Answer any TEN QUESTIONS.
All questions carry equal marks.
Answer any question in maximum 20 lines.
1. Discuss briefly the motives behind acquisition of businesses and companies by existing companies and describe briefly the types of acquisitions that they make to satisfy the specific motives.
2 What is due diligence? Explain important steps in it.
3. What are the provisions of Income tax Act regarding income from business and profession? Examine their relevance when a company is acquiring another company.
4. Explain the provisions of accounting standard AS-14.
5. ABC Limited acquired PQR Limited for a consideration of Rs.40,00,000 to be satisfied in the form of fully paid equity shares of Rs.10 each. The balance sheets of the two companies on 31st March 2006, the date of acquisition were as follows:
Table not included
You are required to pass the necessary journal entries in the books of the transferee company and prepare the balance sheet, when amalgamation is by way of purchase. The development rebate reserve and Export profit reserve are to be maintained in the books of the transferee to claim the accompanying benefits.
6. A company’s present revenues are one million dollars. An analyst made the following estimates regarding the future performance.
Sales growth: 20 percent for the next five years and zero from then on.
Operating cost: 82% of the sales revenue.
Taxes: 38% of the operating income.
Incremental working capital requirements: 8% of the annual revenues in the years where revenue growth is there..
Incremental investment in plant and machinery; 2% of the annual revenues in the years where revenue growth is there.
Calculate the free cash generated by the company in the future years.
7. What is strategy? According to Michael Porter, what are the steps in strategy formulation? How do acquisitions support Michael Porter’s conception of strategy?
8. Give a brief account of steps involved in initiating and completing a merger in India.
9. Describe the important points in SEBI Guidelines regarding takeover in India.
10. Explain the important steps to be taken up by a company to successfully integrate an acquired unit with its operations.
11. Describe briefly various theories put forward in the area of acquisitions and mergers.
12. Explain any two empirical studies that were done in the area of acquisitions and mergers.
13. Discuss the reasons why companies divest some divisions and discuss any one empirical study on the performance of companies and that divested the divisions and companies that acquired the divisions.
14. ABC Limited acquired PQR Limited for a consideration of Rs.30,00,000 to be satisfied in the form of 2,00,000 fully paid equity shares of Rs.10 each. The balance sheets of the two companies on 31st March 2006, the date of acquisition were as follows:
Table not included
You are required to pass the necessary journal entries in the books of the transferee company and prepare the balance sheet, when amalgamation is by way of merger
Tuesday, August 5, 2008
Sunday, August 3, 2008
Mergers and Acquisitions Course Plan - 2008
Topics/chapters to be covered
Prescribed Text: Fred Weston/Mitchell/Mulherin
Ch.1 The Takeover process
Ch.2 The legal and Regulatory Framework - Instead of the material in the chapter Indian framework on mergers and SEBI regulations on takeovers will be discussed.
Ch.3 Accounting for M&As - Instead of material in the chapter, Indian Accounting Standard AS-14 will be discussed.
Book to be referred - Maheshwari and Maheshwari Advanced Accounting Volume 2, Chapter on Amalgamations
Ch.4 Deal Structuring: Some Indian legal issues may be discussed
Ch.5. Strategic Issues
Ch.6. Theories of Mergers and Tender Offers
Ch.7. The Timing of Merger Activity
Ch.8. Empirical Tests of M&A Performance
Ch.9. Alternative Approaches of Valuation
Ch.10. Increasing the value of the Organization
Ch.11. Corporate Restructuring and Divestitures
Ch.12. Empirical tests of Corporate Restructuring and Divestitures
Ch.16. Going private and Leveraged buyouts
Ch.17. International Takeovers and Restructuring
Ch.22. Implementation and Management Guides for M&A s
-----Duel Diligence
-----Integration
Prescribed Text: Fred Weston/Mitchell/Mulherin
Ch.1 The Takeover process
Ch.2 The legal and Regulatory Framework - Instead of the material in the chapter Indian framework on mergers and SEBI regulations on takeovers will be discussed.
Ch.3 Accounting for M&As - Instead of material in the chapter, Indian Accounting Standard AS-14 will be discussed.
