To develop and implement the most effective strategy that would gain a firm competitive advantage, firms need to be aware ofthe resources they possess as well as their capabilities.In order to achieve this, firms have to carry outinternal analysis with the aim of identifyingitsunderlying strengths and weaknessesvis-à-visits resources and capabilities.
According to Johnson, Whittington, Scholes, Angwin, & Regner(2014), resources are the assets that firms have or call upon and form the basis of theircapabilities. They can be tangible or intangible.Tangible assets can be counted and quantified and observed such as financial assets, technological assets, physical assets, and organizational assets. Intangible assets are resources that exemplify a firm’s history and areaccrued over time. They include Brand value, relations, human resources, or distribution channels, and innovation. According toIreland, Hoskisson, & Hitt(2008), it is better for a firm to have intangible assets relative totangible assets. This is for the reason thatthey are lessdiscernible, and this makes it arduous for competing firms to analyze, imitate, purchase or substitute them. Ireland, Hoskisson, & Hitt(2008) further addsintangible assets can also be leveraged within a network of users to benefit each user. As such, a competitive advantage based on intangible resources is more strategic and sustainable.
Capabilities are the capacity of an organization to utilize its resources torealize specific organizational goals.They form the basis of an organization’s core competencies.They rest in the skills of the employees in a firm and their functional expertise.As such, human capital is critical in developing and collectively using capabilities.According toJohnson et al.,(2014), there are two forms of capabilities: Dynamic and strategic. Dynamic capabilities refer to a firms competence to recreate and renew its strategic capabilities in order to meet the needs of an increasingly dynamic environment. The concept of dynamic capabilities emphasizes that strategic capabilities need to correspondingly change as the environment and market context of a firm changes.That is, dynamic capabilities allow a firm to refashion its strategic capabilities to be in-synch with the changing environment.When a firm’s strategic resources and capabilities are combined to serve as sources of a firm’s competitive advantage, they make up a firm’s core competencies.Core competencies are the ways that a firm’s assets are deployed effectively, forming the foundation for the firm’s competitive advantages.Some of the features of core competencies include: they are acquiredover time, they are the specific activities that an organizations performs well relative to its competitors, and lastly, they represent only the resources and capabilities of a firm that bring strategic value to the firm.
Amason(2011),states that the resources and capabilities of a firm can afford a firm a strategic competitive advantage if they exhibitsome key characteristics. These are Valuable, Rarity, Costly to Imitate (Inimitability), and Non-Substitutable. The author states that firms that control resources that meet this VRIN criteriongain competitive advantage and hence generate more profitable transactions.Johnson et al.,(2014) replaced the Non-Substitutable Characteristic with Organization Support to have a VRIO Framework.
According to Amason(2011),the Valuablecapabilitiesrefers to resources that lead to profit-rendering transactions by creating products that have value to a customer. For example, a good location for a hotel could be a valuable resource as it provides customers with convenience. Valuable resources can be tangible as in the physical infrastructure, or intangible as in brand value. In both cases, the resources are valuable because they enable the creation and delivery of products and services that consumers find desirable and worthwhile. Rarity is the second critical capability that resources of an organization exhibit to gain a competitive advantage. It refers to the unique identity of a firm. Johnson et al.,(2014)defines it asthe capabilityof a firm’s resources to be uniquelypossessed by one firm.Firms that possess of this characteristic have a longer lasting competitive advantage. For example,firms that have patented their product.
Inimitabilityis the thirdcapability of a resource in the VRIL framework(Ireland, Hoskisson, & Hitt, 2008). It refers to the ability of a firm’s resources to be differentiated such that no competing firmcan produce a closely related quality of the good. They are difficult and costly to imitate or obtain or substitute by competing firms. However, it is worth noting that due to the increased use of the outsourcing strategy,manyfirms fail to gain competitive advantage through the inimitability capability as they opt to outsource to other firms, as such any other competing firm can access this capability making the firm lose on this competitive advantage.
Non-substitutabilitycapabilityrefers to resources that do not have strategic equivalents. For example, Apple’s products used to be superior. The resources used were rare and valuable. Since Apple kept the source code for its OS and engineering details secret, they were also difficult to imitate. These capabilities were employed to give Apple a competitive advantage. However, competitors were able to produce products that performed similarly to Apple products although different. Thus they became effective substitutes. As the substitutes became popular, Apples competitive advantage weakened. Thus, all the four characteristics of resources under the VRIL framework are critical if a firm is to maintain a competitive advantage in an industry.
