternative Product Market Expansion Matrix

Source: G Johnson, and K Scholes. Exploring Corporate Strategy, 6th ed. (Pearson
Education, 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 and
development 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 and
generating growth. The most obvious way to grow is to increase market share.
Companies like Bajaj Auto have successfully penetrated the existing market
and sustained their market share. But, this generally happens in a high growth
market or industry (like two-wheelers). Also, one companys share gain is another
companys share loss. Therefore, market share battle increases competitive
pressures, 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 increase
the 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
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three ways, the last one, that is, new applications and users, may be the most
effective. Cadbury had shown this. Cadbury Dairy Milk Chocolate (CDM) was
the market leader. But, with a market share of already 70 per cent, winning
away customers from competitors in the slow-moving market was almost
impossible. Cadbury found the solution in new users among parents (elderly
people) who were earlier keeping away from CDM.1
The best way to identify new uses or applications is to conduct market
research or surveys. Such research or survey would include ascertaining details
about applications of competing products and brands, that is, substitutes. Cost
of such research or studies, and, also, subsequent advertising and promotion
should be taken into consideration to determine the cost effectiveness of such
programmes. Investment in research should be justified by returns in terms of
results or findings, and, applicability of the results.
Arm & Hammer conducted more than 150 market research studies to
support its programmes for development of new applications and products.
Hindustan Unilever undertakes such studies for its FMCG products on a regular
basis. And, many companies have achieved results. Arm & Hammer succeeded
in achieving ten-fold growth in its baking soda sales by persuading people to
use the product as a refrigerator deodorizer. Sales of Lipton soup increased
when 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 used
by oil fields to separate water from oil is used by water plants to eliminate
unwanted 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 to
increase 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
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10.5 Product Development in Existing Markets

Product development goes a step further than effecting increase in usage of
products. A simple way of product development is to make additions to product
features. Different variants of a particular car model (say Indica, Esteem or
Ford Ikon) clearly show the additional benefits of augmented features which
help market penetration. A company making PCs can have a built-in software
as additional feature. A company making industrial products or inputs may add
a special feature to the product or input to make it more tailor-made for certain
customers leading to increase in sales. In services, special tour packages for
individual customers are good examples.
Another type of product development may be through product line
extensions. This may also include developing new generation products in the
same category which make the existing products obsolete in terms of technology
or usage. This happens in the electronics field almost on a regular basisbe it
computer, CTV or cellular phone. Introduction of disposable contact lenses by
Hindustan Ciba-Geigy almost meant arrival of new generation products in the
visioncare market.
In product development through line extensions (additional features) or
new-generation products, some issues should be considered to make the
strategy workable or effective. First, is the companys R&D, manufacturing and
marketing 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 resource
implications can be quite different. Third, can the existing assets and skills be
applied to the product line extension? If not, there can be asset-skill-product
development mismatch. Philip-Morris underestimated the problems of applying
its existing marketing skills to the 7UP business and, finally gave up because of
lack of success.
7. A simple way of product development is to make additions to product
features. (True/False)
8. Developing new generation products in the same category, making the
existing products obsolete in terms of technology or usage is a common
in the ________industry.
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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-marketing
synergy to develop a new product which is different from the existing product
lines and, generate additional sales and growth. Originally a machine tool
manufacturer, HMT developed watches as a new product line. With its core
competence 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 into
FMCG products including packaged tea. There are several such examples in
every country.
One good way of new product development is to use the existing brand
image or brand equity and exploit its market strength for extending it to a new
product category. This becomes particularly useful if the company has an
umbrella brand like Ford, Tata, Sony, Maruti, Godrej, etc. Duracells Durabeam
flashlights, Arm & Hammers oven cleaners, Sears kiosks and storesall thrived
on existing brand names.
Marketers should ensure that the new product does not dilute or damage
the association of the brand through wrong promotions or marketing.
10.6.1 Market Testing

To ensure this, and, also, to ascertain acceptability and commercial viability of a
new product, it is necessary to conduct test marketing before launching the
product. In industrial products, test marketing may be comparatively easy and
simple because of small number of customers. If the prototype development is
successful, the new product can be immediately launched given its cost-benefits
or cost-effectiveness. This may also be largely true of specialized service
products. But, for most of the consumer goods, test marketing is generally
more complex and difficult. In a particular market segment, test marketing should
assess 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, there
are four possible outcomes of a test market product as shown in Table 10.1.
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Table 10.1 Possible Alternative Test Marketing Outcomes

