Introduction
Mergers and acquisitions are all corporate strategies, specifically finance and management deals that are involved in the combination of different companies to aid financial stability and growth in an industry without the need for creation of another entity (Olcott, 2004, pp. 4). It is basically a tool used by businesses for the purpose of expansion in their areas of operation with the aim of increase in profitability in the long term (Baker, 2004, pp. 5). There are several ways through which mergers can be conducted each of which has inherent characteristics due to their underlying structure. Furthermore, the success of any merger depends on how the mergers are carried out, the prevailing industry conditions and other factors internal factors like the corporate culture of the two merging companies that may directly or indirectly affect the profitability of the formed outfit.
Context
The major players in the Russian oil sector have engaged in a new look approach by the adoption of US GAAP in their financial planning and acquirement of technology from foreign companies through mergers and acquisition (Harold, 2008, pp. 22). The projections are that the countries oil need is on the increase this is attributed to the application of the US GAAP. The restructuring by the integrated vertical industry players is chiefly responsible for the commendable achievement in oil production (Reed, 1998, pp. 12). Russia has also taken a firm grip on the global leadership in oil and hydrocarbon production as a result of these new changes (Hill, 2007, pp. 324). It is important to note that Russia is blessed with vast resources; it has the second largest coal reserve, the largest natural gas reserve and the eight largest oil reserve in the world, thus the availability of resource combined with good business practices are the two main factors that have led to the positive development of the Russian oil sector (Reed, 1998, pp. 12).
FDI (Foreign Direct Investment) is a business situation where one company moves from its home country to make physical investments in another company based in a foreign country (Coyle, 2000, pp. 5). This relationship may also include investment made in the process of acquiring interests in companies that operate outside the defined economy space of an investor. Therefore, a FDI relationship is made up of a parent organisation and a foreign partner who form a multinational corporation.
The Russian oil sector is currently characterised by intense competition and a number of large players (Coyle, 2000, pp. 12) as a result of its profitability and the market viability and therefore any company that wishes to engage in the Russian oil sector must strategies to its level best and consider all the factors that affect the industry, the organisation’s competitive advantage and use the information obtained to come up with an actionable strategy that will use all the strengths while minimizing the weaknesses. The nature of the Russian oil sector requires a finance intensive approach and therefore, companies must be willing to form mergers in order to exploit the opportunity.
Solution
The adoption of the following strategy by the business will aid it initial entry into the Russian oil sectors and ensure its growth and increase in market share over the years.
Executive Summary
The Russian oil sector presents a good opportunity for the company; the availability of oil reserves, the ever increasing demand for oil and oil products both in Russian and around the world are some of the factors that make this venture viable. The nature of the Russian oil industry requires intense use of finance and resource, furthermore the industry is highly competitive with a big number of players and therefore a good strategy is core to the growth and sustainability of the business as it exploits the opportunity. This strategy document has been development under consideration of the industry, market and the operational environment at the national level. The strategy is aimed at exploiting the Russian oil market by;
l Acquirement of resources and skills necessary for full exploitation of the Russian oil sector.
l Development of a strategy that will ensure the company successfully exploits the Russian oil sector.
Context
Since the end of the USSR, the system of a centralised planned economy which succeeded in separating Russia from the rest of the world has been replaced by market oriented institutions. As a result Russia is increasingly affected by global influences, which has led to more integration of the Russian sector into the global market. Lack of state regulation has led to rent-seeking where costs are externalised at the society and business partners’ expense, furthermore most industries are characterised by lack of transparency in their transactions, poor corporate governance has also been identified as one of the reasons behind investors lack of interest. Shareholders and investor rights violation characterise the oil industry and have been a hindrance for quite sometime.
The global market and industry is increasingly featuring outsourcing as a means of service delivery. The manufacturing and financial sectors players, regardless of their nature, are adopting outsourcing, though the degree of vary from one corporation to another. This popularity has been attributed to the downsizing, cost cutting and strategic reasons.