Book to be referred - Maheshwari and Maheshwari Advanced Accounting Volume 2, Chapter on Amalgamations
Ch.4 Deal Structuring: Some Indian legal issues may be discussed
Ch.5. Strategic Issues
Ch.6. Theories of Mergers and Tender Offers
Ch.7. The Timing of Merger Activity
Ch.8. Empirical Tests of M&A Performance
Ch.9. Alternative Approaches of Valuation
Ch.10. Increasing the value of the Organization
Ch.11. Corporate Restructuring and Divestitures
Ch.12. Empirical tests of Corporate Restructuring and Divestitures
Ch.16. Going private and Leveraged buyouts
Ch.17. International Takeovers and Restructuring
Ch.22. Implementation and Management Guides for M&A s
-----Duel Diligence
-----Integration
Sunday, June 29, 2008
Timing of Merger Activity
Mergers and Macroeconomy
Statistical relationships
Nelson (1959, 1966) Studies
Nelson R.L., Merger movements in American Industry, 1895-1956, Princeton, NJ; Princeton University Press, 1959
Nelson R.L., 1966, Business Cycle Factors in the Choice Between Internal and External Growth,” The Corporate Mergers, W.W. Alberts and J.E.Segall, eds. Chicago; University of Chicago Press, 1966.
1959 study
For the period 1897-1954 period, there were 14 cycles in general business activity and 12 merger cycles.
A definite timing relationship to the reference cycle turning points was found in 11 of 12 merger cycles.
The two reference expansions 1911-13, 1921-23 for which there was no corresponding merger expansion were either of short duration or of moderate amplitude. The reference cycle contraction of 1953-54 had no corresponding merger contraction and was one of the mildest contractions in the six-decade period.
The peaks of merger cycle usually preceded the peaks of the reference cycle.
Hoewver, th time sequence for troughs was less consistent than for peaks. Nelson (1959. p.112) suggests that this irregular time sequence of merger activity indicates ‘ that economic forces in a depression are likely to be diffuse and weak, compelling no great uniformity in the response of merger activity
Study of relation between merger activity nad other economic series revealed that merger activity was closely related to stock trading, stock prices and business incorporations.
The peak in merger activity wsa reached one month earlier than stock prices, but its trough lagged the trough in stock prices by three months.
Analysis based on detrended series showed that mergers were more positively correlated to stock pirce changes than to changes in industrial production in periods of high merger activity.
Mergers were more positively correlated to industrial production in periods of low merger activity.
In a follow-up study, Nelson(1966) found that merger activity for the 1919-1961 period peaked on average five months before the peak in stock prices, whereas peaks in plant construction contracts and equipment orders were almost coincident with those in stock prices. Nelson's interpretation for this result was that external growth through mergers was selected by firms early in a stock price rise and before they undertook internal investments. One of the reasons offered by Nelson is that the phenomenon reflects the immediacy with which mergers start to produce revenues and profits. Internal investments may involve a protracted waiting period.
In the same study it was found that a peak in merger activity on an average, came 19 months following the trough in the reference cycle or at about the two thirds point in a reference cycle expansion lasting about 29 months.
Melicher, Ledolter, and D’Antonio (1983 Study) on the relationship between merger activity and macroeconomic variables – Industrial activity, Business failures, Stock prices, and Interest rates
Melicher, Ledolter, and D’Antonio, “A Time Series Analysis of Aggregate Merger Activity,” The Review of Economics and Statistics, 65, August 1983, pp. 423-430.
They used FTC quarterly merger data for 1947 through 1977.
Each times series was transformed into white noise ( that is, uncorrelated random variables or residuals from univariate time series models).
From these prewhitened series correlations were determined to find out lead and lag structures.
Among their findings are:
1. An increase in stock prices followed in a quarter by an increase in merger activity. Since merger negotiations begin on average about two quarters before consummation, merger negotiations may precede stock price movements by about one quarter.
2. Mergers respond inversely to prior changes in bond yields, although this relationship is weaker than the case of mergers and stock prices. Further an increase in bond yields decreases stock prices in the same period. An increase in stock prices leads to an increase in bond yields in the following period.
3. Changes in merger activity and changes in stock prices both lead changes in industrial production.
4. Merger activity precedes business failures by one quarter and the relationship is negative.
Linkages between mergers and macroeconomy have also been studied by Becketti (1986)
Becketti, S., “corporate Mergers and the Business Cycle,” Economic Review, Federal Reserve Bank of Kansas City, May 1986, pp. 13-26
Golbe and White (1987) is another study that examined determinants of merger activity.
Golbe, Devra L., and Lawrence J White, “A time series analysis of mergers and acquisitions in the U S Economy,” mimeo, Presented at the NBER Conference on Mergers and Acquisitions , February 1987.