Situation
Trial Rate
Repeat Rate
Test Outcome
High
High
Successful
Low
High
Review/Improve
High
Low
Terminate
Low
Low
Rework
In situation 1, the new product can be launched almost immediately. In

situation 2 , the high repeat rate means that the product appeal is positive; but
the reason for low trial rate may be inadequate awareness. This can be rectified
through increased consumer campaigns and promotional activity. Situation 3 is
more worrying. This situation indicates that having tried the product, consumers
remain unconvinced about its merit or performance and, hence, the low repeat
rate. The decision in this case may be to terminate the product launch plan
unless 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 test
marketing process is incomplete. The company might not have taken it very
seriously or, there is a missing link in the test marketing process. The whole
process may, therefore, have to be reworked to come to clear conclusions about
the result of market testing.
9. Originally a machine tool manufacturer, HMT developed ______as a new
product line.
10. To ascertain acceptability and commercial viability of a new product, it is
necessary 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, developing
new market segments.
Geographic expansion in the same market or customer segment would
mean graduating from a local market or, from a regional market to a national
market or, from a national to an international market. Nirma started with the
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western regional market but, quickly expanded to the national market achieving
significant growth. Indica has moved from the national to the international market;
so, also, many multinational brands like Ford, Honda, Peter England, Levi
Strauss, Ray-Ban and service brands like KFC, McDonalds, Dominos Pizza,
etc.
Expanding into new market segments is another potential avenue for
growth. This can also be more challenging. Cadburys (CDM) rejuvenation is a
good example of expanding into new market segmentfrom predominantly
child market to the market for parents and elders. Johnson & Johnsons baby
shampoo was steadily losing market share till the company turned towards
adults who use shampoo more frequently. Both the Cadbury and Johnson &
Johnson examples show that the most common way to expand into new market
segments is to bring the present non-users into the fold through appropriate
promotion. Companies, should, however carefully assess market viability in terms
of competing products and brands before making investment in the expansion
programme. Federal Express (FedEx) had an unhappy experience. The company
wanted to expand into the European market. But it lacked first-mover advantage
in that market. DHL and some other courier companies had implemented the
FedExs concept much earlier. This seriously affected FedExs competitiveness
in 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 into
new market segment.
10.8 Expansion through Diversification

Diversification, as a strategy, may generate growth in a number of ways. Product
development and market development are two different methods to diversify,
and, we had discussed these two methods earlier. Diversification can also take
place through both new products and new markets. And, a diversification strategy,
whether through product development, market development or both or any other
way, 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.
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It is useful to distinguish between related diversification and unrelated

diversification.
Related diversification means that the new business has commonalities
with the core business or core competence of the company; and, these
commonalities provide the basis or strength for generating synergies or
economies of scale or higher returns by exploiting existing resources and skills
in 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. The
company may have to acquire new skills and expertise for this. The main reason
or motivation for unrelated diversification may be high growth potential in terms
of revenue, market share or profitability. There can be a number of other reasons
also.
In strategic management literature, related diversification is more
commonly known as concentric diversification and unrelated diversification, as
conglomerate diversification, although some analysts may like to make some
distinction 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 take
place within the company without involving any other company; or, it may
associate another company as part of the expansion or diversification
programme. External diversification is a common characteristic of corporate
strategy in the developed countries, particularly in the US. In counties like India
also, such diversification is taking place. Expansion or diversification, which
involves another company as part of the expansion/diversification programme,
can be of four major types:
1. Strategic alliance
2. Joint venture (JV)
3. Takeover/acquisition
4. Merger
Activity 1
Carry out a desk research on the diversification strategy of ITC. Mention
the main features of the strategy, focusing on the different products and
markets. You may use the Internet and company literature for your research.
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13. Diversification cannot take place through both new products and new
markets. (True/False)
14. The kind of diversification in which new business has commonalities with
the core business or core competence of the company is called_______.
10.9 Strategic Alliance