The last characteristic that makes resources strategically valuable is Organization Support. It was identified by Johnson et al.,(2014) under their VRIO framework. They state that firmsmust also be strategicallymanaged to supplement theVRILcapabilities by utilizing aptorganizational systems and processes.That is, the mere possession of strategic resource does not make an organization capable. Much depends on their usage within an organization.
In conclusion, for any firm to possess a competitive advantage, it has to identify, develop, and leverage its resources and competencies essential for success, given the conditions of the industry and the environment. To accomplish this, firms must ensure that their resources exemplify the key characteristics identifiedunder the VRIN and VRIO framework. Achieving this will guarantee a firmcompetitive advantage that is both profitable and sustainable.
Cost Leadership Strategy
Cost leadership strategy is one where a firm seeks to operate its businesses with low cost, opening a cost advantage over competitors. It involves a firm setting a price that is lower than its competitors’. This is with the goal of gaining a larger market share. To employ this strategy, a firm must continuously drive its costs lower than competitors’ costs. The drivers of the cost leadership strategy include Input Factor costs, Economies of Learning, Economies of Scale, and Experience-Curve Effects. Successful use of the cost leadership strategy results when a firm continuously finds ways to reduce its value chain costs comparatively to its competitors. This involves discovering ways through which the primary and support activities in its value chain can be lowered with no loss its products functionality. With regards to the economies of learning and experience-curve effects driver, Firms implementing the cost leadership strategy aim at having strong process engineering skills, and places an emphasis on production activities that support efficiency and productivity (Ireland, Hoskisson, & Hitt, 2008). The strategy is also driven by managerial and organizational efficiency. The cost leadership strategy relies heavily on the analysis of the value chain to establish primary and support activities wherein product value can be created at minimal costs. In this strategy, a firm does not need to outperform competitors in every of the primary activities and support activities on the value chain.
Cost-leadership strategy is characterized by several features. They have a functional structure where authority is highly centralized in corporate staff. This is done to ensure that the firms’ products are manufactured at the lowest input costs. Under this strategy jobs are deeply specialized and homogenized to create efficiency. In addition, rules are highly formalized. This organizational structure ensures that efficiency is achieved and this allows a firm to keep its costs low. Further, the operations function of a firm is emphasized under this strategy. This is done to ensure that the firms’ product are being produced at low costs. There are many benefits associated with the cost leadership strategy. First, the firm is protected against the threat of entry of new firms due to economies of scale. Second, the firm benefits from protection against increases in input price which can be absorbed. Third, the firm, through absorption is shielded from decline in sales price. Fourth, a firm is shielded from substitutes by way of lowering prices futher. Lastly, a firm has protection against price wars for the reason that the lowest-cost firm will win. Similarly, the use of this strategy has two major risks. First, innovations by its competitors may empower competing firms to produce products at a cost lower than that of the costs leader, and secondly, to much emphasis on cost reduction may result to a cost leaders producing products at a low price to a market that is less inclined to buy them. This risks can have detrimental effects on a firms operation.
The differentiation strategy on the other hand is an action plan that a firm develops to produce products perceived to be unique. The firm’s ability to uniquely satisfy customer’s needs that competitors cannot, suggests that a premium price can be charged (Hill & Gareth R. Jones, 2011). The ability to increase revenue by charging premium prices allows a firm to better its competitors and obtain above average profits. Customers are willing to pay a higher price because they believe the products’ differentiated qualities are worth the difference (Schermerhorn, 2010). There are four key drivers of this strategy. These are: product differentiated features, quality customer service, customization to customers preferences and complements. The differentiation strategy is characterized by a functional organizational structure that places a lot of importance on the Marketing and Research and Development functions. Emphasis is placed on the Research and Development function to facilitate continuously product differentiation by way of innovation. The Marketing function is underscored to make potential customers aware of the distinctive and inimitable value of the firms’ products. Under this strategy, authority is highly decentralized and spread out to allow staff in personal contact with the customers decide how to differentiate the firm’s products. Jobs in this structure also have low specialization, and employees work without a large number of formal rules and processes. These characterizations enable employees to frequently communicate and coordinate their work. The differentiation strategy has several benefits associated with it. First, it gives a firm protection against new market entrantsowing toits intangible resources for instancecustomer service and brand. Secondly, it hassurety against input price increases which can be transferred to the customer. Thirdly, the strategy shields a firm from decrease in sales prices since differentiated goods are not perfect substitutes. Fourthly, this strategy has the advantage that due to the differential appeal, a firm is shielded from substitutes. Lastly, the strategy protects a firm from competitors, especially if the differential appeal of their products is enough to command premium price. The differentiation strategy is not without risk. First, the target customers may adjudge the differentiated features of a product are not worth the premium price charged. The second risk arises when the differentiating features of a product ceases to hold any value for the customers. Lastly, there is the risk that customers may weigh the relative benefits brought about by differentiation with a lower-cost alternative, and conclude that the opportunity cost of the differentiated product is now acceptable.
