Strategy Dose - II

Blue ocean Strategy:

A corporate strategy and bestselling business book written by Professors W. Chan Kim and Renée Mauborgne, of INSEAD.

The "ocean" refers to the market or industry. "Blue oceans" are untapped and uncontested markets, which provide little or no competition for anyone who would dive in, since the markets are not crowded.

A "red ocean", on the other hand, refers to a saturated market where there is fierce competition, already crowded with people (companies) providing the same type of services or producing the same kind of goods.

Their idea is to do something different from everyone else, producing something that no one has yet seen, thereby creating a "blue ocean". An essential concept is that the innovation (in product, service, or delivery) must raise and create value for the market, while simultaneously reducing or eliminating features or services that are less valued by the current or future market. The authors critique Michael Porter's idea that successful business are either low-cost providers or niche-players. Instead, they propose finding value that crosses conventional market segmentation and offering value and lower cost.

A current example of this strategy is the success of the Nintendo Wii, which Nintendo designed to target audiences not traditionally known to play videogames.
There is some amount of criticism of this framework because, the authors assume that innovation necessarily brings in success while this is not fully proven by research.
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Increasingly, private equity players are showing great interest in investing in India.Many Private Equity players such as Actis Partners, Warburg Pincus, Citigroup Venture Capital,Barings and Westbridge Capital, 3i, Blackstone and Goldman Sachs are setting up shop in India,each with deep pockets.

Blackstone group (largest private-equity player in the world) is in news for its recent management buy-out in BPO company called Intelenet Global Services, takeover of Gokaldas Exports and picking up minority stake in Nagarjuna Constructions.

Management Buy-Out (MBO): Form of acquisition where a company's existing managers acquire a large part or all of the company

Management Buy-In (MBI): Occurs when a manager or a management team from outside the company raises the necessary finance, buys it, and becomes the company's new management.

Management Employee Buyout (MEBO): A restructuring initiative that involves both managerial and non-managerial employees buying out a firm in order to concentrate ownership into a small group from a widely dispersed group of shareholders. (This can turn a public company into a private company !)

Leveraged buyout (LBO): Also called as highly-leveraged transaction (HLT), or "bootstrap" transaction. It is a strategy involving the acquisition of another company using a significant amount of borrowed money (bonds or loans) to meet the cost of acquisition. Often, the assets of the company being acquired, in addition to the assets of the acquiring company, are used as collateral for the loans. The purpose of leveraged buyouts is to allow companies to make large acquisitions without having to commit a lot of capital. In an LBO, there is most often a ratio of 70% debt to 30% equity.

Leveraged build-up, (LBU): A leveraged build-up is a situation of a company bought out via a leveraged buy-out that raises even more debt to acquire the companies in the same sector in order to reinforce the strategic positions.

Buy-In Management Buy-Out (BIMBO): A form of a buyout that incorporates characteristics of both a management buyout and a management buy-in. A BIMBO occurs when existing management - along with outside managers - decides to buyout a company. The existing management represents the buyout portion while the outside managers represent the buy-in portion.

By the way, what is the rationale of going for MBOs?? The management might want to make their own jobs more secure. Also they can maximize the profits if they own the majority stake in their own company. Also it wards off some outside company to buy out their company.

Thus Spake Socrates