Strategic alliance may be defined as cooperation between two or more
organizations with a common objective, shared control and contributions (in
terms of resources, skills and capabilities) by the partners for mutual benefit.
This definition can be expanded and made more comprehensive in terms of
essential features or characteristics of strategic alliance. A typical strategic
alliance exhibits five essential features or characteristics:
(a) Two or more organizations join together to pursue a defined objective or
goal during a specified period, but, remain organizationally independent
entities;
(b) The organizations pool their resources and investments and also share
risks for their mutual (and not individual) interest/benefit;
(c) The alliance partners contribute, on a continuing basis, in one or more
strategic areas like technology, process, product, design, etc;
(d) The relationship among the partners is reciprocal with partners sharing
specific individual strengths or capabilities to render power to the alliance;
(e) The partners jointly exercise control over the performance or progress of
the arrangement with regard to the defined goal or objective and share
the benefits or results collectively.
10.9.1 Objectives and Forms of Strategic Alliance

The basic objective behind all strategic alliances is to secure competitive or
strategic advantage in the market. All strategic alliances have long-term objective
or purpose. Many companies realize that they do not possess adequate
resourcesfinancial and managerialto pursue an innovation, develop a new
product or technology. They look towards other organizations to supplement or
augment their resources or capabilities for the fulfilment of their objective. It can
also be a functional area where they have very little expertise. Different authors
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have analysed the objectives or purposes or reasons for strategic alliance. Six
objectives or purposes are more commonly observed:
(a) Development of a new product: In the pharmaceutical industry, new product
development takes place on a continuous basis, and, in this, many strategic
alliances are formed between pharmaceutical companies and research
laboratories and institutions for R&D. We have already given the example
of Boeing and their Japanese partners.
(b) Development of a new technology: Development of technology is a longterm process, and, also, many times, involves considerable cost.
Collaboration leverages the resources and technical expertise of two or
more companies.
(c) Reducing manufacturing cost: Co-production, common in the
pharmaceutical industry, is a good form of strategic alliance to reduce
manufacturing 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 local
companies (host country) to enter into and establish themselves in that
country. Piggybacking is a common form of strategic alliance. Some of
the Japanese electronic manufacturing companies like Matsushita
Electricals, during their initial years, had entered into strategic alliances
with some US electrical or electronic manufacturers for entering into the
US market.
(e) Marketing and Sales: This is common in both national and international
business. Many manufacturers in India have marketing and sales
arrangements with companies like MMTC and Tata Exports for both
domestic and international marketing.
(f) Distribution: In pharmaceutical and other industries where distribution
represents high fixed cost, potential competitors swap their products for
distribution in the respective markets where they have well-established
distribution systems. Many such alliances exist between the US and
Japanese 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 be
by one of the parties or all of them. The nature of funding depends on the type
of strategic alliance, i.e., whether new product development, technology
development or transfer, marketing or sales, etc., and also the parties involved.
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For example, if research laboratories or institutions are involved, most of the

funding is done by the corporate concerned.
As mentioned above, many areas of businessfrom R&D to distribution
provide scope for strategic alliance. In the semi-conductor industry, many
companies in the US and Japan feel short-handed in their R&D, and they swap
licences. In a multiple alliance, which includes both technology and operations,
Samsung Electronics and IBM Korea have entered into an agreement to swap
patents for design and manufacture of semiconductors. IBM and Apple Computer,
have formed an alliance for development of hardware and software technology
for a new generation of desktop computers. Ranbaxy has formed a strategic
alliance with Eli Lilly of the US to fulfil its mission of becoming a research-based
international pharmaceutical company. In the telecommunication sector, a
number of strategic alliances have been formed between Indian and foreign
companies: Crompton Greaves and Millicom; Usha Martin and Telekom Malaysia;
SPIC group and Telstra, etc. A good example of synergistic benefits from a
strategic alliance is that of Taj hotels and British Airways; both create mutual
advantages through complementarity of hotel and airline services. In the field
of agricultural development, Hindustan Unilever and ICICI have entered into a
partnership 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, it
becomes a joint venture. A joint venture may be defined as a business venture
in which two or more independent companies join together, contribute to equity
capital in equal or agreed proportion and establish a new company. JVs are
long-turn ventures formed for an indefinite period. Some JVs can also be
contractual, that is, formed for a fixed period of time and dissolved at a specified
date. Contractual JVs are non-equity based. They are recommended or are
useful under five conditions:
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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, competitiveness
and success of business;
A joint venture is the only way to gain entry into a foreign market, particularly
if the foreign government requires that, for entry into that market, a local
partner has to be chosen (OTIS and Mitsubishi elevators in China).
All joint ventures, formed under any of the conditions mentioned above, exhibit
some common or essential characteristics. Five important characteristics are:
An agreement between the parties for common long-term business
objectives 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 parties
for achievement of the agreed objectives;
Characteristics of the pooled assets and resources as contributions by
the respective parties;
Pursuance of the agreed objective through a new management system
or structure, which is separate from the existing management systems of
the parties;
Sharing of profits from the joint venture between the parties usually in
proportion to their capital (equity) contributions. The liabilities of the parties
are also normally linked to their capital contributions.2
Joint ventures are commonly formed within the same industry. But, JVs can
take place across industries also. Joint ventures can take place within the same
country or between companies in two countries, or, sometimes, even more than
two countries. Classified this way, five types or forms of joint ventures are
possible:
Between two (or more) companies in the same industry;
Between two (or more) companies across different industries;
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Between a local company and a foreign company with technological