Challenges That Might Hamper The Repositioning
The Challenges that might hamper the reposition of a firm from a cost leadership strategy to differentiation strategy arises from the relative differences between the two strategies. While in cost leadership strategy authority is highly centralized around corporate staffs to efficiency is achieved, in differentiation strategy authority is distributed so that staff with personal contact with customer can decide how to differentiate the firm’s product. In a cost leadership strategy, jobs are highly specialized to increase efficiency, in differentiation strategy jobs have low specialization. This allows employees to produce products that are responsive to the needs of the customer. In cost leadership, there exists rules which have been highly formalized and procedures have been established. This is done to secure efficiency that help keep costs low. However, in differentiation strategy employed work without any rigid rules or processes. This is done with the goal of ensuring the employees frequently communicate and coordinate their work to ensure a good customer experience. Lastly, while cost leadership emphasized on the operations function of the firm to ensure products are being produced at the lowest possible cost, in differentiation strategy, the firm places a lot of importance on the Research and development and marketing functions. This is done to ensure that the products of the firm are continuously differentiated through innovation and customers are made aware of the distinctive value being created by the firm’s products. These differences between the cost leadership strategy and the differentiation strategy make it difficult for a firm to reposition itself from one strategy to the other.
Mergers and acquisitions describe various kinds of transactions for companies where whole entities or parts of it are the objects of purchase. A merger refers to a situation where two or more entities bring their businesses together. It involves a consolidation of two or more similar-sized independent companies where both companies pool together their resources into a large business with their individual shares being exchanged for shares in a new corporation (Thomas, 2009). A merger occurs when none of the business entities is perceived as acquired or the acquirer, both entities take part in the establishment of the management structure of the combined business and are the entities are similar in size such that none of them dominates when combined. Lastly, a merger involves a share swap as opposed to a cash payment. In contrast,acquisition involves a complete buyout of ownership of a company by another including management control. It is defined as a purchase of a company, a part of a company, majority or minority ownership. In acquisitions, a purchase is usually done (Ghauri & Hassan, 2014).
Types of M&A
Mergers and Acquisitions are categorized into four categories. This categorization is contingent on the degree to which the operations of the involved entities are related. These areHorizontal, Vertical, Conglomerate and Concentric (Cooper & Kusstatscher, 2005). Horizontal M&A joins firms in the same industry operating on the same value-added step. For example two direct competitors merging. The motive of Horizontal M&A is to expand market share, gain cost synergies and competitive advantages including economies of scope and scale. Vertical M&A bring together firms from successive processes within the same industry, but in different steps of the value chains. They refer to organizations in a supplier-customer relationship. Motives for this type of M&A are to extend the vertical integration within the value chain or to discard dependencies on supplier or customer. Conglomerate M&A occurs between companies in completely unrelated business fields. It involves entities that do not compete in the same market. They are often consequences of diversification strategies. They provide businesses with the option to have instant access to new markets. Entities engaged in Conglomerate M&A search for new business opportunities on new markets or try to lower their operational risk by diversification. Concentric is the last form of M&A. It results when firms operating in different but related industries combine. The motivation for Concentric M&A is for a firm to expand into a different field of business.
Motivation for M&A
Different businesses have different motivations for engaging in M&A. according to Cooper & Kusstatscher(2005), the most common motivation is gaining the synergy effects associated with M&A, and the economies of scope and scale. Synergy effects of M&A assure firms survival in a business environment that is increasing becoming dynamic and complex. The amalgamation of businesses facilitates centralization and rationalization of business activities. This results in more efficient use of common resources in sales, administration and production. It also results to cost cuttings and time saving. Other motives for M&A activities are grounded in managerial strategies. These include risk mitigation through product diversification, and acquiring each firm’s technology and market share. Other motivations for M&A is to attain the industry dominant position, and the power to influence the rules for antitrust and competition. value creation through cost cutting or out of added value as a result of increased scope are further motivations for M&A. For an acquired firm the main motivation for M&A is succesion or financial problems.It is worth noting that even external factors can be a motivation for M&A strategy. For example Market conditions that offer for sale more companies, eased government regulations, availability of capital, as well as the prospect to create a monopoly or get tax relief. Other motivating external factors include a desire to share risks, increased specialization, and inseparable problems. Other motivating factors according to Galpin(2012) include a fear of obsolescence, desire by shareholders to maximize value of a business, and management prestige. Additionally, some businessmanagement board might be looking for ‘excitement’, or satisfaction of ‘personal whims’.
