Mergers and industry life cycle.

Stage: Pioneer / development phase.

Characteristics: Firms need capitals to fund development as there is little or
no profit.
Motivations: Acquiring unique capabilities and resources, such as capital and
management talents.
Types of mergers: Conglomerate and horizontal mergers.

Stage: Rapid accelerating growth.

Characteristics: High profit margins, accelerating sales and little competition.
Motivations: Acquiring unique capabilities and resources, such as capital, to
expand existing capacity.
Types of mergers: Conglomerate and horizontal mergers.

Stage: Mature growth.

Characteristics: growth potential still exists but few new entrants to the
market.
Motivations: Cost synergy (economy of scale), increasing operational
efficiencies.
Types of mergers: Horizontal and vertical mergers.

Stage: Stabilization and market maturity.

Characteristics: Increasing competition and capacity constraints.
Motivations: Cost and revenue synergies, external growth, increasing market
power, unlocking hidden value.
Types of mergers: Horizontal mergers.

Stage: Deceleration of growth and decline.

Characteristics: overcapacity, declining profit margins and lower demand.
Motivations: All kinds of motivations.
Types of mergers: Horizontal, vertical and conglomerate mergers.
Objective type questions

Select the correct statement(s):

I. The motivations of mergers depend on what phase of the industry life cycle
 the company is in.
II. The motivations of mergers depend on the type of merger.
III. The types of merger depend on what phase of the industry life cycle the
company is in.
IV. The stages in an industry life cycle are based on their rates of growth.

In the pioneer phase, the common types of mergers are:

I. Horizontal mergers.
II. Vertical mergers.
III. Conglomerate mergers.

Horizontal are common in these industry life cycle stages:

I. Pioneering development.
II. Rapid accelerating growth.
III. Mature growth.
IV. Stabilization and market maturity.
V. Deceleration of growth and decline.

In the mature growth phase, the common types of mergers are:

I. Horizontal mergers.
II. Vertical mergers.
III. Conglomerate mergers.

Review Questions
1

Conglomerate mergers are common in these industry life cycle stages:

I. Pioneering development.
II. Rapid accelerating growth.
III. Mature growth.
IV. Stabilization and market maturity.
V. Deceleration of growth and decline.
A. All of them.

B. I, II, and IV.

C. I, II and V.

Vertical mergers are common in these industry life cycle stages:

I. Pioneering development.
II. Rapid accelerating growth.
III. Mature growth.
IV. Stabilization and market maturity.
V. Deceleration of growth and decline.
A. All of them.

B. III and V.

C. I, II and IV.

In the rapid accelerating growth phase, the common types of mergers are:

I. Horizontal mergers.
II. Vertical mergers.
 III. Conglomerate mergers.
A. I and II.

B. II and III.

C. I and III.

In the stabilization and market maturity phase, the common types of mergers
are:

I. Horizontal mergers.
II. Vertical mergers.
III. Conglomerate mergers.
A. I and II.

B. I and III.

C. I only.

In the deceleration of growth and decline phase, the common types of mergers
are:

I. Horizontal mergers.
II. Vertical mergers.
III. Conglomerate mergers.
A. II and III.

B. I and III.

C. I, II and III.
Strategic approaches to M & A

 Porter’s five forces model

 PEST/SWOT analysis
 BCG growth matrix

Porter’s Five forces model

Michael Porter (Harvard Business School Management Researcher) designed

various vital frameworks for developing an organization’s strategy. One of the
most renowned among managers making strategic decisions is the five competitive
forces model that determines industry structure. According to Porter, the nature
of competition in any industry is personified in the following five forces:

i. Threat of new potential entrants

ii. Threat of substitute product/services
iii. Bargaining power of suppliers
iv. Bargaining power of buyers
v. Rivalry among current competitors
 FIGURE: Porter’s Five Forces model

The five forces mentioned above are very significant from point of view of
strategy formulation. The potential of these forces differs from industry to
industry. These forces jointly determine the profitability of industry because they
shape the prices which can be charged, the costs which can be borne, and the
investment required to compete in the industry. Before making strategic decisions,
the managers should use the five forces framework to determine the competitive
structure of industry.

