ALTERNATIVE METHODS OF STRATEGY DEVELOPMENT

Internal Development
Many companies use internal development as their primary method of strategy development.
They prefer to expand by adding to the list of products or services they are offering, rather
than trying to expand the territory in which they operate.
Their strategy is based on the assumption that, by offering customers a wide range of
products, there is more likelihood that they will buy your products rather than go to a
competitor.
Examples of internal development are often found in the food industry, especially in
confectionery, where new chocolate products arrive with regularity, and in frozen food
companies, where new frozen meals are often introduced.
The advantages of this method of development include:

the ease with which new products can be added to companies' lists;

the fact that the existing sales force can just add the new line to their product list;

no special distribution facilities need to be set up;

there is no need for different paperwork;

the chance of success should be high, since the company knows the market.

However, there are also some disadvantages to note in the form of:

high development costs even for a new bar of chocolate;

high set-up costs, particularly if extra plant and machinery are required; the cost of
advertising and sales promotion.

At the end of the day, there is no guarantee that the product will be successful. It is thought
that about 80% of new products are abandoned soon after they have been brought to the
market, and a lot of them do not even get that far.

Mergers and Acquisitions

Mergers may take place in a number of ways, for example by one company acquiring the
other company's assets by paying cash or shares or both. In addition mergers may take
many forms, from concentric (between firms in the same market) through to conglomerate
(between firms in different markets).
Reasons for mergers are likewise varied, but the main causes of mergers are as follows:

A Quick Way to Growth

For a variety of reasons high rates of growth are popular with strategic planners.
Mergers represent one of the quickest possible ways to achieve this growth.
Company sales, market share, and asset value, etc can all be increased via merger
activity at a speed which would be virtually impossible using organic growth. In times
of economic stagnation or recession in particular mergers may represent the only way
to achieve growth. Sony and Ericsson are a good example of this reason for merging.

Access to Managerial Skills/Resources

Many new companies are initially successful because of the entrepreneurial skills of
their founders. However, as they grow beyond this initial stage these companies often
find that they lack the managerial skills and/or financial and other resources to grow
further. Sometimes the only way forward is to seek a merger with a larger partner who
can provide these necessary skills and resources.

A good example of a company looking to acquire the necessary skills and resources
through merger was the coming together of Swatch and Mercedes to produce a small,
town-based car.

Increased Market Share/Market Power

One of the most frequent reasons for mergers is to gain market share and thereby
increase market power. Normally horizontal mergers are the route for achieving this.
Buying market share in this way may be a much cheaper (and, as we saw earlier, a
much quicker) route to increasing market share than by alternative methods. There
may be several reasons for wanting to increase market share, but a major one is that
greater market share leads to greater market power and hence increased levels of
profitability. This motive has underpinned the merger strategies of many of the world's
automotive manufacturers in recent years.

Economies of Scale
Another way mergers can lead to higher profits is by reducing costs. Increased size
may give rise to economies of scale in manufacturing, purchasing, and marketing.
Sometimes, unless a company reaches a certain minimum size or "critical mass", it
can never hope to compete effectively in the market place. Pharmaceuticals and
airlines are examples of industries where there is potential for economies of scale
through merger.

Risk Reduction
One motive for pursuing a conglomerate merger strategy (i.e. merging with companies
in unrelated product/market areas) can be to reduce market risks. If a company can
build a portfolio of disparate businesses it reduces the risks of overall corporate failure
by spreading its interests across several markets/industries. Caterpillar and CocaCola are both examples of companies who have pursued mergers for this reason.

Synergy
One of the most frequently quoted reasons for mergers is to achieve the benefits of
synergy. Put simply, the notion of synergy is that by combining two parts (or
businesses) the sum of this combination will be stronger and more effective than the
sum of the previously individual parts (or businesses). Virgin is a company that has
achieved synergies through merger activity.