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Exam 4: Planning,developing Business,and Acquisition Plans: Phases 1 and 2 of the Acquisition Process

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Question 51

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The market or markets in which a firm chooses to compete should reflect the fit between the firm's primary strengths and its ability to satisfy customers needs better than the competition.

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Market segmentation involves identifying customers with common characteristics and needs.

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A cost leadership strategy can be highly destructive to the firm with the largest market share if pursued concurrently by a number of firms with very different market shares.

The joint venture may represent an attractive alternative to a merger or acquisition.

What is the core competence underlying Honda Corporation product offering?

Case Study Short Essay Examination Questions Maturing Businesses Strive to "Remake" Themselves-- UPS, Boise Cascade, and Microsoft UPS, Boise Cascade, and Microsoft are examples of firms that are seeking to redefine their business models due to a maturing of their core businesses. With its U.S. delivery business maturing, UPS has been feverishly trying to transform itself into a logistics expert. By the end of 2003, logistics services supplied to its customers accounted for $2.1 billion in revenue, about 6% of the firm's total sales. UPS is trying to leverage decades of experience managing its own global delivery network to manage its customer's distribution centers and warehouses. After having acquired the OfficeMax superstore chain in 2003, Boise Cascade announced the sale of its core paper and timber products operations in late 2004 to reduce its dependence on this highly cyclical business. Reflecting its new emphasis on distribution, the company changed its name to OfficeMax, Inc. Microsoft, after meteoric growth in its share price throughout the 1980s and 1990s, experienced little appreciation during the six-year period ending in 2006, despite a sizeable special dividend and periodic share buybacks during this period. Microsoft is seeking a vision of itself that motivates employees and excites shareholders. Steve Ballmer, Microsoft's CEO, sees innovation as the key. However, in spite of spending more than $4 billion annually on research and development, Microsoft seems to be more a product follower than a leader. : -In your opinion,what are the primary challenges for each of these firms with respect to their employees,customers, suppliers,and shareholders? Be specific.

A merger or acquisition is generally not considered an example of an implementation strategy.

Which of the following are components of a business strategy?

An acquisition plan is developed if management determines that an acquisition or merger is required to implement the firm's business strategy.

Resource limitations in developing the acquisition plan include money,borrowing capacity,as well as management time and skills.