capability in the home country (Maruti Udyog -Maruti Suzuki, Hero HondaKinetic Honda)
Between a local company (home country) and a foreign company in the
foreign country (host country);
Between a local company (home country) and a foreign company in a
third country.3
10.10.1 JVs in Practice

If we analyse various JVs in operation in different countries, we can classify
them into three major categories:
1. JVs within the same country and within the same industry or related
industries;
2. JVs between the domestic companies and foreign companies in foreign
countries in the same industry or related industries;
3. JVs between the foreign companies and local companies in the domestic
country 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 in
Category 3.
JVs between Indian companies: IPITATA Sponge Iron Ltda JV between
TISCO (now Tata Steel) and IPICOL, a wholly owned company of the
Government of Orissa.
Neelanchal Ispata JV between MMTC and Orissa Mining Corporation
for manufacturing steel; Metal Junctiona JV between SAIL and TISCO for
online (Internet) trading of steel and steel scrap. There are other examples
also.
JVs between Indian companies and foreign companies in foreign countries:
Aditya Birla Group companies in Malaysia, Indonesia, Thailand and other
countries for textiles, sugar and viscose staple fibre; Tata group companies in
UK, Germany, and other countries in commercial vehicles, cars and hotels;
Kirloskars in Malayasia and other countries for compressors and other
engineering products; Oberois in Australia and other countries for hotels and
others.
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JVs between Indian companies and foreign companies in India: Maruti

Udyoga JV between Government of India and Suzuki of Japan; Hero BMW
between Hero Motors and BMW, AG, Germany for assembling BMW cars; Hero
Hondabetween Hero group and Honda Motors for two wheelers; ThermaxFujibetween Thermax Ltd and Fuji Electric Company of Japan for manufacture
of industrial boilers; HCL HPbetween Hindustan Computers (HCL) and
Hewlett-Packard, US for PCs; Tata Information Systemsbetween IBM World.
Trade Corporation and Tata Industries Ltdfor development of information
technology.
Reliance Industries and Nynex Corporation, A V Birla Group and AT&T,
Tata Industries and Bell Canada, Ashok Leyland and Singapore Telecom for
development of telecommunication; and others.
We have given many examples of JVs which are in operation and have
been working satisfactorily. But, there are many JVs which have not worked
well and have resulted in failure. Several studies have found a failure rate of 30
per cent for joint ventures in developed countries and 4550 per cent in
developing countries. Most of these JVs are between companies in two different
countries, 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 common
reasons is that foreign companies set up their fully owned subsidiaries and,
either withdraw from the JVs or the subsidiaries run parallel to the JVs affecting
their performance. Japanese automakers like Honda, Toyota and Nissan have
abandoned their European distribution partners and set up their own dealer
network. BMW has done the same in Japan. In India, a number of foreign
multinationals, like Pfizer, Honda Motors and ABB have established fully owned
subsidiaries in addition to being JV partners. In such cases, the subsidiaries
usually get more attention, including latest technology and the JVs suffer. Another
very common reason for failure of JVs is conflicts between foreign and domestic
partners. Conflicts can arise on many issues: sourcing of raw material inputs or
components, 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 (between
Tomen Corporation, Japan, Delton Cables, India and Taihan Corporation, South
Korea).
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17. A strategic alliance that involves equity participation by both (or all) the
parties 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 its
resources, management and control. Another way to define or describe
acquisition is that an organization develops its resources and competence by
taking over another organization. Takeover or acquisition can be friendly or
hostile. If the takeover is through mutual agreement between the acquiring and
the acquired company, it is friendly acquisition; but, if the takeover/acquisition is
through stock market operations or financial institutions against the wishes of
the 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 sixstep 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 a
systematic course, particularly in cases of hostile takeover. The NEPC takeover
bid for Modiluft is a good example of non-systematic hostile takeover. In this
case, Modiluft management got the news of takeover from leading dailies. The
takeover attempt finally got mired in controversy. Several similar takeovers India
have been controversial. Peaceful or friendly takeovers are normally systematic
and follow a more rational path. Some examples of friendly takeovers are given
in Table 10.2.
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Table 10.2 Selected Acquisitions by Indian Companies

