In this episode, we will overview some of

the very well known classic schools of strategy formulation.

And we'll try to see how they've developed.

And why is that, that sometimes,

we have to go back to them and see why they affect our M&A decisions.

So, this is our strategy schools.

Well, we are not here pretending to be comprehensive,

we'll just mentioned the most well known.

Well, the first one is the approach of the Boston Consulting Group.

And this is quite famous.

So, here, they introduced experience curves,

product life cycles, and the famous portfolio balance.

That most of the people,

when we talk about portfolio balance is strange word,

but everyone knows this break down by growth and profitability,

when we have these dogs, when both is bad,

when we have stars,

and fast growth and huge profit.

When you have cash cows that are not growing fast but they produce a lot of cash.

And then there are problem childs,

the projects that and products

that have high growth but they do not produce a lot of money.

So, the idea is that the company to be successful,

must have a balance with that.

You cannot have only these promising things because if you do not generate enough cash,

then you'll be very dependent on raising external investments.

And basically, we can say that the VBCG approach,

it supports the cost leadership as one of the most import generic competitive advantages.

And provides the theoretical background for that.

The next thing is Michael Porter.

That also is famous for his book in competitive strategy,

written as early as in 1980.

But Porter, everyone knows that he talked about,

I will start that from the second thing.

Then he talked about competitive advantage.

That is, cost leadership or differentiation.

That everyone remembers.

But often people skip the fact that Porter would start with the attractive industry.

And by attractive industry here comes the famous Porter cross.

An attractive industry is the one that has,

let's say high barriers to entry.

The other there's not that much rivalry than

suppliers and customers do not have a lot of bargaining power.

So, basically this is the industry of the segment in which,

you are likely to have high profits.

And then also Porter talks about value chain.

So, these are classic things that go back to the 80s and

even to the 70s of the previous century.

And now let's see how that proceeded.

Well, in the 80s and 90s and then to the beginning of this 21st century.

There were some specific things that became quite popular in strategy.

First of all it's like well,

it's in search of excellence.

This is the quoting of the book of Peters and Waterman.

But also here you have all these books like built to last by Koller's and Porus.

And I would point out let's say, search for excellence.

And this is Peters and

Waterman but although they had quite a few of us but I will mention just some.

First of all, they said this is a bias for action.

So, instead of thinking,

instead of theorizing, you'd better do something.

It's like in the famous advertising the like is just do it.

And then, you have to be close to customers.

What does that mean? Especially now.

You cannot force people to buy what you think is good for them.

You better react to what they think is good for them.

And that is why for example,

many of the greatest successful stories here they were because people

felt what is likely to be properly accepted by the customers.

Now, the next thing again is this entrepreneurship,

that I talked about a lot.

Or sometimes, it's called creative leadership.

Next thing is focus on people,

that is close to that.

So, they say that people not

machines or even money that contribute most to your success.

And then, what I would put as something very

special as far as I'm concerned this is what is called stick to the knitting.

Well, sometimes, people take that metaphorically and say

well basically this is do what you know how to do best.

Because that's been quite a bit of time, effort,

money that has all accumulated and then you became powerful in this.

And instead of trying to do everything,

you might be much better off if you do something that you know how to do best.

Now, later on in let's say 1990s and then to 2000s,

we can see that there was a shift in that.

I would point out here something like,

well first of all the famous funky business.

And then this whatever like everlasting change.

That started even earlier.

So, the idea here is that,

the world and the market is changing so fast,

that it cannot stick to a certain strategy even if the strategy is great.

Like building a clock that shows time or just

building up on your sustainable competitive advantage.

That may not be enough unless you really watch what's going on and you are able

to adapt to the situation that you observe everywhere.

So, now I would like to add something else to that,

that we would like,

New, it's not yet a school.

But now, we can see that because

the market is so new special that it is due to the Internet,

the IP technology, the new channels of communication that I would just point this out.

Again, you may say well, your repeating yourself.

Well, indeed I am to an extent but that is done on purpose.

Because the influence of this new market environment on M&A is so great,

that it was not so even as late as 10 years ago.

And it's becoming more and more important.

So, we talk about social media.

We talked about big data.

We talked about artificial intelligence.

And so on and so forth.

So, one of the big challenges of that is,

all becomes obsoleted quickly.

So, you don't have to do any strategy at all.

Well, this is the big exaggeration.

You unfortunately can not rely on this only and you have to understand,

that there are certain fundamental pieces

that contribute to these schools that we mentioned.

And we cannot just throw them away and ignore because they were formulated 35 years ago.

There are important ideas about competition,

about success and even about value that are in them.

And I would wrap up this episode

by saying that in order to

not get bogged down in this temptation to throw everything away,

we have to understand that strategy does not provide solutions.

Strategy is a methodology that provokes creative thinking.

That results in the formulation of a process.

This is the approach to dealing with some problems

and with trying to to foresee the future to the best extent you can.

And so I would put like, no solutions, process.

And now there are some key success factors.

And first of all this is fit strategic strength.

Structural and cultural fit that we talked about before.

If you're in actual project business,

you cannot manage that in the very theoretical out of your little bureaucratic way.

Now, what else is important?

The identification of value drivers.

Some people say well it's too generic.

We'll see value drivers in our next week when we study evaluation of M&As.

But that always has to be kept in mind.

You have to have a focus on that.

Now, as we said before,

this is management of

change and that is close versus feedback.

You can no longer afford to just keep pushing what you believe is right,

even you are an insightful person with a lot of power.

And still, you have to have this feedback because every so often,

people that do something else that are not

openly and directly contributing to the strategy formulation, may invent something,

may have an idea,

may have the view, the understanding,

the knowledge and if you ignored the feedback of these people,

you are likely to lose.

Now, that wraps up

the overall idea of strategic schools.

And now in the second part of this week,

we will come closer to the major theories and motives of M&As.

And we will see exactly how they contribute to the potential value creation.

So, we will keep part of that in mind and although that will

be maybe not the overall comprehensive view

but that'll be very helpful for us to see why

some strategies are more likely than others to create value.

2.4. Some well-known classic schools of strategy

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