Non organic growth strategy

Non original emergence strategyAbstract As microfinance industry has been maturation rapidly, in m slightly(prenominal) places the market of this sector becomes relatively mature and lies in competitive situation. Some of microfinance institutions start thinking, exploring and doing non organic growth strategies. This stem presents the predilection of non organic growth strategies in microfinance whether through strategical alliances or conjugations and skills which quarter be a choice for achieving rapid growth and expansion. One of the key achievement factors in doing such strategies in microfinance could be the comprehensive perspicacity to the similarities and goings of nerves characteristics, such as their structure and culture.BACKGROUNDIn the recent years undoubtedly that microfinance has become a diverse and growing industry. This sector has been attracting many eyes for several reasons. One of the reasons tin be said that on one side microfinance melody is not moreover ground on financial motive, besides in addition on other side used as kernel for social development, as many called double bottom line principal. Many microfinance institutions (MFIs) have been placing and operating the business in the atomic number 18a where in that location has been potential market of micro green lights and low-income households. Consultative Group to supporter The Poor (2010) , broadly outlined microfinance institution (MFI) is as an musical arrangement that deals with the provision of financial services mainly for the benefit of the poor. These organizations vary in their legal structure, mission, and methodology. in general there argon four categories of microfinance providers, namely informal, member-owned organizations, NGOs and stately financial institutions ,such as Regulated MFI and Commercial Bank (Helms, 2006).All categories of those microfinance institutions argon struggling to grow and experience in the arena. As the market is facing the maturity and fierce competition, many microfinance institutions bound trying to expand their portfolio by providing financial services to a big number of clients while at the same time fulfilling an MFIs social mission. Some of them explore to alternative means for reaching rapid growth by formulating and doing damp strategies. They have been trying to adapt non organic growth strategies whether through doing strategic alliances or mergers and acquisitions.Generally speaking in the world of business, we have been witnessing with a locoweed of examples of many firms achieving growth by creating alliances/collaboration with other parties and mergers and acquisitions. Both strategies are common done by many firms in the world since these piece of ass avail the firms to covering each own weaknesses and unite each own different resources as wellspring as facing challenges much more respectable. But in microfinance those cardinal kind of strategies are still unused ly developed.In authors opinion, the issue of non organic growth strategy chosen by MFI whether they want to decide to do strategic alliance/collaboration or merger and acquisition is affaireing due to the fact of unique characteristics of the players in microfinance arena as mentioned above. For example, we find that Microfinance Formal monetary Institution (MFIF) comparing to Microfinance NGO is more financially oriented rather than socially. In MFIF, the organization goals are always associated with the financial indicators and sales indicators. Whereas in microfinance NGOs are closely fixd to the non financial changes, particularly in the social changes of community, such as household income changes, effects of loan to women empowerment, health etc. These differences are rattling important to be understood considering that the differences inherent to those 2 institutions will affect to the no-hit or the failure of doing non organic growth strategic.Therefore,this paper pr esents the idea for MFIs, mainly for MFIF and Microfinance NGO types, in choosing such non organic growth strategies, whether they want to create a strategic alliance or merger and acquisition. The structure of this paper will be presented as follows Section 1 provides the backdrop regarding to authors opinion to raise the issue of non organic growth strategy in microfinance. The section 2 elaborates the conceptual background about the definition of strategic alliance and the merger and acquisition, and points out motives and diffrences behinds these strategies as well as the explanation of success keys. Then institutional features of players in microfinance arena is presented in the section 3. In the section 4, we try to give the idea to answer the question which strategy chosen by MFIs base on the different characteristics of those non organic growth strategies and distinctive features of microfinance institutions as explained in section 2 and 3, and this section leads to the c onclusion as section 5. At the end references are appeared in the section 6. The limitation of this paper is not addressing the issue of alliances or mergers and acquisitions between MFIs which formed in informal and member-owned organizations or cooperatives. This paper further focuses on the basic idea of doing alliances or mergers