In order to stay competitive and/or achieve a better position in the market, organisations look to change their scope; whether that be to increase or decrease it, there are many ways of adjusting this. They can change:
Scope of Firm
– Breadth of internal activities, product and service offerings, and geographic market presence.
Horizontal Scope
– Range of product and service segments.
Vertical Scope – Extent of activities that encompass their value chain.
(Thompson et al., 2017)
There are three ways in which an organisation changes their scope, each comes with its own problems and positives, and with the challenge to choose the best one moving forwards. As the title of this paper suggests, the three options for organisations are to either acquire, ally or grow organically, and in turn I will discuss the pros and cons of each. Many companies do not take the time to weigh up the pros and cons of each and view them as interchangeable, which could be argued to be one of the reasons so many fail year on year (Dyer, Kale & Singh, 2004).
Acquisitions
Under this title there are two actions a company can take:
Merger
– The combination of two or more companies into a single corporate entity (Thompson et al., 2017)
Acquisition
– Where a target firm surrenders its ownership and control to the acquirer (Tseng, 2017)
Although at their core mergers and acquisitions (M&As) are different actions, the similarities between them mean that they are referred to in the same statements for the majority of the time. The key focal point is between whether they merge or acquire horizontally or vertically.
M&As that are horizontal occur between organisations within the same general industry ("Horizontal Merger", n.d.). This has the ability to strengthen their competitiveness via efficiency of operations, product differentiation, reducing rivalry, increasing bargaining power and enhancing dynamic capabilities, but it isn’t without risks (Thompson et al., 2017). A high percentage of M&As fail and there are many reasons for this, such as cost savings being smaller than expected or differences in management styles proving hard to resolve (Thompson et al., 2017).
M&As that are vertical occur along the organisation’s value chain and can either be forward (moving towards the end consumer) or backward (moving towards the suppliers and raw materials) ("Vertical Merger", 2017). It is an art that is harder to perfect when compared with horizontal M&As; they only make strategic sense if they reduce costs and/or create a differentiation-based advantage, but due to the drawbacks such as vulnerability to technological changes, higher business risk and potential for channel conflict, it is unlikely to ultimately be a positive move for the organisation (Thompson et al., 2017).
In 2016, the total M&As around the globe were valued at approximately $3.7 trillion (Arcano & Kennedy, 2017) proving the popularity of the method for increasing the scope of organisations. However, with the resulting rate of failure being so high, it begs the question whether more consideration is required over whether such a decision is wise when measured against the other options.
Alliances
A strategic alliance, unlike M&As, narrows the scope of an organisation’s operations, with a common strategy being developed between the organisations and the pooling of their resources, risks and investments ("Strategic alliance", 2009). Alliances can involve contractual agreements but lack formal ownership, unless engaging in a joint venture wherein the participating organisations create an independent corporate entity which they both own and control (Thompson et al., 2017). Wakeham (2003) has come up with 5 factors that make an alliance a strategic choice:
1. It helps build, sustain or enhance a core competence or competitive advantage
2. It helps block a competitive threat
3. It increases the bargaining power of alliance members over suppliers or buyers
4. It helps open up important new market opportunities
5. It mitigates a significant risk to a company’s business
The acknowledgement of a strategic alliance over a convenient one is important in the comparison between acquisitions, alliances and organic growth, as to choose between them would mean the organisation was making a strategic move.
There are strong advantages to alliances. They lower investment costs/risks, are flexible and responsive to change, and they are rapidly deployed. However, they aren’t without pitfalls; there can be management integration problems, a poor fit of resources and capabilities, an organisation can grow to be dependent on another, and the companies will be sharing their knowledge base, technologies and trade secrets (Thompson et al., 2017). In a study conducted by the CMO Council, 85% of respondents claimed that alliances were essential or important to their business, proving their popularity, yet unexpectedly they had a 60% failure rate (Whitler, 2014). This once again raises the question of whether organisations need to be more aware of different avenues they could possibly take when trying to change their scope, which may be more suitable to their position and objectives.
Organic Growth
This is strengthening a company using its own energy and resources. Despite being slower than the other strategic options, it involves lower upfront costs, and can therefore be seen as favourable (Mack, n.d.). Large enterprises use corporate venturing – “the process of developing new businesses as an outgrowth of an organization’s established business operations” – to achieve organic growth (Thompson et al., 2017). These are short ventures, generally lasting around a year, but can move faster, more flexibly, and more cheaply to help an organisation respond to changes in technologies and business models (Lerner, 2013).