Case Study Short Essay Examination Questions Nokia's Gamble to Dominate the Smartphone Market Falters The ultimate success or failure of any M&A transaction to satisfy expectations often is heavily dependent on the answer to a simple question. Was the justification for buying the target firm based on a sound business strategy? No matter how bold, innovative, or precedent-setting a bad strategy is, it is still a bad strategy. In a bold move that is reminiscent of the rollout of Linux, Nokia, a Finnish phone handset manufacturer, announced in mid-2008 that it had reached an agreement to acquire Symbian, its supplier of smartphone operating system software. Nokia also announced its intention to give away Symbian's software for free in response to Google's decision in December 2008 to offer its Android operating system at no cost to handset makers. ^{A smartphone is one device that can take care of all of the user's handheld computing and communication needs in a single handheld device.} This switch from a model in which developers had to pay a license fee to create devices using the Symbian operating system software to a free (open source) model was designed to supercharge the introduction of innovative handheld products that relied on Symbian software. Any individual or firm can use and modify the Symbian code for any purpose for free. In doing so, Nokia is hoping that a wave of new products using Symbian software would blunt the growth of Apple's proprietary system and Google's open source Android system. Nokia is seeking to establish an industry standard based on the Symbian software, using it as a platform for providing online services to smartphone users, such as music and photo sharing. According to Forrester Research, the market for such services is expected to reach $92 billion in 2012 (almost twice its size when Nokia acquired Symbian), with an increasing portion of these services delivered via smartphones. In its vision for the future, Nokia seems to be positioning itself as the premier supplier of online services to the smartphone market. Its business strategy or model is to dominate the smartphone market with handsets that rely on the Symbian operating system. Nokia hopes to exploit economies of scale by spreading any fixed cost associated with online services over an expanding customer base. Such fixed expenses could include a requirement by content service providers that Nokia pay a minimum level of royalties in addition to royalties that vary with usage. Similarly, the development cost incurred by service providers can be defrayed by selling into a growing customer base. The implementation strategy involved the acquisition of the leading supplier of handset operating systems and subsequently to give away the Symbian software free. The success or failure of this vision, business strategy, and implementation strategy depends on whether Symbian can do a better job of recruiting other handset makers, service providers, and consumers than Nokia's competitors. The strategy to date seems to be unraveling. At the time of the acquisition, Symbian supplied almost 60 percent of the operating system software for smartphones worldwide. Market researcher Ovum estimates that the firm's global market share fell to less than 50 percent in 2010 and predicts the figure could decline to one-third by 2015, reflecting the growing popularity of Google's Android software. Android has had excellent success in the U.S. market, leapfrogging over Apple's 24 percent share to capture 27 percent of the smartphone market, according to the NPD Group. Research-In-Motion (RIM), the maker of the Blackberry, remained the U.S. market share leader in 2010 at 33 percent. For more information, see ^{www.guardian.co.uk/business/2010/feb/04/symbian-smartphone-software-open-source}. Case Study Short Essay Examination Questions Dell Computer's Drive to Eliminate the Middleman Historically, personal computers were sold either through a direct sales force to businesses (e.g., IBM), through company-owned stores (e.g., Gateway), or through independent retail outlets and distributors to both businesses and consumers (e.g., CompUSA). Retail chains and distributors constituted a large percentage of the customer base of other PC manufacturers such as Compaq and Gateway. Consequently, most PC manufacturers were saddled with the large overhead expense associated with a direct sales force, a chain of company-owned stores, a demanding and complex distribution chain contributing a substantial percentage of revenue, or some combination of all three. Michael Dell, the founder of Dell Computer, saw an opportunity to take cost out of the distribution of PCs by circumventing the distributors and selling directly to the end user. Dell Computer introduced a dramatically new business model for selling personal computers directly to consumers. By starting with this model when the firm was formed, Dell did not have to worry about being in direct competition with its distribution chain. Dell has changed the basis of competition in the PC industry not only by shifting much of its direct order business to the internet but also by introducing made-to-order personal computers. Businesses and consumers can specify online the features and functions of a PC and pay by credit card. Dell assembles the PC only after the order is processed and the customer's credit card has been validated. This has the effect of increasing customer choice and convenience as well as dramatically reducing Dell's costs of carrying inventory. The Dell business model has evolved into one focused relentlessly on improving efficiency. The Dell model includes setting up super-efficient factories, keeping parts in inventory for only a few days before they are used, and selling computers based on common industry standards like Intel chips and Microsoft operating systems. By its nature, the Dell model requires aggressive expansion. As growth in the PC market slowed in the late 1990s, the personal computer became a commodity. Since computers had become so powerful, there was little need for consumers to upgrade to more powerful machines. To offset growth in its primary market, Dell undertook a furious strategy to extend the Dell brand name into related electronics markets. The firm started to sell "low end" servers to companies, networking gear, PDAs, portable digital music players, an online music store, flat-panel televisions, and printers. In late 2002, the firm began to sell computers through the retail middleman Costco. Michael Dell believes that every product should be profitable from the outset. His focus on operating profit margins has left little for product innovation. Dell's budget for new product R&D has averaged 1.3% of revenues in recent years, about one-fifth of what IBM and Hewlett-Packard spend. Rather than be viewed as a product innovator, Dell is pursuing a "fast follower" strategy in which the firm focuses on taking what is currently highly popular and making it better and cheaper than anyone else. While not a product innovator, Dell has succeeded in process innovation. The company has more than 550 business process patents, for everything from a method of using wireless networks in factories to a configuration of manufacturing stations that is four times as productive as a standard assembly line. Dell's expansion seems to be focused on its industry lead in process engineering and innovation resulting in super efficient factories. The current strategy seems to be to move into commodity markets, with standardized technology that is widely available. In such markets, the firm can apply its finely honed skills in discipline, speed, and efficiency. For markets that are becoming more commodity-like but still require some R&D, Dell takes on partners. For example, in the printer market, Dell is applying its brand name to Lexmark printers. In storage products, Dell has paired up with EMC Corp. to sell co-branded storage machines. As these markets become more commodity-like, Dell will take over manufacturing of these products. This is what happened at the end of 2003 when it took over production of low-end storage production from EMC. In doing so, Dell was able to cut production costs by 25%. The success of Michael Dell's business model is evident. Its share of the global PC market in 2003 topped 16%; the company accounts for more than one-third of the hand-held device market. At the end of 2003, Dell's price-to earnings ratio exceeded IBM, Microsoft, Wal-Mart, and General Electric. Dell has had some setbacks. In 2001, the firm scrapped a plan to enter the mobile-phone market; in 2002 Dell wrote off its only major acquisition, a storage-technology company purchased in 1999 for $340 million. Dell also withdrew from the high-end storage business, because it decided its technology was not ready for the market. Discussion Questions: -Who are Dell's primary customers? Current and potential competitors? Suppliers? How would you assess Dell's bargaining power with respect to its customers and suppliers? What are Dell's strengths/weaknesses versus it current competitors?

