Strategic fit

Last updated

Strategic fit expresses the degree to which an organization is matching its resources and capabilities with the opportunities in the external environment. The matching takes place through strategy and it is therefore vital that the company has the actual resources and capabilities to execute and support the strategy. Strategic fit can be used actively to evaluate the current strategic situation of a company as well as opportunities such as mergers and acquisitions (M&A) and divestitures of organizational divisions. Strategic fit is related to the resource-based view of the firm which suggests that the key to profitability is not only through positioning and industry selection but rather through an internal focus which seeks to utilize the unique characteristics of the company's portfolio of resources and capabilities. [1] A unique combination of resources and capabilities can eventually be developed into a competitive advantage which the company can profit from. However, it is important to differentiate between resources and capabilities. Resources relate to the inputs to production owned by the company, whereas capabilities describe the accumulation of learning the company possesses.

Class

Resources can be classified both as tangible and intangible:

Tangible:

Intangible:

Several tools have been developed one can use in order to analyze the resources and capabilities of a company. These include SWOT, value chain analysis, cash flow analysis and more. Benchmarking with relevant peers is a tool to assess the relative strengths of the resources and capabilities of the company compared to its competitors.

Strategic fit can also be used to evaluate specific opportunities like M&A opportunities. The strategic fit would, in this case, refer to how well the potential acquisition fits with the planned direction (strategy) of the acquiring company. In order to justify growth through M&A transactions the transaction should yield a better return than organic growth. The differential efficiency theory states that the acquiring firm will be able to increase its efficiency in the areas where the acquired firm is superior. In addition, the theory argues that M&A transactions give the acquiring firm the possibility of achieving positive synergy effects meaning that the two merged companies are worth more together than the sums of their parts individually. [2] This is because merging companies may enjoy from economies of scale and economies of scope. However, in reality, many M&A transactions fail due to different factors, one of them being lack of strategic fit. A CEO survey conducted by Bain & Company in 1997 showed that 94% of the interviewed CEO's considered the strategic fit to be vitally influential in the success or failure of an acquisition. [3] A high degree of strategic fit from can potentially yield many benefits for an organization. Best case scenario a high degree of strategic fit may be the key to a successful merger, an efficient organization, synergy effects or cost reductions. It is a vital term and it should be taken into consideration when evaluating a company's strategy and opportunities.

Related Research Articles

<span class="mw-page-title-main">Mergers and acquisitions</span> Type of corporate transaction

Mergers and acquisitions (M&A) are business transactions in which the ownership of companies, other business organizations, or their operating units are transferred to or consolidated with another company or business organization. As an aspect of strategic management, M&A can allow enterprises to grow or downsize, and change the nature of their business or competitive position.

Corporate development refers to the planning and execution of strategies to meet organizational objectives. The kinds of activities falling under corporate development may include management team recruitment, phasing in or out of markets or products, arranging strategic alliances, identifying and acquiring companies (M&A), securing corporate financing, divesting of assets or divisions, and management of intellectual property.

In the field of management, strategic management involves the formulation and implementation of the major goals and initiatives taken by an organization's managers on behalf of stakeholders, based on consideration of resources and an assessment of the internal and external environments in which the organization operates. Strategic management provides overall direction to an enterprise and involves specifying the organization's objectives, developing policies and plans to achieve those objectives, and then allocating resources to implement the plans. Academics and practicing managers have developed numerous models and frameworks to assist in strategic decision-making in the context of complex environments and competitive dynamics. Strategic management is not static in nature; the models can include a feedback loop to monitor execution and to inform the next round of planning.

Marketing management is the organizational discipline which focuses on the practical application of marketing orientation, techniques and methods inside enterprises and organizations and on the management of a firm's marketing resources and activities.

A core competency is a concept in management theory introduced by C. K. Prahalad and Gary Hamel. It can be defined as "a harmonized combination of multiple resources and skills that distinguish a firm in the marketplace" and therefore are the foundation of companies' competitiveness.

The word ‘dynamics’ appears frequently in discussions and writing about strategy, and is used in two distinct, though equally important senses.