and acquisition for MFIFs and NGOs form and doesnt explain quantitatively in details.Conceptual BackgroundThe words of organic growth and non-organic (external) growth are common known in the corporate growth raillery. Organic growth is ordinarily defined as a companys growth rate excluding any scale increases from takeovers, acquisitions, or mergers. Growth of this type is also referred to as a companys core growth. Organic growth is generated, for example, by selling more product (services as well) to current customers, selling product to new-fangled customers, or selling product at a higher price ( Dalton and Dalton, 2006) .Whereas non organic g rowth obviously tin can be defined as a strategy to obtain companys growth through alliances, mergers and acquisition and takeovers.Many firms decide to do alliances /collaboration or merger acquisition to survive and to grow rather than to run business relying on the individual efforts. These non growth strategies are done by many firms to form powerful energy in managing difference resources owned by each party. As Zhiang et al (2009) notes that resources are heterogeneously distributed across firms, therefore many important internal resources can be obtained from external sources via inter organizational relationships such as alliances, or by engaging in mergers and acquisitions. Compared to internal development or organic growth, strategic alliances as well as mergers and acquisitions strategy is a much faster way to build organic capabilities.Strategic AlliancesA strategic alliance is defined as an arrangement between two or more commutative companies that decide to carry ou t a project or operate in a specific business area by coordinating the necessary skills and resources jointly rather than operating on their own or merging their trading operations (Dussauge et al,1999) . It can be a contractual arrangement to collaborate on one or all levels without any intended change in organization legal structure (McCarter, 2002). Strategic alliance occurs for a certain period of time whether short or long time. According to Koza and Lewin (1998), there are two main motivations for the decision of doing alliances, namely exploitative and exploratory. Exploitative means that in the agreed alliance, each party seeks to leverage their own resources and capabilities in order to stir revenue or reduce cost, whereas exploratory each collaborating party willing to create new opportunities, markets, product and technologies.From the conceptual point of view, Sudarsanam (2003) lists some(a) factors potentially contributing(prenominal) to successful alliancesEach part y should bring complimentary skills, capabilities and market to the allianceMarket overlap between partners should be minimal to avoid conflict of interestAlliance should be based on balance of business strength and ownership interest among partnersThe alliance must have a degree of self-sufficiency with strong leaders and continual commitment and supportThe alliance must build up trust and confidence between the partners and not depend tho contractual right and obligationsDivergence of management styles and corporate culture must be handled with sensitivity, and a new common style and culture distinct.Merger and skillMerger and acquisition is defined as the combination of two companies or firms to achieve certain strategic and business objectives forming a great significance work not only to the companies but also to many constituencies, such as share holder, workers, managers, competitors, communities as well as the economy as whole (Sudarsanam, 2003). Schoenberg (2003) notes that firms very much use mergers and acquisitions in order to achieve such diverse strategic goals , for example, increasing market power, expanding to new product markets or geographical territories, or gaining get at to valuable resources. From this point, even though it seems we can see that strategic alliance and mergers and acquistions have the similar purpose but we noticed that mergers and acquisitions whitethorn create some different change concerning the business, organization, ownership and legal status in the result company. Furthermore, Damodaran (2002) describes the edge of merger,consolidation, tender offer, acquisition and buy out as all part of merger and acquisition parlances, and a firm can be combined by another firm by 5 ways Mergers , when a derriere firm become part of acquiring firm and stockholder approval needed from both firms.integration, when target firm and acquiring firm become new firm and stockholder approval needed from both firms.Tender offer, when firm continues to exist, as long as there are dissident stockholders holding out. winning tender offers ultimately become mergers and no shareholder approval is needed.Acquisition of asset , when target firm remains as shell company, but its assets are transferred to the acquiring firm and ultimately target firm is liquidated.Buy Out, when target firm continues to exist but as a one-on-one business usually accomplished with tender offer.There are several and diverse motives for mergers and acquisitions, Johnson et al (2005) grouped under three headings. They are environment, strategic capability and expectationsEnvironment. The need to keep up with a changing