Let’s discuss the five factors of Porter’s model in detail:

1. Risk of entry by potential competitors: Potential competitors refer to the

firms which are not currently competing in the industry but have the
potential to do so if given a choice. Entry of new players increases the
industry capacity, begins a competition for market share and lowers the
current costs. The threat of entry by potential competitors is partially a
function of extent of barriers to entry. The various barriers to entry are-
 Economies of scale
 Brand loyalty
 Government Regulation
 Customer Switching Costs
 Absolute Cost Advantage
 Ease in distribution
 Strong Capital base
2. Rivalry among current competitors: Rivalry refers to the competitive
struggle for market share between firms in an industry. Extreme rivalry
among established firms poses a strong threat to profitability. The strength
of rivalry among established firms within an industry is a function of
following factors:
 Extent of exit barriers
 Amount of fixed cost
 Competitive structure of industry
 Presence of global customers
 Absence of switching costs
 Growth Rate of industry
 Demand conditions
3. Bargaining Power of Buyers: Buyers refer to the customers who finally
consume the product or the firms who distribute the industry’s product to
the final consumers. Bargaining power of buyers refer to the potential of
buyers to bargain down the prices charged by the firms in the industry or to
increase the firms cost in the industry by demanding better quality and
service of product. Strong buyers can extract profits out of an industry by
lowering the prices and increasing the costs. They purchase in large
quantities. They have full information about the product and the market.
They emphasize upon quality products. They pose credible threat of
backward integration. In this way, they are regarded as a threat.
4. Bargaining Power of Suppliers: Suppliers refer to the firms that provide
inputs to the industry. Bargaining power of the suppliers refer to the
potential of the suppliers to increase the prices of inputs( labour, raw
materials, services, etc) or the costs of industry in other ways. Strong
suppliers can extract profits out of an industry by increasing costs of firms
in the industry. Suppliers products have a few substitutes. Strong suppliers’
products are unique. They have high switching cost. Their product is an
important input to buyer’s product. They pose credible threat of forward
integration. Buyers are not significant to strong suppliers. In this way, they
are regarded as a threat.
5. Threat of Substitute products: Substitute products refer to the products
having ability of satisfying customers needs effectively. Substitutes pose a
ceiling (upper limit) on the potential returns of an industry by putting a
setting a limit on the price that firms can charge for their product in an
industry. Lesser the number of close substitutes a product has, greater is
 the opportunity for the firms in industry to raise their product prices and
earn greater profits (other things being equal).

The power of Porter’s five forces varies from industry to industry. Whatever be
the industry, these five forces influence the profitability as they affect the
prices, the costs, and the capital investment essential for survival and competition
in industry. This five forces model also help in making strategic decisions as it is
used by the managers to determine industry’s competitive structure.

Porter ignored, however, a sixth significant factor- complementaries. This term

refers to the reliance that develops between the companies whose products work
is in combination with each other. Strong complementors might have a strong
positive effect on the industry. Also, the five forces model overlooks the role of
innovation as well as the significance of individual firm differences. It presents a
stagnant view of competition.

PEST/SWOT analysis

Once the firm has specified its objectives, it begins with its current situation to
devise a strategic plan to reach those objectives. Changes in the external
environment often present new opportunities and new ways to reach the objectives.
An environmental scan is performed to identify the available opportunities. The
firm also must know its own capabilities and limitations in order to select the
opportunities that it can pursue with a higher probability of success. The situation
analysis therefore involves an analysis of both the external and internal
environment.

The external environment has two aspects: the macro-environment that affects all
firms and a micro-environment that affects only the firms in a particular industry.
The macro-environmental analysis includes political, economic, social, and
technological factors and sometimes is referred to as a PEST analysis.

PEST Analysis

A PEST analysis is an analysis of the external macro-environment that affects all

firms. P.E.S.T. is an acronym for the Political, Economic, Social, and Technological
factors of the external macro-environment. Such external factors usually are
beyond the firm's control and sometimes present themselves as threats. For this
reason, some say that "pest" is an appropriate term for these factors. However,
changes in the external environment also create new opportunities and the letters
sometimes are rearranged to construct the more optimistic term of STEP analysis.

Many macro-environmental factors are country-specific and a PEST analysis will

need to be performed for all countries of interest. The following are examples of
some of the factors that might be considered in a PEST analysis.

