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Prasad G. Godbole
Copyright 2009 Vikas Publishing House Pvt. Ltd. All rights reserved. Prasad G. Godbole. All rights reserved.
Chapter 3
Mergers and Acquisitions as a Growth Strategy
Copyright 2009 Vikas Publishing House Pvt. Ltd. All rights reserved. Prasad G. Godbole. All rights reserved.
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1. Intensive Growth
2. Integrative Growth
3. Diversification Growth
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It involves a company seeking increased sales for its present products in the present markets through more aggressive marketing efforts. It involves activities like expanding the dealer and retailer network, getting bigger and prime shelf space from the retailers, launching attractive dealer and consumer incentive/gift schemes, launching heavy advertisement campaigns, etc. The ones who are market leaders already also need to maintain their position and if possible expand the degree of market penetration so as to enhance their leadership stature. It is achieved in an organic manner. Example: Marketing war between Pepsi and Coke or between Hindustan Unilever Limited (HUL) and Procter & Gamble (P&G)
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It consists of a company seeking increased sales by taking its existing products into new markets. When a regional company launches its products in another region or a company which was hitherto operating in a domestic market starts exporting its products, it is said to be following a market development strategy. It can be either organic or inorganic. Example: China Inc
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Integrative Growth
(a) Backward integration
It consists of a company seeking ownership or increased control of its supply system. It could be organic or inorganic. Example: Reliance Industries Limited is the most impressive example of backward integration. Starting with Vimal range of fabrics, RIL went backward into manufacture of polyester fiber and yarn, followed by intermediate chemicals, polymers, refinery and finally oil exploration. With this, RIL has become a fully integrated company across the entire value chain.
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It consists of a company seeking ownership or increased control of its distribution system. It could be organic or inorganic. Example: A refinery getting into petrol pumps (like RIL) or a film production house getting into distribution and subsequently, into running of cinema halls.
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Concept of integration whether backward, forward or horizontal does not mean that there has to be a merger of the target company ( acquired company) with the acquirer company. It is sufficient that the acquirer acquires control over the target company such as in case of Grasim- UltraTech.
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Versace gown
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Quadrant II Stars
Medium 0%
Quadrant III
Low-20%
Quadrant IV
Cash cows
Dogs
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Product development
Concentric diversification
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Decide
between
To Sell them
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While the BCG matrix was specifically developed to strategize portfolio rebalancing in case of multiple businesses firms, the grand strategy matrix can be used for single business firms or for different businesses or divisions of a multiple business firm.
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Market development
Product development Horizontal Integration Divestiture
Liquidation
Horizontal integration
Concentric diversification
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This approach states that every industry and product passes through four stages during its life cycle, viz, introduction, growth, maturity and decline. It must be understood that in case of multi-product industries, a single products life cycle would not represent the life cycle of the industry as a whole.
In case of single product industries, the industry life cycle would be same as that of the product.
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(b) Growth stage: This is a period of substantial sales and profit generation. While the existing players expand their capacity, many new players get attracted by lure of high growth in sales and profits.
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Launch of a new product or service would naturally require a firm to follow market penetration and market development, it will require a firm to invest a significant amount of resources. If the product has been launched by an established resourcerich firm, it would be able to take the product to the growth stage relatively easily and without falling prey to acquisition by other firms. If the product has been launched by a new firm promoted by first generation entrepreneurs, then such a firm often has no choice but to sell out to another large firm. Horizontal integration via mergers could be a good strategy for a bunch of new firms.
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The phenomenon of large resource-rich firms gobbling up stand alone start-ups is more pronounced in the growth stage because of larger investment. For example, Sabir Bhatia selling Hotmail to Microsoft for US$ 400 million. Bazee.com being sold to e-bay and Daksh e-Services merging with IBM.
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Horizontal integration Horizontal integration through the acquisition of a large but unprofitable firm Concentric diversification Downsizing, cost reduction and reengineering
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For cash-rich firms in decline stage, one could prescribe conglomerate diversification through acquisition of firms in growth industries, followed by phasing out of declining business either through divestiture or liquidation.