Acquiring 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 Air
and Air Deccan by Kingfisher Airlines.
Many acquisitions also take place at international level. A select list of
acquisitions among foreign companies and international acquisitions is given in
Table 10.3.
Table 10.3 Selected Foreign and International Acquisitions
Acquiring 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 Integration

In takeover or acquisition, post-takeover action or management becomes an
important issue. This is primarily the problem of integrationintegrating the
acquirer and the acquired company. Integration may take place in two ways:
merging the two companies or keeping the acquired company independent and
integrating it with the organizational culture, structure and functioning of the
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present company. Merger after acquisition is appropriate or recommended if it

produces synergy. Majority of the friendly takeovers can lead to mergers except
for strategic reasons. Some of the good examples of acquisitions (shown in
Table 10.3) resulting in mergers are: ICICIITC Classic Finance and Anagram
Finance for diversification in retail financing; Tata-TeaConsolidated Coffee and
Asian Coffee for consolidation of tea and coffee business; Hindustan Unilever
and TOMCO to strengthen consumer goods business.
But, in many acquisitions, such synergy may not exist or may not be
available or the two companies may be kept separate for strategic reasons,
and, those have to be managed as independent entities. In such cases, the
process of integration becomes more difficult. Ghoshal (1999) has suggested
some measuresstepwise processfor integrating the acquired company with
the 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 is
assimiliation; the parents (acquiring companys) culture will remain and effort
will be made for assimilating the joiner into that culture. Second is to build a
hybrid 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 two
organizations separate. This is more appropriate when the reason for acquisition
is financial rather than strategic, and integration of cultures and activities may
not be so vital.5
There may be number of other operational problems also in postacquisition integration. Many times, benefits of synergy may not be realized
because the process of integrating the new company into the activities and
management style of the existing company may not be very successful because
human values are involved. This actually centres around the problem of cultural
fit. In cases where acquisition is used to acquire new competences, clash of
cultures may be more dominant; and, consequently, the acquirer may not be
able to add sufficient value to the acquisition. This is the issue of corporate
parenting (discussed in Unit 8).
Many acquisitions are intended to produce financial synergy or improve
financial gain or performance. Company experiences show that acquisition is
not an easy or guaranteed strategy for improving financial performance. It may
take considerable time for the acquiring company to secure any significant
financial benefits from acquisition. Research reveals that as as much as 70 per
cent of acquisitions end up with lower returns to shareholders of both the
organizations.6
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19. In________ or _______, one company takes over another organization
its 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 acquires
the assets and liabilities of the other in exchange for shares or cash, or the
organizations are dissolved, and a new company is formed, which takes over
the assets and liabilities of the dissolved organizations and new shares are
issued. So, combination or merger takes place, either through acquisition or
amalgamation or consolidation. For the company which acquires another
company, it is acquisition; for the company which is acquired, it is a merger. If
both or more organizations dissolve themselves and form a new organization, it
is amalgamation or consolidation. More common forms of mergers are through
acquisition. There are many reasons why two or more organizations like to
merge. There are reasons for buyer organization; there are reasons for the
seller organization. Glueck and Jauch (1984) have identified several reasons
both 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
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(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 Mergers