Marketing strategy is a process that can allow an organization to concentrate its limited resources on the greatest opportunities to increase sales and achieve a sustainable competitive advantage.

A strategic alliance is an agreement between two or more parties to pursue a set of agreed upon objectives needed while remaining independent organizations.

A value network is a graphical illustration of social and technical resources within/between organizations and how they are utilized. The nodes in a value network represent people or, more abstractly, roles. The nodes are connected by interactions that represent deliverables. These deliverables can be objects, knowledge or money. Value networks record interdependence. They account for the worth of products and services. Companies have both internal and external value networks.

VRIO is a business analysis framework that forms part of a firm's larger strategic scheme. The basic strategic process that any firm begins with a vision statement, and continues on through objectives, internal & external analysis, strategic choices, and strategic implementation. The firm will hope that this process results in a competitive advantage in the marketplace they operate in.

The resource-based view (RBV) is a managerial framework used to determine the strategic resources a firm can exploit to achieve sustainable competitive advantage.

Growth platforms are specific initiatives selected by a business organization to increase their revenue and earnings growth. There are two types of growth platforms: strategic or tactical. Strategic growth platforms usually take from 3 to 6 years to implement and give the desired results being long term initiatives. On the other hand, Tactical growth platforms take less time to implement as they are shorter term initiatives and both the initiative and the results are based on the current budget year of the particular business.

In marketing, a company’s value proposition is the full mix of benefits or economic value which it promises to deliver to the current and future customers who will buy their products and/or services. It is part of a company's overall marketing strategy which differentiates its brand and fully positions it in the market. A value proposition can apply to an entire organization, or parts thereof, or customer accounts, or products or services.

Corporate synergy refers to a financial benefit that a corporation expects to realize when it merges with or acquires another corporation. Corporate synergy occurs when corporations interact congruently with one another, creating additional value. Synergies are divided into two groups: operational and financial. Seeking for synergies is a nearly ubiquitous feature and motivation of corporate mergers and acquisitions and is an important negotiating point between the buyer and seller that impacts the final price both parties agree to. The synergy value should not be confused with the control premium; these metrics should be calculated separately.

Post-merger integration or PMI is a complex process of combining and rearranging businesses to materialize potential efficiencies and synergies that usually motivate mergers and acquisitions. The PMI is a critical aspect of mergers; it involves combining the original logistical-socio-technical systems of the merging organizations into one newly combined system.

A chief strategy officer (CSO) is an executive, that usually reports to the CEO, and has primary responsibility for strategy formulation and management, including developing the corporate vision and strategy, overseeing strategic planning, and leading strategic initiatives, including M&A, transformation, partnerships, and cost reduction. Some companies give the title of Chief Strategist or Chief Business Officer to its senior executives who are holding the top strategy role.

Management due diligence is the process of appraising a company's senior management—evaluating each individual's effectiveness in contributing to the organization's strategic objectives.

For international trade, Foreign market entry modes are the ways in which a company can expand its services into a non-domestic market.

Capability management is the approach to the management of an organization, typically a business organization or firm, based on the "theory of the firm" as a collection of capabilities that may be exercised to earn revenues in the marketplace and compete with other firms in the industry. Capability management seeks to manage the stock of capabilities within the firm to ensure its position in the industry and its ongoing profitability and survival.

<span class="mw-page-title-main">Jay Barney</span> American professor (born 1954)

Jay B. Barney is an American professor in strategic management at the University of Utah,

References

  1. Grant, Robert M. (1998). "Analyzing resources and capabilities" . Contemporary Strategy Analysis: Concepts, Techniques, Applications (3rd ed.). Malden, MA: Blackwell. pp.  105–140. ISBN   0631207805. OCLC   38120557.
  2. Ivey Management Services (1995) "A note on mergers and acquisitions and valuation", Ivey
  3. Harris, Elizabeth (1 January 1997). "CEO Survey: Mergers & Acquisitions – the 1997 Business Week Symposium of CEOs". www.bain.com.