environment can dominate thinking about acquisitions. Some major aspects which influenced the changing environment are the need of business speed, competitive situation and deregulation.Strategic capability. Achieving cost efficiency, developing innovation and learning organization are some reasons behind mergers and ac quisitions in many industries.Expectation. In some ways, stakeholders have highly expectation and interest to give insight for the growth of company. In this case, mergers and acquisition may be perceived by many stakeholders as a quick way to deliver companys growth.Mark and Mirvis (1993), from their research have summarized that one of the key success for establishing the desired combination between two companies is the assessment of two sides companys structures and cultures. They suggest that in mergers and acquisitions efforts, each party should be proactive in the pre combination phase planning and preparation are integral to success when companies join forces At least there are different aspects to be taken into account carefully in steering a combination toward the successful path purpose, partner, parameter and people. But it doesnt end up to the planning and preparation. The most important thing to be taken into account for achieving successful mergers and acquisitions is post-merger combination. All these efforts may foster to overcome the most commonly cited reasons for failures conflicting corporate cultures, over estimation of synergies, inadequate due diligence, slow/poor post-merger combination and poor leadership or management (McCarter, 2002)The DifferencesFrom the explanation about two kinds of non organic growth strategy above, we can note the main difference between strategic alliances and mergers and acquisitions. It can be said that creating strategic alliances is not as laborious as mergers and acquisitions. It is because of devising the mergers and acquisition work successfully is complicated process which involves not only putting two organizations together but also involves integrating people of two organizations with different cultures, attitudes and mindsets (Mallikarjunappa and Nayak, 2007). Meanwhile, in the strategic alliances, each company is still independent and it seems to need less effort in term of cost and time.Therefo re, Reuer (1999) differentiates alliances and merger and acquisitions in four dimensions which strategic alliances may be preferredInfeasibility acquisition may not be feasible for regulatory, political or legal reasons.Information asymmetry the partners have access to different information sets making it difficult to value their relative contributionsIndigestibility post mergers and acquisition integration of the acquirer and the acquired firms poses problems so severe as to prevent value creation from the acquisition. When indigestibility is substantial, alliances can be attractive because they allow companies to link their resources selectively. Even when acquired assets can be divested this alliance advantage remains.Strategic flexibility it is more important than commitment of the partners.Now, how we relate this conceptual background of those strategy into the idea of impelementing these to the microfinance industry. However, we should better know the two kind of institution al features of microfinance as explained below.Institutional Features MFIFs and MFI NGOsAs mentioned in the previous page, there are some players in the microfinance arena and they obviously have different characteristics. However, there are basically two main different characteristics in the discussion about players in microfinance industry, namelyfor profit or financially oriented, and non profit or socially oriented The financially oriented institution, mainly private enterprises/ companies, could be Microfinance Formal financial institutions (MFIF) such as bank and regulated MFI or non bank financial institution. Mean while the socially oriented institutions, most of them are NGOs.What makes different between two types of MFIs? It may be better to look at a table presented by Estallo et al (2006) indicating the differences between private enterprise and NGO types All these factors make different structure and culture of those two organizations. In the case of MFIs, another impo rtant distinctive feature between private MFIFs and MFI NGOs is concerning with the ownership. As Lauer (2008) stated that ownership structure is one of the critical issues to consider in the specific context of each type transformation of such institution. MFIs ownership structure encompasses the ensemble of mechanism by which stakeholders define and pursue the institution vision and mission and ensure its sustainability.Alliances or Merger and Acquisitions ?As whole, from the conceptual background section, we have seen that strategic alliances and mergers and acquisitions might have some similarities and some principally differences. In other section, we have also already known the main difference characteristics of the microfinance players. Then now it raises a question how does an MFI choose a choice between two?MFIF NGO AlliancesThere have been some evidences that alliances can do the collaborative firms or institution to expand its business. Strategic alliances are able to