Mergers can be differentiated on the basis of activities or businesses currently
pursued by the merger partners, and, also, the nature of activity or business to
be added during the process of merger. Based on these, four major types of
mergers may be distinguished:
1. Horizontal merger
2. Vertical merger
3. Concentric merger
4. Conglomerate merger
Horizontal merger takes place when there is a combination of two or more
companies in the same business or product group or product. For example, a
cement company combines with another cement company or a pharmaceutical
company merges with another pharmaceutical company and so on.
Vertical merger takes place when there is a combination of two or more
companies which are not in the same business but in related businesses or
products. The combination or merger takes place to create complementarity of
businesses or products. For example, a refrigerator-manufacturing company
combines with a compressor-manufacturing company.
Concentric merger takes place when there is a combination of two or
more companies related to each other in terms of production process, technology
or market. For example, a leather shoe-manufacturing company combines with
a leather goods company making purses, handbags, jackets, etc.
Conglomerate merger takes place when there is a combination or two or
more companies which are not related to each other in terms of production
process, technology or market. For example, a shoe manufacturing company
merges with a pharmaceutical company or an FMCG company.
As mentioned above, one of the major objectives of merger is to obtain
advantages of synergy.
A study has analysed synergistic benefits in different functional areas
accruing from different types of mergers8 (Table 10.4).
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Table 10.4 Synergistic Advantages under Different Types of Merger

Areas of synergy (in percentage)
Type of merger
Finance
Marketing
Technology
Production
Conglomerate
100
58
20
32
Concentric-technology
100
72
72
57
Concentric-marketing
100
100
57
72
Horizontal
96
100
41
29
All categories
100
74
33
36
Source: J Kitching, Why do Mergers Miscarry? Harvard Business Review, NovemberDecember, 1967.
We had mentioned earlier that common forms of mergers are through

acquisition. We had given examples of such mergers in Table 10.2 (mergers in
India) and Table 10.3 (mergers in foreign countries including international
mergers). Some more examples of mergers through acquisition are: TVS
Whirlpool Ltd with Whirlpool of India Ltd; Sandoz (India) Ltd with Hindustan
Ciba Geigy Ltd and Polyolifin Industries with NOCIL.
Mergers through amalgamation or consolidation are less common than
through acquisitions.
Some examples are: Nirma Detergents Ltd, Nirma Soaps and Detergenets
Ltd, and Shiva Soaps and Detergents Ltd into Nirma Ltd; Hi Beam Electronics
and other two companies formed Tristar Electronics subsequently named as
Solidaire India Ltd; British Motor Corporation and Leyland Motors into British
Leyland Motors (in UK); likely amalgamation/consolidation: United Airlines and
US 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 unrelated
business/division in a diversified company into a stand-alone company along
with a free distribution of its shares to the existing shareholders of that original
company.9 Some examples of demergers are: Sandoz India from Sandoz
renamed as Clariant India; Ciba Speciality from Ciba India and Aptech from
Apple Industries.
21. A _________ is a combination of two or more organizations, in which one
acquires the assets and liabilities of the other in exchange for shares or
cash, or the organizations are dissolved, and a new company is formed.
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22. When there is a combination of two or more companies in the same

business or product group or product, it is called _________.
23. When there is a combination or two or more companies which are not
related 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 companies
which 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 strategy
for growth. Forward integration takes place when a company enters into a
downstream activity with respect to the same product line/flowfor example, a
garment manufacturer starts its own retail chain.
Backward integration means moving upstreamthe same garment
manufacturer enters into fabric production. Both backward and forward
integration are vertical integration strategies involving a value chain. Horizontal
integration takes place when a company acquires a competing business or two
or more companies in competing businesses merge (Figure 10.3).
Figure 10.3 Vertical and Horizontal Integrations

