To Ally or to Acquire

Types of Strategic Coordination

Licensing Alliance/Partnership JV Merger Acquisition

Low Medium High

Investment
Control
Impact
Integration
Pain of separation
 Choosing between Acquisitions and Alliances
Factor Strategy

1. Types of synergies Modular Non equity alliances

Sequential synergies Equity alliances
Reciprocal Mergers/Acquisitions

2. Nature of resources
Relative value of soft to hard resources
Low-medium Acquisitions
High Equity alliances

3. Extent of redundant resources Low Non equity

Medium Equity
high Acquisitions

4.Degree of market uncertainty Low Non equity

Low- medium Acquisitions
High Equity alliances

5. Level of Competition
Degree of competition for resources Low Non equity alliances
Medium Equity alliances
High Acquisitions
BLUE PRINT FOR INTEGRATING
ACQUISITIONS
Post merger integration (PMI) context
 Diversified firm A has acquired/merged with a diversified firm T
and now (A+T) has to function to realize the identified
synergies in the valuation phase

Aim is to understand:
 The challenges that make integration difficult
 The basic strategic decisions in an integration process – how
much to integrate what?

Note: A – Acquirer; T- Target

Where does PMI fit in the M&A process?

Target Valuation & Implemen-

Due diligence Evaluation
selection negotiation tation

• Preliminary • Attaining the

amount of desired level of
integration integration of
preparation activities
and planning across acquirer
and target in
order to extract
the synergies
Blue print for Integrating Acquisitions

.
According to a study conducted by Booz- Allen
Hamilton, the success of M&A does not depend much
upon industry type, type of integration, the purchase
premium or the capitalization ratio, rather it depends
on the firm’s pre and post integration strategy
and the ability to act quickly.
The work of integration should really
start when the firm is planning the
acquisition, because integration
determines to a large extent, whether
the merger is going to be a failure or a
success.
Phases of Integration

I)Pre-acquisition negotiation process

II) Post acquisition integration process

 PREACQUISITION – NEGOTIATION PROCESS
START MAKE TWO OPERATING PROTECT RELY ON
BEFORE TEAMS- MANAGERS AGAINST HARD
OTHERS IN DEAL ESCALATING STRUCTURAL
a)FOR MAKING COMMITMENT FACTS
EVALUATION
UNDERSTAND
b) NEGOTIATING SELLER’S
AND DEAL MOTIVATION
MAKING
Post acquisition integration process-
I) Cleaning and building the foundation
II) Strategic and Organizational
Revitalization
III) Integration of people and operations
POST ACQUISITION INTEGRATION PROCESS

CLEANING UP AND BUILDING THE

FOUNDATION
PHASE I
ALIGN TOP INSTILL DEBOTTLENECK FEW QUICK
MANAGEMENT DISCIPLINE CAPACITIES HITS TO
THROUGH IMPROVE
( PROTECT REPORTING PERFORMANCE
OTHER AND AND MORALE
MANAGEMENT CONTROL
LAYERS) SYSTEMS
 STRATEGIC AND ORGANIZATIONAL
REVITALIZATION
PHASE II
ESTABLISHING INVESTMENT STRUCTURAL CONTINUING
VISION AND FOR REORGANIZATI COMMITMENT
STRETCH ENHANCING ON IF OF CORPORATE
GOALS BASIC NECESSARY TOP
FUNCTIONAL MANAGEMENT
COMPETENCIES
AND EMPLOYEE
SKILLS
(MANAGEMENT
DEVELOPMENT)
 INTEGRATION OF PEOPLE AND
OPERATIONS
PHASE III
BROADENING THE JOINT STRATEGIC TWO-WAY
INTERFACE RATIONAIZATION INVESTMENT FLOW OF
BETWEEN OF PRODUCTION, AND MARKET PEOPLE AT
ACQUIRED AND MARKETING, IT EXPANSION DIFFERENT
ACQUIRING ETC. LEVELS
UNITS.
A wrongly conceived merger will fail, no
matter how good the integration process;
and a deal based on sound logic might
stumble if the integration process is
poor
The PMI challenge
Limited
Complexity
(Function of inter-related Information Functioning
decisions between AU and TU (Implementation phase reveals while integrating
based on synergies identified) details that were obscure until
valuation)

Uncertainty and
change Cultural
(Dealing with employee differences
motivation, role and task
allocation)
Basic tasks in an integration process: “Grouping”
and “linking” the AU-TU pair

“Grouping and Linking”…OR “Boxes and Lines”! What do we mean?