Statistical relationships
Nelson (1959, 1966) Studies
Nelson R.L., Merger movements in American Industry, 1895-1956, Princeton, NJ; Princeton University Press, 1959
Nelson R.L., 1966, Business Cycle Factors in the Choice Between Internal and External Growth,” The Corporate Mergers, W.W. Alberts and J.E.Segall, eds. Chicago; University of Chicago Press, 1966.
1959 study
For the period 1897-1954 period, there were 14 cycles in general business activity and 12 merger cycles.
A definite timing relationship to the reference cycle turning points was found in 11 of 12 merger cycles.
The two reference expansions 1911-13, 1921-23 for which there was no corresponding merger expansion were either of short duration or of moderate amplitude. The reference cycle contraction of 1953-54 had no corresponding merger contraction and was one of the mildest contractions in the six-decade period.
The peaks of merger cycle usually preceded the peaks of the reference cycle.
Hoewver, th time sequence for troughs was less consistent than for peaks. Nelson (1959. p.112) suggests that this irregular time sequence of merger activity indicates ‘ that economic forces in a depression are likely to be diffuse and weak, compelling no great uniformity in the response of merger activity
Study of relation between merger activity nad other economic series revealed that merger activity was closely related to stock trading, stock prices and business incorporations.
The peak in merger activity wsa reached one month earlier than stock prices, but its trough lagged the trough in stock prices by three months.
Analysis based on detrended series showed that mergers were more positively correlated to stock pirce changes than to changes in industrial production in periods of high merger activity.
Mergers were more positively correlated to industrial production in periods of low merger activity.
In a follow-up study, Nelson(1966) found that merger activity for the 1919-1961 period peaked on average five months before the peak in stock prices, whereas peaks in plant construction contracts and equipment orders were almost coincident with those in stock prices. Nelson's interpretation for this result was that external growth through mergers was selected by firms early in a stock price rise and before they undertook internal investments. One of the reasons offered by Nelson is that the phenomenon reflects the immediacy with which mergers start to produce revenues and profits. Internal investments may involve a protracted waiting period.
In the same study it was found that a peak in merger activity on an average, came 19 months following the trough in the reference cycle or at about the two thirds point in a reference cycle expansion lasting about 29 months.
Melicher, Ledolter, and D’Antonio (1983 Study) on the relationship between merger activity and macroeconomic variables – Industrial activity, Business failures, Stock prices, and Interest rates
Melicher, Ledolter, and D’Antonio, “A Time Series Analysis of Aggregate Merger Activity,” The Review of Economics and Statistics, 65, August 1983, pp. 423-430.
They used FTC quarterly merger data for 1947 through 1977.
Each times series was transformed into white noise ( that is, uncorrelated random variables or residuals from univariate time series models).
From these prewhitened series correlations were determined to find out lead and lag structures.
Among their findings are:
1. An increase in stock prices followed in a quarter by an increase in merger activity. Since merger negotiations begin on average about two quarters before consummation, merger negotiations may precede stock price movements by about one quarter.
2. Mergers respond inversely to prior changes in bond yields, although this relationship is weaker than the case of mergers and stock prices. Further an increase in bond yields decreases stock prices in the same period. An increase in stock prices leads to an increase in bond yields in the following period.
3. Changes in merger activity and changes in stock prices both lead changes in industrial production.
4. Merger activity precedes business failures by one quarter and the relationship is negative.
Linkages between mergers and macroeconomy have also been studied by Becketti (1986)
Becketti, S., “corporate Mergers and the Business Cycle,” Economic Review, Federal Reserve Bank of Kansas City, May 1986, pp. 13-26
Golbe and White (1987) is another study that examined determinants of merger activity.
Golbe, Devra L., and Lawrence J White, “A time series analysis of mergers and acquisitions in the U S Economy,” mimeo, Presented at the NBER Conference on Mergers and Acquisitions , February 1987.
Wednesday, June 18, 2008
Implementing the Growth Strategy
An article to be referred to
Growth Through Acquisitions: A Fresh Look. By: Anslinger, Patricia L.; Copeland, Thomas E..
Harvard Business Review,
Jan/Feb96, Vol. 74 Issue 1, p126-135, 10p, 1 graph, 2bw;
Growth Through Acquisitions: A Fresh Look. By: Anslinger, Patricia L.; Copeland, Thomas E..
