Strategies for entry into new agribusiness

BY- A RAJ SHRAVANTHI10-501-001

Strategies For Entry Into New Agribusiness

Introduction

Factors important to the success or failure of a particular

entry move include economic principles apart from all

human, organizational, financial, legal and administrative

factors.

The economics of entry rests on some fundamental

market forces

In economist’s sense-

if these forces work perfectly= entry not possible

Not working perfectly= entry possible

Methods of entry

Entry through Internal Development

Entry through Acquisition

Sequenced entry

Entry through Internal Development

Also called internal entrant

It involves creation of new business entity in

an industry including new production

capacity, distribution relationships, sales

force etc

Joint venture

Advantages & Disadvantages of Joint ventures

Advantages

Acquire competencies or

skills not available in-house

When market needs to be

penetrated quickly, eg. when

competitive entry is

imminent or technological

change is very rapid

Spread the risk of a large

project over more than one

firm

Enable faster entry and

payback

Avoid tariff barriers and

satisfy local content

requirements

Disadvantages

Partners do not have full

control of management

May be impossible to

recover capital invested

Disagreement on new export

markets Partners may have

different views on expected

benefits .

Entry Barriers

2 entry barriers in an industry:

Structural entry barriers (investment & start

up losses)

Expected reaction of incumbent firm(eg:

lowering prices)

Various costs involved

Investment costs – manufacturing facilities &

inventory

Additional investment – brand identification &

proprietary technology

Expected cost from incumbents’ retaliation –

lower prices & escalated marketing costs

Expected cash flows from being in the industry

Factors often neglected in entry decisions

Costs usually considered by internal entrants include- constructing

manufacturing facilities and assembling sales force

Costs usually neglected – costs for overcoming SEB like brand franchise,

distribution channels tied up by competitors , competitors access to the

most favorable sources of raw material

Entrants new capacity

Impact of the probable reactions of existing firms

shaving prices- entry by Georgia- pacific in gypsum industry disrupted prices

Escalation in marketing activities, special promotions, extension of warranty

terms, easier credit & product quality improvements

Excessive capacity expansion

Will retaliation occur?

Internal entry will harm future prospects in the following kinds of

industries:

Slow growing market- vigorous retaliation

Commodity / commodity like products

High fixed costs

High industry concentration

Incumbents who attach high strategic importance to their position

in the business- sharp retaliation.

Attitudes of incumbent management

Identifying target industries for internal entry

Industry in disequilibrium

New industries

Rising entry barriers

Poor information

Slow or ineffectual retaliation from incumbents may be expected (niche

markets-ice-creams)

The firm has lower entry costs than other firms (eg: Nokia, general

motors, John Deere’s)

The firm has distinctive ability to influence the industry structure (like

good distribution channel , good R & D)

There will be positive effects on firms existing business ( ICICI BANK,

Eaton corporations)

Generic concepts for entry

Reduce product/process costs

entirely new tech- Nokia smart phones, apple i-pod

larger plant reaping greater economies of scale

modern facilities- mobiles

Shared activities- network sharing idea-aircel

Buy in with low price

Offer a superior product , broadly defined

Discover a new niche

Introduce a marketing innovation

Use piggybacked distribution

Entry through acquisition

Market for companies

The market is well organised, involving finders,

brokers and investment bankers

Selling is by bidding

Bidding price should be more than floor price

Floor price=present value of continuing to operate

the business (gives owners premium for selling)

Acquisition is profitable, if:

Floor price is low

The market for companies is imperfect &

does not eliminate above- average returns

through the bidding process

Buyer should have unique ability to operate

the acquired business

Floor price

Floor price is low when seller feels the greatest

compulsion to sell, because:

Seller has estate problems

Seller needs capital quickly

Has lost key magt / sees no successor

Seller is not optimistic

Imperfections in the market for companies

Successful acquisition will occur, if:

The buyer has superior information

The number of bidders is low(unusual business or

very large business)

The condition of economy is bad

The selling company is sick

The seller has objectives besides maximising the

price received for the business (hutch to vodafone)