Case Study Short Essay Examination Questions Adobe's Acquisition of Omniture: Field of Dreams Marketing? On September 14, 2009, Adobe announced its acquisition of Omniture for $1.8 billion in cash or $21.50 per share. Adobe CEO Shantanu Narayen announced that the firm was pushing into new business at a time when customers were scaling back on purchases of the company's design software. Omniture would give Adobe a steady source of revenue and may mean investors would focus less on Adobe's ability to migrate its customers to product upgrades such as Adobe Creative Suite. Adobe's business strategy is to develop a new line of software that was compatible with Microsoft applications. As the world's largest developer of design software, Adobe licenses such software as Flash, Acrobat, Photoshop, and Creative Suite to website developers. Revenues grow as a result of increased market penetration and inducing current customers to upgrade to newer versions of the design software. In recent years, a business model has emerged in which customers can "rent" software applications for a specific time period by directly accessing the vendors' servers online or downloading the software to the customer's site. Moreover, software users have shown a tendency to buy from vendors with multiple product offerings to achieve better product compatibility. Omniture makes software designed to track the performance of websites and online advertising campaigns. Specifically, its Web analytic software allows its customers to measure the effectiveness of Adobe's content creation software. Advertising agencies and media companies use Omniture's software to analyze how consumers use websites. It competes with Google and other smaller participants. Omniture charges customers fees based on monthly website traffic, so sales are somewhat less sensitive than Adobe's. When the economy slows, Adobe has to rely on squeezing more revenue from existing customers. Omniture benefits from the takeover by gaining access to Adobe customers in different geographic areas and more capital for future product development. With annual revenues of more than $3 billion, Adobe is almost ten times the size of Omniture. Immediately following the announcement, Adobe's stock fell 5.6 percent to $33.62, after having gained about 67 percent since the beginning of 2009. In contrast, Omniture shares jumped 25 percent to $21.63, slightly above the offer price of $21.50 per share. While Omniture's share price move reflected the significant premium of the offer price over the firm's preannouncement share price, the extent to which investors punished Adobe reflected widespread unease with the transaction. Investors seem to be questioning the price paid for Omniture, whether the acquisition would actually accelerate and sustain revenue growth, the impact on the future cyclicality of the combined businesses, the ability to effectively integrate the two firms, and the potential profitability of future revenue growth. Each of these factors is considered next. Adobe paid 18 times projected 2010 earnings before interest, taxes, depreciation, and amortization, a proxy for operating cash flow. Considering that other Web acquisitions were taking place at much lower multiples, investors reasoned that Adobe had little margin for error. If all went according to plan, the firm would earn an appropriate return on its investment. However, the likelihood of any plan being executed flawlessly is problematic. Adobe anticipates that the acquisition will expand its addressable market and growth potential. Adobe anticipates significant cross-selling opportunities in which Omniture products can be sold to Adobe customers. With its much larger customer base, this could represent a substantial new outlet for Omniture products. The presumption is that by combining the two firms, Adobe will be able to deliver more value to its customers. Adobe plans to merge its programs that create content for websites with Omniture's technology. For designers, developers, and online marketers, Adobe believes that integrated development software will streamline the creation and delivery of relevant content and applications. The size of the market for such software is difficult to gauge. Not all of Adobe's customers will require the additional functionality that would be offered. Google Analytic Services, offered free of charge, has put significant pressure on Omniture's earnings. However, firms with large advertising budgets are less likely to rely on the viability of free analytic services. Adobe also is attempting to diversify into less cyclical businesses. However, both Adobe and Omniture are impacted by fluctuations in the volume of retail spending. Less retail spending implies fewer new websites and upgrades to existing websites, which directly impacts Adobe's design software business, and less advertising and retail activity on electronic commerce sites negatively impacts Omniture's revenues. Omniture receives fees based on the volume of activity on a customer's site. Integrating the Omniture measurement capabilities into Adobe software design products and cross-selling Omniture products into the Adobe customer base require excellent coordination and cooperation between Adobe and Omniture managers and employees. Achieving such cooperation often is a major undertaking, especially when the Omniture shareholders, many of whom were employees, were paid in cash. The use of Adobe stock would have given them additional impetus to achieve these synergies in order to boost the value of their shares. Achieving cooperation may be slowed by the lack of organizational integration of Omniture into Adobe. Omniture will become a new business unit within Adobe, with Omniture's CEO, Josh James, joining Adobe as a senior vice president of the new business unit. He will report to Narayen. This arrangement may have been made to preserve Omniture's corporate culture. Adobe is betting that the potential increase in revenues will grow profits of the combined firms despite Omniture's lower margins. Whether the acquisition will contribute to overall profit growth depends on which products contribute to future revenue growth. The lower margins associated with Omniture's products would slow overall profit growth if the future growth in revenue came largely from Omniture's Web analytic products. -What factors external to Adobe and Omniture seem to be driving the transaction? Be specific.