Harvard Business Review,
Jan/Feb96, Vol. 74 Issue 1, p126-135, 10p, 1 graph, 2bw;
Acquisitions - Agency and Resource perspectives
The agency theory perspective is very popular in explaining why firms engage in ineffective M&A. The agency logic predicts that manager-controlled industrial firms will pursue conglomerate diversification. A firm's managers may benefit from the increase in firm size in that these firms are less likely to fail and executive pay is often linked to firm size. Bank managers have an incentive to improve their employment stability through acquisition since governments are reluctant to close large troubled banks because the failure of a large bank would create severe problems throughout the banking system.
From the resource-based perspective, the firm is composed of a bundle of tangible and intangible resources. Resources do not create value statically or independently and their value comes from their interactions with other resources (Gupta and Roos, 2001). If complementary resources are not under its ownership control, the firm has difficulty in realizing the true potential of its resources. Consequently, the firm has an incentive to merge or acquire other firms that own complementary resources. Hagedoorn and Dysters (2002) suggest that M&A can be one of the alternatives that firms have to exploit external sources of innovative competencies to protect their core businesses. Firms can also pursue non-synergistic acquisitions to grow dramatically and maintain sustained returns at the same time. The resource-based scholars tend to emphasize how a firm that has heterogeneous scarce, valuable and inimitable resources can lead to sustainable competitive advantage (Barney, 1991).
The agency logic predicts that manager-controlled industrial firms will pursue conglomerate diversification. A firm's managers may benefit from increases in firm size in that these firms are less likely to fail.
Barney, J.B. (1991), "Firm resources and sustained competitive advantage", Journal of Management, Vol. 17 pp.99-120.
Barney, J.B., Zajac, E.J. (1994), "Competitive organisational behaviour: Toward an organisationally-based theory of competitive advantage", Strategic Management Journal, Vol. 15 pp.5-9.
Gupta, O., Roos, G. (2001), "Mergers and acquisitions through an intellectual capital perspective", Journal of Intellectual Capital, Vol. 2 No.3, pp.297-309.
Hagedoorn, J., Dysters, G. (2002), "External sources of innovative capabilities: the preference for strategic alliances or mergers and acquisitions", Journal of Management Studies, Vol. 39 No.2, pp.167-88.
From the resource-based perspective, the firm is composed of a bundle of tangible and intangible resources. Resources do not create value statically or independently and their value comes from their interactions with other resources (Gupta and Roos, 2001). If complementary resources are not under its ownership control, the firm has difficulty in realizing the true potential of its resources. Consequently, the firm has an incentive to merge or acquire other firms that own complementary resources. Hagedoorn and Dysters (2002) suggest that M&A can be one of the alternatives that firms have to exploit external sources of innovative competencies to protect their core businesses. Firms can also pursue non-synergistic acquisitions to grow dramatically and maintain sustained returns at the same time. The resource-based scholars tend to emphasize how a firm that has heterogeneous scarce, valuable and inimitable resources can lead to sustainable competitive advantage (Barney, 1991).
The agency logic predicts that manager-controlled industrial firms will pursue conglomerate diversification. A firm's managers may benefit from increases in firm size in that these firms are less likely to fail.
Barney, J.B. (1991), "Firm resources and sustained competitive advantage", Journal of Management, Vol. 17 pp.99-120.
Barney, J.B., Zajac, E.J. (1994), "Competitive organisational behaviour: Toward an organisationally-based theory of competitive advantage", Strategic Management Journal, Vol. 15 pp.5-9.
Gupta, O., Roos, G. (2001), "Mergers and acquisitions through an intellectual capital perspective", Journal of Intellectual Capital, Vol. 2 No.3, pp.297-309.
Hagedoorn, J., Dysters, G. (2002), "External sources of innovative capabilities: the preference for strategic alliances or mergers and acquisitions", Journal of Management Studies, Vol. 39 No.2, pp.167-88.
Sunday, June 15, 2008
Mergers and Acquisitions Course - 2008
Topics/chapters to be covered from Fred Weston/Mitchell/Mulherin
Ch. 1 The Takeover process
Ch.2 The legal and Regulatory Framework - Instead of the material in the chapter Indian framework on mergers and SEBI regulations on take overs will be discussed.
Ch. 3 Accounting for M&As - Instead of material in the chapter, Indian Accounting Standard AS-14 will be discussed.