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A number of factors or considerations govern the decision for diversification

through integration. We can also call them integration benefits. Some of the
major 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 analysed
in terms of transaction cost economics. According to transaction cost analysis,
a company should take a make or buy decision during procurement of inputs
and sale directly or through others for sales of finished products. Relative costs
of these alternatives should be evaluated, and a decision should be taken on
backward 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 should
move up the value chain and manufacture the product itself. Similarly, if the
cost of selling the finished product directly is less than the price paid to other
sellers to do the same thing, then, it is profitable for the company to move down
in the value chain and perform the selling operation itself. In both these cases,
the company is adopting an integration strategyin the former case, it is
backward integration and in the latter case, it is forward integration.
Companies have gained advantages through both backward and forward
integrators. Hewlett- Packard lost vital time in supplying workstations to the
market because a key supplier of chips delayed delivery by six months, whereas
IBM, with integrated sources was on time, and, therefore, enjoyed a clear
competitive advantage. To establish upstream linkages, Japanese automobile
manufacturers like, Honda and Toyota participated in equity capital, and, also in
the management of some of the ancillary units. To gain access to major
customers, American car manufacturers, as an integration move, invested in
car rental companiesFord invested in Hertz and Budget, General Motors in
Avis and National, and, Chrysler owns Thrify and Snappy. In India, Modern
Suitings went for both backward and forward integrationintegrating backward
in the wool processing and integrating forward by diversifying into worsted
suitings.
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Experience of companies shows that vertical integrationwhether

backward or forward can be profitable. Buzzell (1983) analysed about 1650
businesses in the PIMS (Profit Impact of Marketing Strategy) database to
ascertain the impact of vertical integration on profitability. In the study, vertical
integration has been defined in terms of value addition as percentage of sales.
The analysis shows that net profit (PAT), as percentage of sales, increases with
vertical integration, but, net profit as percentage of investment or return on
investment (ROI) does not.
Activity 2
Choose a company either Tata or Godrej and analyse the integration
process, either forward or backward or both.
25. _________ integration takes place when a company enters into a
downstream activity with respect to the same product line/flowfor
example, a garment manufacturer starts its own retail chain.
26. _______integration means moving upstreamthe same garment
manufacturer enters into fabric production.
10.14 Case Study

Tata Steels Acquisition of Corus
Tata Steel realized that success in the global market was not possible with
greenfield plants or projects. More recently, Tata Steel showed its renewed
interest in overseas acquisitions, particularly in Europe and in USA. Corus,
the second largest steel producer of Europe and the fifth largest in the
world, gave an inviting signal. Corus expressed its interest in China, Brazil
and India for cheaper steel. This induced Tata Steel to cash in on the
opportunity and decided to make a bid for Corus. Corus was also interested
in setting up a modern steel distribution network in India. Tata Steel decided
to leave no stone unturned to mark its European presence.
Tata Steels audacious, but successful bid for Corus at an enterprise value
of 6.7 billion, gives it a capacity of 28 million tonnes, including 8.7 million
tonnes of its own. But, the immediate stock market reaction to Tata Steel
almost running away with Corus in a head-to-head bidding with Brazils
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CSN was negative. Market participants thought Corus at 608 pence,