The Russian oil industry is growing at a high rate and the statistics show that this trend will continue with the increasing demand for oil and oil products in Russia and globally, the economy grows at the rate of 6%and is quite stable (Douglas Stinemetz , 2003, pp. 4). Though this may be the case, most multinationals operating in Russia prefer to vend their products in the international market as they consider the Russian market to be less empowered thus there is an unmet domestic demand (Douglas Stinemetz , 2003, pp. 9). Furthermore, the Russian market buying power is on the increase ad the consumer good sector is expected to grow considerably in the future as a result of this. The industrial sector is characterised by a growth rate of 2.5% on average and this is expected to continue for a number of years. The willingness of most companies to commit considerable amount of money in the Russian market is lacking due to what is considered to be a poor legal and banking system (Douglas Stinemetz , 2003, pp. 8). In a nutshell, the economy is centralised and diversification is lacking as players seek to one function in the distribution framework.
Acquisitions and mergers also characterise the Russian industry as foreign players merge with the local ones to form entities that are much stronger and financially stable. There have been a number of legal issues that have bogged down the formation and the running of such mergers that mainly implement the FDI (Douglas Stinemetz , 2003, pp. 8). The reason for FDI has been cited as the complexity of the Russian market that makes it impossible for multinationals to deal in and the width of the market that makes it hard for the small local players to fully meet its needs.
Lastly, government interference is prevalent in the Russian oil sector as the profitable sector attracts interests from political fronts and thus politically affiliated organisations have an additional advantage (Gaugha, 2002, pp. 5), furthermore the bureaucracy that is inherent of almost all government structures has led to the loss of time that would have been used in production as 10% of organisational time is spent in tracking down government officials.
Acquirement of Skills and Resources.
Priority: To acquire skills and resources that would make it possible to engage in the Russian oil industry an achieve profitability.
Strategic Direction
Steps must be taken to merge with another company so as to create a good and sustainable pool of human and financial resource. This is done through FDI with either a foreign or a local industry player.
Key Actions
The organisation must commit resources towards research that is aimed at identifying its strengths and weakness after which a list of possible partners is formulated, their willingness evaluated and their contribution to the merger determined. This will include evaluation of their strength and weaknesses in the current operational environment and what is expected of their future. Furthermore, evaluation of compatibility in culture, values, strategic approach and the implication of the merger to the two entities must be done conclusively.
The external and internal attributes of the venture must be determined. The external issues may include taxation while the internal affairs are mainly concerned with the partners’ conduct within the venture. Both the micro and macro environment must be considered in discussing this issue.
Strive at developing good corporate culture by ensuring proper integration, and the implementation of a good management framework. This will involve research into the two cultures which will determine their similarities and differences and thus identify areas in which they pose a threat to the success or complement the venture.
Determination of the means through which the success of the venture will be evaluated. This may be done through the evaluation of individual company success and contribution, or from the joint venture success and contribution.
Drafting up a paper that will address all the legal aspects involved in the venture. This will include research into the legal issues that both companies face and their impact on the venture.
The development of a good management team and strategy that will govern the two companies with respect to the joint venture or merger.
Development of Strategy
Priority: To develop a strategic plan that will ensure the venture fully exploits the Russian oil sector.
Strategic Direction
The venture must push for the implementation of mechanisms that will ensure that the strategic plan it adopts is future oriented and aimed at fully exploiting the Russian oil industry now and in the future.
Key Actions
a) Marketing
The venture must develop a good framework that addresses both the domestic and foreign markets. This will be done through:
Channelling resources towards market research to establish the market needs, segments, growth and expectations, the information acquired is then used in the formulation of marketing policies.
Channelling resources towards research into the best marketing and promotion strategies that will be used in the development of a promotion strategy. Furthermore, resources should be availed to the promotion and marketing initiative at all levels from the formulation to the implementation.
Determination of the future market needs by keenly watching the global and local industrial and market trends.
b) Operations
The operations of the venture will be done in such a way that efficiency and cost cutting are achieved. Moreover, the operations will be aimed at ensuring customers satisfaction which is the reference point to success. This is done through:
Ensuring all operations are done with great caution and care to meet the customers’ expectations ascertained through a comprehensive research on their needs and expectations.