Grouping (Boxes):

• Includes grouping AU and TU into organizational units such

as departments with a common boss, incentives and
procedures (i.e. the boxes in an organization)

Linking (Lines):

• Includes grouping activities across groupings such as

vertical reporting, dedicated liaisons, temporary task forces
(i.e. lines in the org. chart)

Note: PMI is essentially an Org. Design problem!

Choices of level of grouping and linking are complements

Grouping and Linking choice spectra The choices have to be complementary for a fruitful integration
Decisions about Portfolio Composition:
reducing the scope of the corporation

Divesture: stay or exit

Divesture refers to the process of reducing the
portfolio of the businesses a firm owns. It is one of the
two important ways in which a corporation reduces
its scope. The other is outsourcing.

Divesture occurs when the firm reduces the number

of businesses it is active in by completely pulling out
of the value chain to the relevant customers.
Difference between divesture and outsourcing
The two basic modes of divesture-
Sell offs
Spin-offs.

The other two modes are-

equity carve outs
split ups.
Ownership after divesture
Spin-offs: A spinoff is the creation of an independent
company through the sale or distribution of new shares
of an existing business or division of a parent company.

In a spin-off, the owner shares of the divested business

are distributed to the existing shareholders. Thus the
shareholders can choose whether they want to hold
both shares or sell their stakes in the divested business.
Indian Rayon and Industries(IRIL) spinning off its
insulator business (Jaya Shree Insulators) in favour of
i)a new company – Vikram Insulators Pvt Ltd(VIPL)
ii)VIPL- NGK a 50-50 joint venture formed.
iii) renamed as Birla- NGK Insulators Pvt. Ltd

ITC’s proposed demerger of the hotel business

through a partial spin-off to a new entity called New
Delhi(60% shareholding of common shareholders and
40 % with ITC)
One of the most prominent examples is the spin-off of
PayPal from its former parent eBay in 2015.
In that case, eBay shareholders received one share of
PayPal for each share of eBay they owned.

eBay recognized the growth potential of PayPal as an

independent company and made the following
announcement “each company will have a sharper
focus and greater flexibility to pursue future success in
their respective global commerce and payments
market.”
Sell offs : Divested businesses are sold to another
company

GSK divesting Horlicks and other Consumer

Healthcare nutrition products to HUL

Divesture of the tractor, glass and Cement

businesses of L&T

L&T divested its Electrical & Automation

business(E&A) to Schneider Electric
Equity carve out :
In an equity carve out, the parent sells a fraction of a
business’s stock to the general public and keeps the rest.
This is also called an Initial Public offering (IPO).
Equity Carve-Out is a partial spin-off in which an existing
company creates its subsidiary. After the creation of such a
subsidiary, it brings out its Initial Public Offer (IPO). The reason
why it is called as a partial spin-off is that it does not give
away its control of the subsidiary.
Reliance Industries Ltd(RIL) created a wholly
owned subsidiary called Reliance Retail
Ventures(RRV). RRV in turn owned 99.93 % in
Reliance Retail Ltd(RRL).

Over the years RRV carved out its equity. RIL’s stake
in RRV is about 85%. Over the years , a host of
global investors, like KKR, Mubadala, Abu Dhabi
Investment authority, General Atlantic, GIC and
TPG, put in 47000 crores INR for a 10.08 % stake in
RRV. About 5% stake are with minority stakeholders.
RRL is on the verge of being listed.
Split-Up: Under a split-up shares are created in the
underlying businesses, while those in the former
parent are discontinued.