Book to be referred - Maheshwari and Maheshwari Advanced Accounting Volume 2, Chapter on Amalgamations
Ch. 4 Deal Structuring: Some Indian legal issues may he discussed
Ch 5. strategic Issues
Ch 6. Theories of Merges and Tender offers
Ch. 7. The Timing of Merger Activity
Ch. 8 Empirical Tests of M&A Performance
Ch. 9 Alternative Approaches of valuation
Ch. 10 Increasing the value of the organization
Ch. 11 Coproate Restructuring and divestitures
Ch. 12 empirical tests of Corporate Restructuring and Diverstitutes
Ch. 16 Going private and leveraged buyouts
Ch. 17 International Takeovers and Restructuring
Ch.22 Implementation and Management Guides for M&A s
-----Duel Diligence
-----Integration
Ch. 1 The Takeover process
Ch.2 The legal and Regulatory Framework - Instead of the material in the chapter Indian framework on mergers and SEBI regulations on take overs will be discussed.
Ch. 3 Accounting for M&As - Instead of material in the chapter, Indian Accounting Standard AS-14 will be discussed.
Book to be referred - Maheshwari and Maheshwari Advanced Accounting Volume 2, Chapter on Amalgamations
Ch. 4 Deal Structuring: Some Indian legal issues may he discussed
Ch 5. strategic Issues
Ch 6. Theories of Merges and Tender offers
Ch. 7. The Timing of Merger Activity
Ch. 8 Empirical Tests of M&A Performance
Ch. 9 Alternative Approaches of valuation
Ch. 10 Increasing the value of the organization
Ch. 11 Coproate Restructuring and divestitures
Ch. 12 empirical tests of Corporate Restructuring and Diverstitutes
Ch. 16 Going private and leveraged buyouts
Ch. 17 International Takeovers and Restructuring
Ch.22 Implementation and Management Guides for M&A s
-----Duel Diligence
-----Integration
Monday, June 9, 2008
Acquisition and Strategic Planning - 1
Strategic Planning for Growth
According to Boston Consulting Group, of all the factors contributing to the fundamental value of a business, by far the most important is profitable growth. They estimate that it is responsible for between two-thirds and three-fourths of a company's TSR over the long term.
To support companies in planning for profitable growth, BCG helps companies determine the precise role that growth should play in their corporate strategies, identify the most promising growth opportunities, and set the appropriate balance between organic growth and growth by acquisition.
http://www.bcg.com/impact_expertise/practice_area.jsp?practice=38
What actually is (successful) growth?
What is growth? We can measure corporate growth with statistics about
· Revenue
· Profits
· Number of staff
· Number of subsidiaries.
There are several strategic options, how organizations can grow:
· Internal growth (e.g. entry in new markets, launch of new products)
· Mergers and acquisitions
· Joint ventures
· Leveraging (licensing, development of a network of franchise partners).
Successful growth fulfils the following criteria:
A growing organization should always generate value. Successful growth can be measured by the criteria of sustainability, profitability and shareholder value generation.
· Growth does not necessary generate shareholder value.
· Successful corporate growth needs focus on and leadership in some core businesses.
· Success of failure in growth is not a matter of industry or size of the organization. It is, however, a matter of managerial decisions.
That sounds simple, but it is not. According to a study of Bain & Company, only a one out of seven organization manages to grow successfully.
Barriers to Growth
Barriers to successful corporate growth are complex. The main reason is a lack of a growth strategy – or failure to implement one. A poll from ADL and Fortune revealed that only about 25% of all respondents finally realized their intended strategies.
This allows two conclusions:
· Parts of the management have deficits, which prevent realization of the strategy. These deficits may base in communication or the inability to translate the overall vision and strategy into smaller steps and projects for particular divisions.
· In some companies, the whole planning process is little more than rubbish, since they fail to analyze their environment correctly and hence to develop appropriate projections and scenarios.
Moreover, there may be barriers to growth on operational levels:
· Lack of financial means or insufficient access to outside capital
· Lack of qualified staff / expertise
· Lack of preparation to take risks
· Lack of willingness and ability to change (“we always did it that way”)
· The “this is not invented here”-syndrome – the lack of willingness to take on external knowledge
Preconditions for Growth
The most important thing an organization should have is a strong core business. Such a core business has the following characteristics:
· It is a unique, profitable combination of strategic assets (e.g. equipment, intellectual property rights), skills and abilities (e.g. expert knowledge of workforce), products/services, and relations to external environment.
· It distinguishes the organization from its competitors.
· It enables the organization to serve a particular market segment with a perceived value added.
· It may be a single line of business or a combination of several divisions.
· It is the long-lasting major source of growth and value generation.