Reasons for failures of Mergers and Acquisitions
Mergers and Acquisitions affect the organizational structures of the participating businesses. The new entity is obliged to consolidate its respective firms supply chain factors, shareholders, distributors, creditors, and retailers. It is also compelled to blend the incongruent corporate cultures of the different firms. The presence of all these dynamics in a population that previously had not experienced them forms the source of failures ofMergers and Acquisitions. Role stress, ambiguity, and conflict arise owing to the paucity of relevant information in the new entity, along with the level of complexity and change.
According to Cooper & Kusstatscher(2005), failure of M&A can be attributed to many reasons. The authors highlight some of the reason as poor selection decision, underprivileged due diligence analyses, lack of preplanning, financial and strategic incompetence or mismatch, and unforeseen changes in the market environment. Mellen & Evans(2010) identified additional reasons that cause M&A to fail. These the authors outlined asincompatible corporate cultures among the M&A partners, failure of the alliance to meet shareholders expectations, inadequate diligence by the entities, lack of a strategic rationale, impracticable expectations of synergies, and difficulty melding to partnering entities. Other causes of M&A failure are failure to implement the M&A effectively, inability to sustain financial performance, productivity loss, discordant M&A partners cultures, and clash in management styles (Ghauri & Hassan, 2014).
how to avoid failure of M&A
Based on identified causes of failure of M&A, many researchers have conducted studies to identify approaches which can be adopted to assist in decreasing the rising cases of failed M&A ventures. According to Thomas(2009) failure in M&A can be avoided by preparing well for the M&A. The authors highlight some elements that would help in ensuring a M&A is successful. They state that before the M&A entities should first design and manage the programme of activities to ensure delivery of the business case. Secondly, the entities must also understand the risks in the context of integration, and plan how they will engage the people in both companies to ensure a successful M&A.
Galpin(2012) suggests steps that would address the problem of a conflicting company culture. According to studies up to 80% of failures in M&A are caused by a culture clash between the involved entities. To avoid this challenge (Galpin, 2012) suggests that cultural due diligence needs to be conducted before the entities can merge. This the author states will identify potential avenues for cultural conflict bringing the two organizations cultures together to create a new culture for the new organization. The authors also suggest that increasing organization commitment of employees will ensure the success of the M&A. This is because most of the problems related to M&A integration involve the human resource. Achieving this will address common M&A challenges such as leadership and power struggles, low motivation, and increased dissatisfaction. M&A failure can also be minimized by Management monitoring multiple aspects of integration that are deemed critical to the success of the alliances (Ghauri & Hassan, 2014). These integration issues include consolidation of information systems, human resources and financial systems, product delivery systems, and pricing, promotion, and customer services policy. Achieving this will ensure that an M&A process goes well, and the new entity runs with minimal obstacles.
Mellen & Evans(2010) identified various strategies which can be adopted to prevent the failure of M&A alliances. The authors suggest that top management must make firm decisions and stick to them. Lastly, the buying entity must conduct a market analysis to identify the probable benefits of a M&A. It must also conduct a performance forecast to evaluate the relative feasibility of a M&A, and set in place a deal structure and terms to ensure that there will be no role conflict or conflict in the merging entities cultures.
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Cooper, C. L., & Kusstatscher, V. (2005). Managing Emotions in Mergers and Acquisitions. Northampton, MA: Edward Elgar Publishing.
Galpin, T. J. (2012). Redifining Due Diligence to Jump Start Effective Integration. In R. Gleich, T. Hasselbach, & G. Kierans, Value in Due Diligence: Contemporary Strategies for Merger and Acquisition Success (pp. 139-153). Burlington, VT: Gower Publishing.
Ghauri, P. N., & Hassan, I. (2014). Evaluating Companies for Mergers and Acquisitions. Warrington, UK: Emerald Group Publishing.
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