s cale up access to financial services in rural areas in term of the outreach to new clients and markets as well as the introduction of new products (Gallardo et al, 2006). Rondinelli and London (2003) noted that Alliances, in fact, may be the only option for companies provoke in accessing the knowledge held by (NGOs), since internal development of such expertise may be too costly, inefficient and time-consuming for most companies and merger with or acquisition of an (NGO) is highly unlikely. While Kramer and Kania (2006) also stated with a similar view that nonprofits often have much deeper comprehension to solve the social problems, which enables them to help companies determining comprehensive strategies and set more ambitious and goals. Strategic alliances are also important in the public sector as a means of addressing particular social outcomes (Johnson et al, 2005). This also could happen in the alliance MFIF-NGO.Dahan et al (2009) gives examples of MFIF NGO strategic allian ces. HSBC Amanah (HSBCs global Muslim banking division) has partnered with, an international development and relief organization, the Islamic Relief, to provide financial services to Muslims in accordance with Islamic Shariah law. Another example is In Dominica. MasterCard builds on an affinity card relationship with Banco prevalent Dominicano and Asociacion para el Desarrollo de Microempresas, Inc. (ADEMI), a micro and small-scale lender .This partnership is aimed at providing unbankable entrepreneurs using MasterCard-ADEMI- BancoPopular Dominicano credit cards to withdraw cash and to pay public utility company and other bills in order to support the micro entrepreneurs in Dominica to run their business.However, this does not close the possibility of the combination between MFIF and NGO in mergers form. For example, McCarter (2002), gives two mergers between MFIF with NGO. In Nicaragua, the Interfin, a licensed Nicaraguan financier, in January 2000 merged with NGO Mennonite Econom ic Development Associates (MEDA) Chispa microcredit program, forming Financiera Confia. Another example in Guatemala, there was a merger between Bancasol, a local commercial bank, with ACCION Internationals affiliate NGO to form Genesis. Meanwhile in 2007, Sonata, a start up MFI in Union India purchased of Jeevika Livelihood Support Organization to expand its microfinance operation (Tiwari and Chasnow, 2009).Mergers and Acquisitions between MFIF and MFIF or between NGO and NGOAs stated on the previous page, making the mergers and acquisition work is complicated process rather than strategic alliances, but this doesnt mean that this strategy is far away from success. Mergers and acquisitions can be used by MFIs to create new capability to survive and achieve significance growth.Mergers and acquisitions are not only about the combination between two organizations which merely based on financial aspect but also the structure and culture of two organizations combined. It takes much mor e energy, cost and time. It may be the similarity of structure and culture of organization used as a good starting point to think about mergers and acquisitions in the arena of non growth strategy of MFIs. So doing MFIF-MFIF merger or NGO-NGO mergers is more appropriate combination than creating strategic alliances. However, it doesnt mean that MFIF-MFIF strategic alliances cannot be implemented to reduce the competition tension. There are some examples mergers and acquisition in the microfinance industry around the world as summarized and showed in the annex of this paper.ConclusionAs the microfinance sector matures, non organic growth strategies mainly strategic alliances and mergers and acquisitions can be a choice for achieving rapid growth and expansion in microfinance. Of course, this effort actually is not easy to be implemented. But it is also not to say that making work such strategies is impossible to be realized.By analyzing the differences between two non organic growth strategies above as well as the different characteristics between MFIF and NGO, on the one hand we may conclude that strategic alliance will likely to be considered for both rather than mergers and acquisitions. However, this does not close the possibility of the combination between MFIF and NGO in mergers and acquisitions form. A strategic alliance between MFIF and NGOs is less effort in term of cost and time but still can result in the growth of the organization.On the other hand, mergers and acquisition can also be created for combining MFIF with MFIF or NGO with NGO. Some evidences showed that the similarity of the structure and culture of those organizations can be used as the good starting point to do mergers and acquisition. It is very important to be considered because mergers and acquisitions are not only about the marriage between two organizations which merely based on financial aspect but also the structure and culture of two organizations combined.One of the key success factors for the future microfinance non growth strategy should be based on the assessment of characteristics of the similarities and differences of organization (i.e structure and culture) before choosing strategic alliances or mergers and acquisitions strategy. 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