The announcement by GE in November 2022, that it

will eventually split into three companies focused on
aviation, healthcare and energy.
The energy business is known as GE Vernova. It
has been spun off in 2023

The health-care business will be named GE

Healthcare. It will be spun off in early 2024

The aviation business will be the remaining core

business of GE and will be called GE Aerospace
and GE will be an aviation focused company.
Modes of Divesture
From the divesture test it follows that a
corporate parent should divest for one or both
of the following reasons:

a) Failing the synergy test

b) Another corporate parent is a better owner.
1. Failing the synergy test (V(AB)> V(A)+V(B))

In the absence of synergies, divesture is a god option.

Assuming Dm[B] >=V[B]

Sell- off: Dm[B]is the price of selling a business which

should be at least the standalone value of that business.

Spin-off :Dm[B]is the standalone value of that business.

Then a failure to pass the synergy test is sufficient to pass

the divesture test.
The Divesture test

V[A] + Dm[B] >V[AB]

V[AB] is the NPV of business A and business B when they
are jointly owned.
V[A] is the standalone value of business A after divesting
business B.
Dm[B] is the value from divesting business B for the original
shareholders of the parent under divesture mode m.

Sell –off : Dm [B] the price for which business B is sold to another company.
Spin-off : Dm[B] the value of business B as an independent , divested unit.
2. Another Corporate parent is a better owner.
If business B is better off with a different corporate
parent than the current one, then it’s time to divest
business B. This might be the case even if business B is
performing well and is benefiting from the presence of
business A.

Thus it is not necessary to fail the synergy test; even if the

synergy test is passed (i.e., V(AB)> V(A)+V(B),) as along as
you can get a good price for business B( i.e., D[B]>V[B]).
Choosing a Divesture mode
Outsourcing : Make or Buy
A company remains in the footwear
business after outsourcing manufacturing
Outsourcing occurs when an organization
hands over part of the value chain it owns
to a different firm, while maintaining the
number of business it is active in.

In other words the firm continues to offer the

products and services based on inputs from
the outsourced value chain activities to the
relevant customers, but these parts of the
value chain are no longer done in-house.
Offshoring occurs when part of a value
chain moves to another geography,
usually one with lower cost.

Offshoring may or may not involve

outsourcing. The same firm could
merely relocate operations to a new
location.
 Outsourcing and offshoring
In-house Send out of firm

Away from Current

location Off-shored but Offshored and outsourced
(different geography) in-house(captive)

Current location Status quo Onshore and outsourced

(Neither offshored
or outsourced)
Outsourcing and offshoring
The Outsourcing Test
A and B are value chain activities
A= Design and Distribution
B= Manufacturing

Vo[A] +O[B]> V[AB]

V[AB] is the NPV of the business when the value chain activities A
and B are jointly owned.
Vo[A] is the value of the business comprising retained value chain
activities
O[B] is the value realized from the outsourced value chain activity B.
Why a specialist vendor can create more
value after taking over parts of your value
chain
When to outsource
Indications of transaction costs in outsourcing
and offshoring
Tata Nano

Apple: iTunes + iPod

Ola Cabs

South West Airlines

Zara

Li & Fung

HUL’s Project Shakti

Strategic Innovation or
Business Model Innovation
Business Model Innovation

Business Model Innovation (BMI) refers to the

creation, or reinvention of a business itself.
A business model innovation results in an
entirely different type of company that competes
not only on the value proposition of its offerings,
but aligns its profit formula, resources and
processes to enhance that value proposition,
capture new market segments and alienate
competitors.
Since 2001, Apple began introducing a series of
successful new products and services – the iPod, the
iTunes online music service, and the iPhone- that
propelled the company to the top of its industry. This
was followed with the iPad.

But the shift wasn’t only a matter of product

innovation. Apple’s success in iPod resulted from its
ability to define a workable business model for
downloading music(iTunes) - something that had
eluded the music industry for years.
Clayton Christensen, a Professor at the
Harvard Business School, cites the need for
business model innovation as one of the core
elements of a successful market disruption.