representing a premium of 153 pence on the opening offer, was an expensive
buy. Whether the Tatas were paying an inflated price for Corus would remain
a subject of debate for some time. Ratan Tata was emphatic that he was
not paying anything that was beyond prudence. It might not have looked so
at that point, but the acquisition cost for the Tatas would be justified, as the
valuation of steel assets around the world would keep on rising. Tata Steel
finally 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 an
Indian 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 stated
objective of growth and globalization. Tata Steel has identified a number of
specific benefits that it sees from a combination with Corus. Enhanced scale
will position the combined group as the fifth largest steel company in the
world by production, with a meaningful presence in both Europe and Asia.
The powerful combination of lowcost upstream production in India with the
high-end downstream processing facilities of Corus will improve the
competitiveness of the European operations of Corus significantly. The
combination will also allow the crossfertilization of research and development
capabilities in the automotive, packaging and construction sectors, and there
will be a transfer of technology, best practices and expertise of senior Corus
management from Europe to India.
Tata Steel also believes that between the two companies, there exists a high
degree of cultural compatibility which would facilitate an effective integration
of the businesses over time. Tata Steel expects to lead the enlarged group
with a combined management team. The acquisition process shows that
Tata Steel has largely taken care of strategic fit, organizational fit and postintegration management issues and economics of the acquisition.
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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. Marketers
have to decide on the most appropriate one based on resources, business
assets and skills and the environment.
Diversification, as a strategy, can generate growth in a number of ways
product development, market development, both product and market
development or any other. Diversification may take the form of either a
new business venture of the company or strategic alliance or joint venture
or acquisition or merger.
Strategic alliance is cooperation between two or more organizations with
a common objective, shared control and resource contributions by the
partners. Strategic alliances, like all partnerships, are delicate to manage,
and, alliance partners have to share their responsibilities for smooth
operation 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 unlike
strategic alliances which are short-term for a fixed period.
Takeover or acquisition means that one company takes over another
companyits resources, management and control, it can be friendly or
hostile.
A merger is a combination of two or more organizations either through
acquisition or amalgamation or consolidation.
Integration, both forward and backward, can be used as a strategy for
growth.
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 of
resources, skills and capabilities) by the partners for mutual benefit.
Joint venture: A strategic alliance involving equity participation by both
(or all) the parties.
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Takeover: (also called acquisition) when one company takes over another
organization 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 Answers
Answers to Self-Assessment Questions
1. Products, businesses
2. Ansoff
3. market share
4. product
5. market research or surveys
6. (d) all the above
7. True
8. Electronics
9. watches
10. test marketing
11. new market segments
12. Dairy Milk
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13. False
14. Related diversification
15. Strategic alliance
16. Competitive, strategic
17. Joint venture
18. False
19. Takeover, acquisition
20. False
21. Merger
22. Horizontal merger
23. Conglomerate merger
24. (a) Vertical merger
25. Forward
26. Backward
Answers to Terminal Questions

1. Ansoffs (1987) product-market expansion matrix has been the basis for
further research and development in growth strategies. Refer to Section
10.3 for further details.
2. Related diversification means that the new business has commonalities
with the core business or core competence of the company. Refer to
Section 10.8 for further details.
3. Strategic alliance is cooperation between two or more organizations with
a common objective, shared control and resource contributions by the
partners. 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 for
further details.
5. Takeover or acquisition means that one company takes over another
companyits resources, management and control. Refer to Section 10.11
and 10.11.2 for further details.
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6. A merger is a combination of two or more organizations either through

acquisition or amalgamation or consolidation. Refer to Section 10.12 and
10.12.2 for further details.
7. Integration, both forward and backward, can be used as a strategy for
growth. 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.
Endnotes
1
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.
M B Rao, Joint Venture: International Business with Developing Countries (New Delhi:
Vikas Publishing House, 1999), 2-3.
A Kazmi, Business Policy and Strategic Management, 2nd ed. (New Delhi: Tata McGraw
Hill Publishing Co., 2002), 189.
P Chandra, Financial ManagementTheory and Practice (New Delhi: Tata McGraw Hill,
1987), 660-61.
G Johnson, and K Scholes (2005), 377.
G Johnson, and K Scholes (2005), 377.
W F Glueck, and L R Jauch, Business Policy and Strategies Management, 4th ed. (New
York: McGraw Hill, 1984), 224.
J Kitching, Why do Mergers Miscarry, Harvard Business Review (NovDec, 1967).
N Venkiteswaran, Restructuring of Corporate India: The Emerging Scenario, Vikalpa

(22) 3 : 7.
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Strategic Management and Business Policy

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10.3 Ansoff Matrix

Figure 10.1 Ansoffs Product Market Expansion Matrix

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Figure 10.2 Alternative Product Market Expansion Matrix

10.4 Penetration Strategy for Growth in Existing Markets

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10.5 Product Development in Existing Markets

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10.6 New Product Development

10.6.1 Market Testing

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Table 10.1 Possible Alternative Test Marketing Outcomes

In situation 1, the new product can be launched almost immediately. In

10.7 Market Development For Existing Products

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10.8 Expansion through Diversification

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It is useful to distinguish between related diversification and unrelated

10.8.1 External Expansion or Diversification

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10.9 Strategic Alliance

10.9.1 Objectives and Forms of Strategic Alliance

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For example, if research laboratories or institutions are involved, most of the

10.10 Joint Venture (JV)

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The new business is uneconomical for a single organization to undertake;

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Between a local company and a foreign company with technological

10.10.1 JVs in Practice

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JVs between Indian companies and foreign companies in India: Maruti

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10.11 Takeover or Acquisition