Implementation of an outsourcing mechanism that will involve the determination of what processes need outsourcing, what mechanisms will be used in choosing a firm to outsource to and the duration of outsourcing. Furthermore, the interaction between the company that has been outsourced to and the organisations’ or the venture must be determined to avoid collisions; this may involve formulation of rules and regulations that govern the two parties.
The venture must develop a mechanism that will ensure diversification so as to gain a competitive advantage over others in the industry. This will ensure the organisation cuts down on costs and diversifies its operations, and thus lead to a larger market share in an industry that features specialisation. This process will require assessment of the possible areas of diversification and evaluation of their viability and impact on the venture.
c) Governance
The venture will be governed in a transparent manner and the organisational structure made known to all. These will be done through:
The formulation of an all inclusive organisational structure where all members have clearly defined obligations, rights and duties. This will be implemented after a thorough research into the organisations’ operational environment that will help in the determination of processes, their interaction and the people responsible for them. The result of this research will act as a guideline to process improvements and thus in the formulation of a good organisational structure.
All decisions made must have clear base from the organisations policy, this will ensure that unilateral decision making is eliminated.
Any decisions or changes made must be relayed to the investors and employees. This is aimed at creation of a feel of importance among all employees involved in the venture.
d) Policy making and implementation
The venture must ensure that the policies are made in a manner that will ensure they ultimately meet the current user needs and be relevant to the consumers in the future. This will be ensured by:
Factual decision making: This will be achieved by researching into the subject that the decision is to be made on and coming up with a clear description of its nature. The research must be organisation or venture wide and therefore is inclusive of the employees, management, investor’s ad the consumers.
Inclusive decision making: The employees, consumers, management and investors or partners must be consulted and their views noted before a common approach can be employed to solving problems. The strategic document should be a representation of the ventures’ view on a subject rather than the view of a faction. This involves the implementation of a communication mechanism that will ensure that all strategies are known to all in the organisation.
Controlled Implementation
The implementation of the policies should be measurable, this involves the inclusion of benchmarks and deadlines that determine what should be done by when, furthermore the policies should clearly spell out the duties of all involved in their implementation.
A decision should be made on whether to implement the team approach or individual approach and in a case where a combination of team and individual approach is desired, the policies must clearly define the constitution of the teams and what jobs are left for the teams and which ones are done through individual effort.
Advantages
a) Decisions made will be inclusive of all in the organisation and therefore any action that is as a result of the decisions is likely to be acceptable to all and thus implemented without further complications.
b) The governance structure that is all inclusive will ensure the confidence of the consumers, investors and employees and therefore aid the acquirement of finance, implementation of policies and increase in market stability.
c) An operations process that is aimed at improving efficiency and cost cutting will ensure customer satisfaction and thus lead to increased sales. This will also be the effect of the marketing policy.
d) Diversification will lead to reduced cost and increased market share.
e) Merging will ensure the organisation has the needed capital and skill to engage the diverse and complicated Russian oil market.
Disadvantages
The approach is quite resource intensive and requires the willingness and the involvement of all in the organisation which is difficult to achieve.
The approach consumes lots of time that would have otherwise been used in production.
Russia’s approach to FDI is quite discouraging as the government is less apprehensive of the approach.
Conclusion
Strategic planning is the bedrock of the ventures future success and therefore both organisations’ must focus as much time and resources in the policy formulation as they do on implementation (Sherman ; Milledge, 2006, pp.19). This will lead to a more realistic approach to the business operations and lead to the achievement of the set goals. The continued achievement of set goals is what success is. Strategic planning on the other hand is quite resource intensive and requires lots of time (Yong, 2003, pp. 99), this may appear as a loss to any organisation that does not embrace this value, but when critically examined, it comes out clearly that the implementation of a strategic plan is advantageous to organisations in the long run and therefore all aspects regarding its implementation must be done as per the book by all who are keen on improving their future.
Bibliography
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