A simplifying technology is needed to spark the

disruption, a new business model is then
needed to maximize the recall of the
technology and a comprehensive value
network must finally evolve to support it.
 Product or
Target Revenue
service
segment model
offering
Value Proposition

Business Model

Value Cost Organizational

Chain Model Processes

Operating Model
As Apple has demonstrated, innovation in a
business model is more than mere product,
service, or technological innovation.

Innovation becomes BMI when two or more

elements of a business model are
reinvented to deliver value in a new way.

Because it involves a multidimensional or

orchestrated set of activities, BMI is both
challenging to execute and difficult to imitate.
What necessitates a business model change :

1. The opportunity to address the needs of

large groups of potential customers who
are shut out of a market entirely because
existing solutions are too expensive or
complicated for them
e.g. Tata Nano, Sachet shampoos (Nyle, Chic CavinKare)

2. The opportunity to leverage a brand-

new technology, wrapping the right
business model around it (Ola, Oyo)or the
opportunity to leverage a tested
technology in a whole new market
e.g. UPI, Cloud based technologies.
3. The opportunity to bring a job to be-
done focus to a market -driven industry.
Such industries tend to make offerings
into commodities. But a job focus allows
a company to redefine the industry
profit formula.

e.g. Lakme, L'Oreal has brought the concept of beauty

care, skin care, hair care Salons to focus on the right
usages and trends in Cosmetics offerings.
4. The need to fend off low-end
disruptors.

e.g. If Micromax becomes very successful it will threaten

other mobile phone manufacturers

5. The need to respond to a shifting basis of

competition

e.g. Airtel outsourcing a large part of its value chain

Industry Model Innovation

This approach involves innovating the

‘industry value chain’.

a) Horizontal moves into new industries

b)Redefining existing industries

c)Development of entirely new Industries-

a) Horizontal moves into new industries
Virgin Group – music and retail to airlines, railways,
beverages, financial services by superior consumer
management

b)Redefining existing industries

Dell – eliminating intermediaries and going directly to
customers
Apple- iTunes- music directly to customers

c)Development of entirely new Industries

eBay, Amazon, Google
Revenue Model Innovation

This approach involves innovations in

how companies generate revenues
by reconfiguring offerings(product/
service/value mix) and or by
introducing new pricing models
Gillette’s strategy to underprice razors to
sell more razor blades

HP’s offering low priced printers to sell

more cartridges
Enterprise Model Innovation

Innovating the structure of the enterprise

and the role it plays in the value chain
by changing our extended enterprise
and networks, with employees, suppliers,
customers and others including
capability/asset configuration. Also by
network plays wherein companies rely
on external communication
Tata Nano- designed to the cheapest car by
reconfiguring the value chain.

Zara- managing design through delivery,

creating feedback loops from customer data
at stores back to designers and manufacturing

Bharti Airtel-
Focuses on marketing, sales and distribution
and outsourcing much of the actual IT and
telecom infrastructure to external partners.

Li & Fung
Anticipating massive change across diverse
industries, top-performing CEOs are
focusing on business model innovation as a
path to competitive strength.

To accomplish this, business leaders can use

three main types of business model
innovation: innovation in industry models,
revenue models or enterprise models. These
approaches can be used alone or in
combination.
Because of its prevalence as a
successful innovation strategy and
relatively easier than other models,
enterprise model innovation,
emphasizing collaboration and
partnerships, is the most prevalent
consideration for executives as they
respond to change.
Designing the multi-business corporation
Multidevice, a maker of PC peripherals who used to
be organised by function- marketing, manufacturing ,
R& D departments- recently undertook a dramatic re-
organization towards a matrix organization with the
two dimensions being product and customer.