Corporate venturing’s success is dependent on six points:
1. Parent organisation holding most/all skills and resources required
2. Ample time to launch business
3. Cost of entry lower than cost of entry via acquisition
4. Industry populated with many small firms rather than powerful rivals
5. Will not adversely impact supply-demand balance in industry
6. Firms in market likely to be slow to react to new competition
(Jemison & Haspeslagh, 1991)
Even with this knowledge, the risk of failure is high and it is worth noting that corporate ventures do not usually produce hoped-for results (McGrath, Keil &Tukiainen, 2006). If executed effectively then results can be substantial, but it is “a time-consuming and uncertain process” and should therefore to be followed with caution (Thompson et al., 2017). There is certainly a time and place for organic growth and corporate venturing and so should be considered when discussing how to change the scope of an organisation.
How to decide
As mentioned before, most companies do not put in the time and effort to research the differences of these avenues for growth and, especially in the case of M&As and alliances, they see them as interchangeable (Dyer, Kale & Singh, 2004). When asked about their last acquisition, 76% of 200 U.S. companies said that they didn’t even consider an alliance (Dyer, Kale & Singh, 2004), which could be part of the reason why “more than 60% destroy shareholder value” (KcKone & Lewis, 2016). There is a lot of scholarly information available regarding when to use which strategy in order to reduce chances of failure, but it appears that organisations do not pay attention to this, which seems very counter-intuitive. Even at a basic level, M&As and alliances have different advantages; for example, M&As help obtain desired knowhow, whilst alliances help more to buffer the interfirm conflicts (Tseng, 2017), so the view of them being interchangeable decisions is naïve.
The literature praises the importance of combining both subjective and objective evaluations (Tseng, 2017) before making the decision of which avenue to take, in order to make the best decision possible. There is no fool-proof formula that will make the choice for you because different industries perform in different ways, therefore a decision between M&As, alliances and organic growth may differ across industries (Yin & Shanley, 2008). A lot of businesses believe they perform acquisitions better than alliances, and hence favour them, but for better competitive advantage, knowing when to use a different strategy may be more beneficial than the execution of the strategy itself (Dyer, Kale & Singh, 2004).
Categorisation is one way that managers can help make a more informed decision. One straightforward example is splitting between high and low requirements of flexibility and commitment, wherein joint ventures are more likely in high commitment industries (Yin & Shanley, 2008). Another example would be to examine the high and low levels of technological capabilities, financial capital and networking capabilities to help come to a conclusion (Chen, Zou & Wang, 2009). Although not an exact science, as it is possible through creative contracting for an alliance to mimic an acquisition in the level of control required (Yin & Shanley, 2008), these categorisation frameworks will help point managers in the right direction.
A mistake that managers of larger organisations seem to also make is treating decisions like this as a singular event when, if they looked at the wider picture, they could see the greater effect of multiple decisions. Engaging in a mixture of ventures, including both vertical and horizontal acquisitions, generates diversity and synergistic discoveries, which leads to more important and valuable discoveries (Mishra & Slotegraaf, 2013). Between 1993 and 2003, Cisco successfully acquired 36 firms and entered into upward of 100 alliances, bucking the trend of an extremely high failure rate and proving that with some thought not only can you succeed with an alliance or M&A, but with multiple at the same time (Dyer, Kale & Singh, 2004). Cisco’s secret appears to be having one person in charge of M&A, strategic alliances and technology innovation, meaning they are “able to look internally first, and then, if there are no viable options for meeting its objectives, consider either an alliance or an acquisition” (Dyer, Kale & Singh, 2004). This centralisation of power means that they have the full picture of the environment and situation, enabling them to make a successful and effective decision.
Knowledge is power and in the case of deciding between acquisitions, alliances and organic growth, it has proven no different. Most managers appear to be uneducated in this field and like to stick to strategies they know well and are comfortable with (Dyer, Kale & Singh, 2004). However, in order to successfully change the scope of their organisation they may have to extend beyond their comfort zone. Cisco has been extremely successful within this field, proving that it is possible and if organisations are willing to invest time and money into a certain venture, it makes logical sense for them to put some time and effort into making sure it is the correct venture for them.
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