Term Paper on "Strategies in Action"

Term Paper 13 pages (3950 words) Sources: 20 Style: Harvard

[EXCERPT] . . . .

Businesses engaged in the 'transfer process must be careful in application of Western benchmarking criteria relating to performance, therefore the soft budget constraints imposed on local firms and their resultant excessive gearing through lending facilitated by local authorities looks a recipe for disaster when Western financial liquidity ratios are applied'. The characteristics pertaining to the entrepreneurial environment are molded by the processes of management at the local level. In this regard, the local government has experienced different issues i.e. 'fixing rates of taxation and finance but with substantial freedom' (Allan, 2003).

Alliance is explained as the coordination between two or more competent companies. It is believed that horizontal alliance will create negative impact on the competitive situation in the market, 'they frequently run afoul of regulatory officials' (Yang, 2005). The degree of concentration is on rise due to the horizontal alliances. Considering an example of Staples Inc., a retailer of office supplies acquired Office Depot i.e. giant retailer of office supplies as well. It was believed that the alliance will reduce the number of superstore competitors, as Staples will be the only product available in the market. The company's pricing data revealed that the Staples planned to establish their monopoly, and wanted to increase the prices of their product 13% after the alliance. The alliance was therefore criticized and blocked by the trading regulatory organizations, this saved 'consumers an estimated $1.1 billion over five years' (Yang, 2005), which otherwise would have been spent towards high prices.

The acquisition and alliance of the supplier with the reseller is regarded as vertical alliance. In the case of vertical alliance, both the parties are involved in buyer-seller relationship. The acquisition of the Medico Container Services by Merck is regarded as vertical alliance. The regulatory authorities have appreciated exercises of vertical alliances. It is expected that consumers are also able to benefit from the vertical alliances, because such activities i.e. The integration of the supply chain, increase the efficiencies, the prices stabilize and quality of the services also improve. The alliance of the Time Warner Inc. And Turner Corp., which are entirely different entertainment networks, has improved the services of the entertainment giants greatly. The regulatory authorities expressed their concerns that Time Warner after alliance will be reluctant to offer and sell its video programs to other competitors of the cable TV companies, and Turner Corp. will have extra benefit through such bargains of alliance, and Turner Corp. will be offered programming right at discriminatory rates, therefore both the companies will establish their monopolies against other competitors including Direct Broadcast Satellite and new wireless cable technologies. The regulatory authority also feared that the alliance will affect competition in the production of video programming; the alliance will allow Time-Turner to refuse the services of transmission by competitors. The regulatory authority therefore approved the alliance as it was likely to improve the services, but ' Direct Broadcast Satellite and new wireless cable technologies' (Yang, 2005).

R&D Alliances

The Corporate Diversification has been discussed in detail by the financial economists, the analysts are of the opinion that corporate diversification has lesser degree of favorable impact in judging the benefits of diversification for different reasons. The primary reason is that 'any diversification possibilities that corporations might have, will, in a perfect capital market, already have been exhausted through shareholders' individual portfolio choices' (Yang, 2005). The secondary reason is that the diversification discount i.e. The diversified corporations have the privilege to trade at discounted rates as compare to their non-diversified counterparts. It has been therefore concluded that corporate diversification is neutral, but has the potential to damage strategy. Surprisingly, the corporate diversification has been strong practice, 'At face value, diversification can be explained by the fact that when pooling income streams that are less than perfectly positively correlated, the resulting income stream is less volatile than were the constituent income streams' (Yang, 2005). The dilution of the risk factor therefore has the potential to be beneficial. The critics of the corporate diversification are of the opinion that any reduction that can be achieved through diversification, by any of the firm, 'can be replicated by the individual shareholders through an appropriately chosen portfolio'. The shareholders are expected to achieve more through cheap and economical diversification, as compare to the firm. It is believed that diversification reduced the exposure of the shareholders towards risk, therefore diversification is beneficial for the shareholders, 'the view of diversification as a means to decrease the exposure to the risk of shareholders is unnecessarily narrow in that corporate diversification and the resulting decrease in risk factor could increase the combined entity's debt capacity' (Montgomery, 1994). The major concern towards the debt capacity motive has been that it has suffered from drawbacks of the similar nature based on pure risk reduction motive. However, in perfectly functioning capital markets, the access to the credit for the firms is constrained and limited by the value of the project, therefore 'under the same conditions where the diversification neutrality result has bite, increasing debt capacity through diversification should not be a concern in the first place' (Yang, 2005). The important feature of the alliance and acquisition features has been its resemblance with the business cycle, the alliance and acquisition activities are positively related to the industrial output, business incorporations and further based on the reduction in interest rates. It has been examined that alliance activity is positively related to easing of financing constraints. The increase in the alliance activity is also based on the increase in the in collateral values (Schelling, 2000). Economists have proposed that reorganization possibilities due to the advent of technology have created focus of the corporate towards alliance and acquisition of corporate. Furthermore, overvaluation is also responsible for the increase in the alliance activity. In certain cases the economy which has poorly capitalized firms, seek assistance through financial intermediaries to that funds for particular project can be increased. The alliance or acquisition of unrelated firm is also expected to boost the debt capacity of the corporate. 'This means that the equilibrium extent of alliance activity is a function of the amount of funds available from financial intermediaries. In equilibrium, when intermediary capital is plentiful, more firms will become active in the economy, many of them becoming so by forming conglomerates' (Montgomery, 1994).

In recent past American companies experienced full-blown alliance mania, for last decade, every year has experienced greater level of alliance and acquisition activities. Although the market has experienced the negative fallout of the alliance activities, the companies and shareholders have suffered tremendous economical blow than expected, however the current corporate sector has completely ignored such facts and has planned further alliances in the years to come, the conglomerate deals of the 1960s and 1970s which was responsible for the emergence of the non-profitable companies including ITT Corp. And Litton Industries 'have been thoroughly discredited, and most of these behemoths have been broken up' (Tirole, 2005). In October 1989, the bankers fail to raise the funds for the 'ill-conceived buyout' of UAL Corp., the deal later collapsed and was responsible for causing severe blow to the stock market. The successful experience of the alliances started when Chemical Bank Corp. And Manufactures Hanover Corp. planned to alliance their finances and services, in 1991 both the corporate agreed to join in a $2.3 billion stock swap, the alliance was responsible for the establishment of the second largest banking company in America, after the alliance the corporate was able to produce $650 million in annual expense savings by the end of 1994. Once the alliance exercises turned profitable, it was regarded that, 'this was to be the era of strategic deals, friendly, intelligent, and relatively debt-free transactions done mostly as stock swaps, which were supposed to enrich share holders by producing synergies in which two plus two equals five or more' (Montgomery, 1994).

Dramatic Shift from Equity-Based Partnerships

It is further evident that the loans which appear in the balance sheet are 'tantamount to local authority equity', provided that the behavior of the authorities is precise and clear. In situations where close association exists between the authorities and the enterprises, such coordination provide the parties with relatively better understanding over western banker to decide over the issues pertaining to the future of the companies 'based on assessments of intangible assets'. It has been observed that the enterprises are assessed on western standards, ignoring the fundamentals of practices and behaviors.

The diversification of the stock portfolio is responsible for the reduction in the risk, as it minimizes the potential loss from any single stock. The observation is applicable in cases of alliances and acquisition, if the 'companies treated the businesses they acquire as investors treat stocks' (Montgomery, 1994), the failure to do so will lead towards the increase in the threshold of risk factor, in some of the cases the diversification of the business is considered to be risky activity. It is because the companies diversify on marginal basis, it is impossible for any of the corporate to diversify broadly… READ MORE

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