Polytron, a rival of Multidevice which is also

organized by function, has hired you to help them
understand why Multidevice made this change, and
whether they should follow suit. How would you
proceed?
Multidevice’s reorganization from a functional structure to a
matrix structure of products and customers
The central issues in corporate strategy pertain
to how managers can create the most value
from the portfolio of businesses they can stitch
together with organizational and governance
linkages (in a way that investors and mutual
fund managers cannot)
Corporations as value chain bundles along
the three dimensions
Elements of organizational structures
Organization Structure
Simple structure:
A simple structure can be thought of as no formal structure
at all. In a simple structure the organization is run by the
personal control of an individual.

Characteristics:
Usually found in small businesses
Little division of management responsibility and formal
processes are missing.
The main problem here is that the organization can
operate effectively only up to a certain size, beyond which
it becomes too cumbersome for one person to control the
same.
The Functional form(f-form)
Functional Structure
Advantages:

Well-defined channels of communication and authority/responsibility relationships. Improve

productivity by minimizing duplication of personnel and equipment, and simplifies training as
well. Suited well for economies of scale.

Disadvantages:
The functional structure can result in narrowed perspectives because of the separateness of
different department work groups.

Decisions and communication are slow to take place because of the many layers of hierarchy.
Authority is more centralized.

The functional structure gives managers experience in only one field—their own. Managers
do not have the opportunity to see how all the firm's departments work together and
understand their interrelationships and interdependence. In the long run, this specialization
results in executives with narrow backgrounds and little training handling top management
duties.
The multi divisional form( M-form)
Disney’s Divisional Structure
Product Divisional Organizational Structure
Divisional structure:
Because managers in large companies may have difficulty
keeping track of all their company's products and activities,
specialized departments may develop. These departments are
divided according to their organizational outputs. Examples
include departments created to distinguish among production,
customer service, and geographical categories. This grouping
of departments is called divisional structure.

These departments allow managers to better focus their

resources and results. Divisional structure also makes
performance easier to monitor. As a result, this structure is
flexible and responsive to change.
The customer-centric form
The product- function form(Matrix structure)
The matrix structure:
A matrix structure is a combination of structures
which could take the form of product and
geographical divisions or functional and divisional
structures operating in tandem
This structure not only increases employee motivation,
but it also allows technical and general management
training across functional areas as well.

Potential advantages include:

Better cooperation and problem solving.
Increased flexibility.
Better customer service.
Better performance accountability.
Improved strategic management.
Drawbacks:

The two-boss system is susceptible to power struggles, as

functional supervisors and team leaders vie with one
another to exercise authority.

Members of the matrix may suffer task confusion when

taking orders from more than one boss.

Teams may develop strong team loyalties that cause a

loss of focus on larger organization goals.
Team- based structures
A team based structure attempts to combine both
horizontal and vertical coordination through
structuring people into cross- functional teams
The hybrid form- A customer technology hybrid
(R&D is grouped by product line, but sales is grouped by
customer segment)
 Present Organisational Structure
Aim: To integrate the global scale benefits into the local markets of each country P&G has ventured into.

Benefits:

To focus on:-
Common consumer benefits
Sharing common technologies
Facing common competitors

Global Business Services (GBS) set up so

as to provide best support services at
lowest possible costs

Lean Corporate Functions to ensure

ongoing functional innovation and
capability improvement
Multidevice’s reorganization from a functional structure to a
matrix structure of products and customers
Functional structures are good for cost efficiencies
and bad for cross-functional integration.

The reorganization suggests the need for cross-

functional integration had either become, or
recognised to have become important.

In particular, the need for rapid product development,

as well as the need for meeting customer needs by
bundling different products together( into solutions)
must have become critical.
Problems :

a)Bottlenecks and delays in time to market.

b)Customers seeking more one-stop stopping
or solutions

Both of these could have been driven by

changes in the external environment.
Typical ownership structure of a Business Group
A holding Company Structure:
An investment company consisting of shareholdings in a variety of
separate business operations. These subsidiaries may operate
independently, have other shareholders and retain their original
company names.