Unique ability to operate the seller

The buyer has a distinctive ability to improve the

operations of the seller(Campbell’s of Vlasic)

The firm buys into an industry that meets the

criteria for internal development

The acquisition will uniquely help a buyer’s

position in its existing business (Reynolds

acquisition of Del Monte)

Irrational bidders

Bidding beyond the point of above-average returns

Reasons for irrational bidders:

o The bidder sees a unique way to improve the

acquisition targeto The acquisition will help the bidders existing

businesso Bidders have goals other than profit max^n

Types Of Acquisitions

Friendly takeover/negotiated takeover

Hostile Takeover

Leveraged Buyouts

Bailout Takeovers

Friendly takeover:

Also commonly referred to as ‘negotiated takeover’, a friendly takeover involves

an acquisition of the target company through negotiations between the existing

promoters and prospective investors. This kind of takeover is resorted to further

some common objectives of both the parties.

Bailout Takeovers:

Another form of takeover is a ‘bail out takeover’ in which a profit making

company acquires a sick company. This kind of takeover is usually pursuant to a

scheme of reconstruction/rehabilitation with the approval of lender

banks/financial institutions. One of the primary motives for a profit making

company to acquire a sick/loss making company would be to set off of the losses

of the sick company against the profits of the acquirer, thereby reducing the tax

payable by the acquirer. This would be true in the case of a merger between

such companies as well.

Leveraged Buyouts:

These are a form of takeovers where the acquisition is funded by borrowed

money. Often the assets of the target company are used as collateral for the

loan. This is a common structure when acquirers wish to make large

acquisitions without having to commit too much capital, and hope to make the

acquired business service the debt so raised.

Ex: Acquisition of Britain’s Corus by Tata an Indian conglomerate by way of a

leveraged buy-out. The Tatas also acquired Jaguar and Land Rover in a

significant cross border transaction

Hostile Takeover:

A hostile takeover can happen if the board rejects the offer, but the bidder

continues to pursue it or the bidder makes the offer without informing the

board beforehand.

Advantages & Disadvantages of Acquisition

Advantages

Decreased time to access and penetrate

target market as the existing company

already has a product line to be

exploited and a distribution network

Prevents an increase in the number of

competitors in the market

Overcome entry barriers including

restrictions on skills, technology ,

materials supply and patents

Disadvantages

Increased risk – may be a large

financial commitment but faces

political and market risks

Poor or slow post-merger integration

Target too large or too small

Overly optimistic appraisal of

synergies

Overestimation of market potential

Inadequate due diligence

Incompatible corporate cultures

Examples of Mergers and Acquisition

In FMCG Sector : P&G and Gillette ; Dabur acquired Balsara for 143

crores ;Godrej Consumer Care bought Keyline Brands ;Marico acquired

HLL Nihar brand.

One such example would be the acquisition of Britain’s Corus by Tata

an Indian conglomerate. The Tatas also acquired Jaguar and Land

Rover in a significant cross border transaction.

Vijay Mallya's United Breweries Group (through Group entities Mc

Dowell & Co, Phipson Distillery, United Spirits and United Breweries

Holdings) acquired a controlling stake in the Jumbo Group's Shaw

Wallace & Company for a total deal value of Rs 16.2 billion ($371.6

million).

McLeod Russell India (part of the B. M. Khaitan

Group) acquired a 90 per cent stake in Williamson

Tea Assam for Rs 2.1 billion ($48.2 million).

HLL's mergers with TOMCO, Lakme, Brook Bond

Lipton India, Pond's India.

HLL's acquisitions: Kissan, Kwality Icecreams and

Modern Foods.

Sequenced Entry

Initial entry into one group and subsequent mobility from

group to group

Ex: Tata group, Procter & gamble

Sequential entry lowers cost of overcoming mobility

barriers & also risk.

References:

‘Competitive Strategy’ by Porterwww.en.wikipedia.org/wiki/

Strategic_managementhttp://www.marketingprofs.comwww.nishithdesai.com Guideline No. 20-

100/2007-AS-1 issued by the DoT, issued on April 22,2008

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