· It does not necessary contribute the largest proportion of revenues, but it does contribute the largest proportion of profits (A-product)
These characteristics of a core business reveal which further preconditions are needed in order to achieve growth:
· Development and implementation of a (growth)strategy
· Sound financial basis
· Ownership or development of two to three profitable core businesses
· Market leadership with these core businesses (even if it is in a narrow niche market)
· Management focus on these core businesses
· Continuous monitoring of external environment, early realization of and reactions to changes in the market
· Avoidance of unnecessary diversification into unknown businesses
The last point needs some explanation. Diversification into new businesses is not wrong in itself. Changes in the external environment may force the organization to explore new products in new markets. Management should however avoid looking for better prospects in unknown territory (here: business) only because they are not successful in their traditional fields.
The general message for corporate growth is:
Start with the exploitation of your existing competitive advantages.
http://www.themanager.org/Strategy/ManagingGrowthII.htm
According to Boston Consulting Group, of all the factors contributing to the fundamental value of a business, by far the most important is profitable growth. They estimate that it is responsible for between two-thirds and three-fourths of a company's TSR over the long term.
To support companies in planning for profitable growth, BCG helps companies determine the precise role that growth should play in their corporate strategies, identify the most promising growth opportunities, and set the appropriate balance between organic growth and growth by acquisition.
http://www.bcg.com/impact_expertise/practice_area.jsp?practice=38
What actually is (successful) growth?
What is growth? We can measure corporate growth with statistics about
· Revenue
· Profits
· Number of staff
· Number of subsidiaries.
There are several strategic options, how organizations can grow:
· Internal growth (e.g. entry in new markets, launch of new products)
· Mergers and acquisitions
· Joint ventures
· Leveraging (licensing, development of a network of franchise partners).
Successful growth fulfils the following criteria:
A growing organization should always generate value. Successful growth can be measured by the criteria of sustainability, profitability and shareholder value generation.
· Growth does not necessary generate shareholder value.
· Successful corporate growth needs focus on and leadership in some core businesses.
· Success of failure in growth is not a matter of industry or size of the organization. It is, however, a matter of managerial decisions.
That sounds simple, but it is not. According to a study of Bain & Company, only a one out of seven organization manages to grow successfully.
Barriers to Growth
Barriers to successful corporate growth are complex. The main reason is a lack of a growth strategy – or failure to implement one. A poll from ADL and Fortune revealed that only about 25% of all respondents finally realized their intended strategies.
This allows two conclusions:
· Parts of the management have deficits, which prevent realization of the strategy. These deficits may base in communication or the inability to translate the overall vision and strategy into smaller steps and projects for particular divisions.
· In some companies, the whole planning process is little more than rubbish, since they fail to analyze their environment correctly and hence to develop appropriate projections and scenarios.
Moreover, there may be barriers to growth on operational levels:
· Lack of financial means or insufficient access to outside capital
· Lack of qualified staff / expertise
· Lack of preparation to take risks
· Lack of willingness and ability to change (“we always did it that way”)
· The “this is not invented here”-syndrome – the lack of willingness to take on external knowledge
Preconditions for Growth
The most important thing an organization should have is a strong core business. Such a core business has the following characteristics:
· It is a unique, profitable combination of strategic assets (e.g. equipment, intellectual property rights), skills and abilities (e.g. expert knowledge of workforce), products/services, and relations to external environment.
· It distinguishes the organization from its competitors.
· It enables the organization to serve a particular market segment with a perceived value added.
· It may be a single line of business or a combination of several divisions.
· It is the long-lasting major source of growth and value generation.
· It does not necessary contribute the largest proportion of revenues, but it does contribute the largest proportion of profits (A-product)
These characteristics of a core business reveal which further preconditions are needed in order to achieve growth:
· Development and implementation of a (growth)strategy
· Sound financial basis
· Ownership or development of two to three profitable core businesses
· Market leadership with these core businesses (even if it is in a narrow niche market)
· Management focus on these core businesses
· Continuous monitoring of external environment, early realization of and reactions to changes in the market
· Avoidance of unnecessary diversification into unknown businesses
The last point needs some explanation. Diversification into new businesses is not wrong in itself. Changes in the external environment may force the organization to explore new products in new markets. Management should however avoid looking for better prospects in unknown territory (here: business) only because they are not successful in their traditional fields.
The general message for corporate growth is:
Start with the exploitation of your existing competitive advantages.
http://www.themanager.org/Strategy/ManagingGrowthII.htm
Subscribe to:
Posts (Atom)