The parent company limits decisions to the buying and selling of

subsidiaries with little involvement in their product or market strategy.

Holding companies are extremely flexible, with the ability to bring in

outside shareholders as partners and to buy and sell their subsidiaries
as conditions change . However they are hard to control, because of
the hands-off management style and the rights of outside
shareholders
How GE is disrupting

itself
 In 2009
GE announced
$ 3 billion

100 Health Care Innovations

lower costs

increase access

improve quality
$1,000 $15,000

handheld portable
electrocardiogram ultrasound machine
device for India for China
They are revolutionary not because of

Small Lower price

size
 But due to

Their innovation process

they are originally developed for rural
markets of India and China, and are
now being sold in the United States
This process is called Reverse Innovation which is

opposite of glocalization.
 For decades, GE and other leading
technology companies developed high-
end products at Home markets
And distributed them globally with some adaptations to local
markets- a process known as glocalization

$
$
$
$ $
$
The Core tenets of Glocalization:

1.Emerging economies will largely evolve in the

same way that wealthy economies did.

However developing countries are more happy with high tech

solutions that deliver decent performance at an ultralow cost-
a 50 % solution at 15 % price.

2. Products that address developing countries'

special needs can’t be sold in developed countries
because they’re not good enough to compete there.
Around 2000, GE leaders talked of the global market
place . They talked about-

US, Europe, Japan and rest of the world.

Now they talk about resource rich regions like the Middle
East, Brazil, Canada, Australia and Russia and people
rich regions such as China and India.

The rest of the world means the US, Europe and

Japan.

The centre of gravity has shifted.

In reverse innovation products are
created for emerging markets
And brought back into wealthy markets

$
Glocalization has
helped GE grow
dramatically
outside the United
States
 $97 billion

> 50 % of GE’s total

revenues
GE- revenues
outside US

$4.8 bil l i o n

1980 2008
However, glocalization limited
the company to skimming
only the top
of emerging markets
 and ignored
their even
faster growing
middle or
lower-end
customer
segment
More importantly new competitors from
emerging markets were innovating and
taking their products global

Mahindra and Mahindra, Haier

Godrej Xiaomi
Narayana Health Mindray
Suzlon Sany
By producing products with a new price performance
paradigm, the emerging giants could even destroy GE
Reverse Innovation is not optional, but oxygen
- Jeff Immelt
Historically Power and P&L responsibility
are concentrated in the developed world
It is extremely
difficult to
implement
successful
reverse
innovation
GE could
overcome
the
difficulties $278 mbusiness

A portable
ultrasound
machine for
China
rural market
THE SUCCESS ….
 GE achieved that by using
Local Growth Team Model

5 Critical Principles
1
Shift power to where the growth is
 Wu Xi, China
A new unit was created,
which is independent
from the existing three
ultrasound business units
 Wu Xi, China
The team was given the
power to develop their own
strategies, organization
configuration and products
2
Build new offering from the ground up
The compact ultrasound was

developed almost from scratch

 although it was having
support from an existing
project in Israel
But the team in China was encouraged
to pursue the concept further for the
compact ultrasound
3
Build the local team like a new company
For GE, organizational software and
support all evolved to support
glocalization
Leaders of Local Growth Team needed to
rewrite the software to support
zero-based innovation
They managed its own
complete value chain
●Local recruitment

●Used local dealers to reach China’s

vast and fragmented rural markets

●Built in- country teams to provide

quicker and less costly service

 4
Customise objectives, targets and
metrics
different criterias are
used to evaluate Local
Growth Teams in China
Product has shorter
government approval
process in china

Shortened
Product development cycle
5
Report to someone high in the organization
Even when it was tiny, the
team in China reported
directly to CEO

He was the key person to

mediate for conflicts
between the team and
global businesses
Connect the team to the
resource
And to build a global
market for the
portable ultrasound

GE now has
established dozen
local growth teams in
India and China
Thus changing the mind-
set of managers is GE’s
biggest challenge

For Reverse Innovation

there is a still long way
to go.