Stakeholders include which of the following groups?

Case Study Short Essay Examination Questions Oracle Continues Its Efforts to Consolidate the Software Industry Oracle CEO Larry Ellison continued his effort to implement his software industry strategy when he announced the acquisition of Siebel Systems Inc. for $5.85 billion in stock and cash on September 13, 2005. The global software industry includes hundreds of firms. During the first nine months of 2005, Oracle had closed seven acquisitions, including its recently completed $10.6 billion hostile takeover of PeopleSoft. In each case, Oracle realized substantial cost savings by terminating duplicate employees and related overhead expenses. The Siebel acquisition accelerates the drive by Oracle to overtake SAP as the world's largest maker of business applications software, which automates a wide range of administrative tasks. The consolidation strategy seeks to add the existing business of a competitor, while broadening the customer base for Oracle's existing product offering. Siebel, founded by Ellison's one-time protégé turned bitter rival, Tom Siebel, gained prominence in Silicon Valley in the late 1990s as a leader in customer relationship management (CRM) software. CRM software helps firms track sales, customer service, and marketing functions. Siebel's dominance of this market has since eroded amidst complaints that the software was complicated and expensive to install. Moreover, Siebel ignored customer requests to deliver the software via the Internet. Also, aggressive rivals, like SAP and online upstart Salesforce.com have cut into Siebel's business in recent years with simpler offerings. Siebel's annual revenue had plunged from about $2.1 billion in 2001 to $1.3 billion in 2004. In the past, Mr. Ellison attempted to hasten Siebel's demise, declaring in 2003 that Siebel would vanish and putting pressure on the smaller company by revealing he had held takeover talks with the firm's CEO, Thomas Siebel. Ellison's public announcement of these talks heightened the personal enmity between the two CEOs, making Siebel an unwilling seller. Oracle's intensifying focus on business applications software largely reflects the slowing growth of its database product line, which accounts for more than three fourths of the company's sales. Siebel's technology and deep customer relationships give Oracle a competitive software bundle that includes a database, middleware (i.e., software that helps a variety of applications work together as if they were a single system), and high-quality customer relationship management software. The acquisition also deprives Oracle competitors, such as IBM, of customers for their services business. Customers, who once bought the so-called best-of-breed products, now seek a single supplier to provide programs that work well together. Oracle pledged to deliver an integrated suite of applications by 2007. What brought Oracle and Siebel together in the past was a shift in market dynamics. The customer and the partner community is communicating quite clearly that they are looking for an integrated set of products. Germany's SAP, Oracle's major competitor in the business applications software market, played down the impact of the merger, saying they had no reason to react and described any deals SAP is likely to make as "targeted, fill-in acquisitions." For IBM, the Siebel deal raised concerns about the computer giant's partners falling under the control of a competitor. IBM and Oracle compete fiercely in the database software market. Siebel has worked closely with IBM, as did PeopleSoft and J.D. Edwards, which had been purchased by PeopleSoft shortly before its acquisition by Oracle. Retek, another major partner of IBM, had also been recently acquired by Oracle. IBM had declared its strategy to be a key partner to thousands of software vendors and that it would continue to provide customers with IBM hardware, middleware, and other applications. : -How would you characterize the Oracle business strategy (i.e.,cost leadership,differentiation,niche,or some combination of all three)? Explain your answer.

A diversification strategy involves a firm moving into only those businesses which are unrelated to the firm's current core business.

Potential competitors include firms (both domestic and foreign)in the current market,those in related markets,current customers,and current suppliers.

A planning-based acquisition process consists of both a business plan and acquisition plan,which drive all subsequent phases of the acquisition process.

The implementation strategy refers to the way in which a firm chooses to implement its business strategy.

A collection of markets is said to comprise an industry.

An analysis of markets should involve current and potential customers,as well as current and potential competitors,but it should exclude suppliers.