Political Analysis

 Political stability
 Risk of military invasion
 Legal framework for contract enforcement
 Intellectual property protection
 Trade regulations & tariffs
 Favored trading partners
 Anti-trust laws
 Pricing regulations
 Taxation - tax rates and incentives
 Wage legislation - minimum wage and overtime
 Work week
 Mandatory employee benefits
 Industrial safety regulations
 Product labeling requirements

Economic Analysis

 Type of economic system in countries of operation

 Government intervention in the free market
 Comparative advantages of host country
 Exchange rates & stability of host country currency
 Efficiency of financial markets
 Infrastructure quality
 Skill level of workforce
 Labor costs
 Business cycle stage (e.g. prosperity, recession, recovery)
 Economic growth rate
 Discretionary income
 Unemployment rate
 Inflation rate
  Interest rates

Social Analysis

 Demographics
 Class structure
 Education
 Culture (gender roles, etc.)
 Entrepreneurial spirit
 Attitudes (health, environmental consciousness, etc.)
 Leisure interests

Technological Analysis

 Recent technological developments

 Technology's impact on product offering
 Impact on cost structure
 Impact on value chain structure
 Rate of technological diffusion

The number of macro-environmental factors is virtually unlimited. In practice, the

firm must prioritize and monitor those factors that influence its industry. Even so,
it may be difficult to forecast future trends with an acceptable level of accuracy.
In this regard, the firm may turn to scenario planning techniques to deal with high
levels of uncertainty in important macro-environmental variables.

An important aspect of the micro-environmental analysis is the industry in which

the firm operates or is considering operating. Michael Porter devised a five forces
framework that is useful for industry analysis. Porter's 5 forces include barriers
to entry, customers, suppliers, substitute products, and rivalry among competing
firms.

The internal analysis considers the situation within the firm itself, such as:

 Company culture
 Company image
 Organizational structure
  Key staff
 Access to natural resources
 Position on the experience curve
 Operational efficiency
 Operational capacity
 Brand awareness
 Market share
 Financial resources
 Exclusive contracts
 Patents and trade secrets

A situation analysis can generate a large amount of information, much of which is

not particularly relevant to strategy formulation. To make the information more
manageable, it sometimes is useful to categorize the internal factors of the firm
as strengths and weaknesses, and the external environmental factors as
opportunities and threats. Such an analysis often is referred to as a SWOT
analysis

BCG growth matrix

What Is BCG Growth-Share Matrix

The Boston Consulting Group (BCG) developed a portfolio analysis tool that helps
managers develop organizational strategy based on market share of businesses
and the growth of markets in which businesses exist.
Strategic Business Units (SBUs)
The first step in using the BCG Growth-Share Matrix is identifying the
organization’s strategic business units (SBUs). A strategic business unit is a
significant organization segment that is analyzed to develop organizational
strategy aimed at generating future business or revenue. Exactly what
constitutes an SBU varies from organization to organization. In larger
organizations, an SBU could be a company division, a single product, or a complete
product line. In smaller organizations, it might be the entire company. 1 Although
SBUs vary drastically in form, they have some common characteristics. All SBUs
are a single business (or collection of businesses), have their own competitors and
a manager accountable for operations, and can be independently planned for.
Categorizing SBUs
 After SBUs have been identified for a particular organization, the next step is to
categorize each SBU within one of the following four matrix quadrants:
Stars – SBUs that are “stars” have a high share of a high-growth market and
typically need large amounts of cash to support their rapid and significant growth.
Stars also generate large amount of cash for the organization and are usually
segments in which management can make additional investments and earn
attractive returns.
Cash Cows – SBUs that are cash cows have a large share of a market that is
growing only slightly. These SBUs provide the organization with large amounts of
cash, but since their market is not growing significantly, the cash is generally
used to meet the financial demand of the organization in other areas, such as the
expansion of a star SBU.
Question Marks – SBUs that are question marks have a small share of a high-
growth market. They are dubbed “question marks” because it is uncertain whether
management should invest more cash in
them to gain a larger share of the market
or deemphasize or eliminate them. Management will chose the first option when it
believes it can turn the question mark into a star, and second when it thinks
further investment would be fruitless.
Dogs – SBUs that are dogs have a relatively small share of a low-growth market.
They may barely support themselves; in some cases, they actually drain off cash
resources generated by other SBUs.