A Risk Mitigation and Decision Making in Business

Introduction

The modern oil market is facing various challenges associated with low oil prices, intense competition, strict environmental regulations, and so on. The acquisition is regarded as one of the methods to address the issues mentioned and achieve organizational goals. Practitioners employ numerous tools to make sure that the process of acquisition will be successful. The issue has also acquired a considerable attention of researchers and scholars who analyze different aspects of the process. The works dwell upon such areas as the essence of the takeover, peculiarities of acquisitions, reasons for the acquisition, associated risks, and the decision-making process. This literature review includes a brief account of the existing literature on acquisitions with a focus on risk mitigation and decision making.

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Literature Review

Understanding the Acquisition

Many works related to the acquisition and other growth strategies focus on the nature of the acquisition. Researchers try to explain major reasons for the takeover, possible pitfalls, as well as strategies, companies utilize. Thus, Reddy (2014) defines the term and explains the peculiarities of the method. The researcher also mentions the most common reasons for the acquisition: strategic, market and economic motives as well as personal motives. The researcher implements an in-depth analysis of the literature on growth strategies and states that the academic papers available lack for an interdisciplinary approach. The author considers different theoretical frameworks researchers use to analyze acquisitions. Importantly, Reddy (2014) provides particular examples of possible ways to apply various theories. At the same time, significant attention is paid to specific effects of acquisitions. Dilshad (2013) states that the information concerning acquisitions tends to have a positive effect on companies’ returns as their value increases. It is noteworthy that the author focuses on the banking sector, but the findings are valuable for managers working for multinationals or big public companies as well.

Some researchers focus on empirical aspects and provide particular models applicable in many cases. Hence, Hackbarth and Miao (2012) design a real options model of mergers and acquisitions. The model defines the product market equilibrium as well as terms and the necessary timing for acquisitions and mergers. The author also highlights a number of important findings. Hackbarth and Miao (2012) note that the competition tends to slow down the process of acquisition, acquisitions are likely to occur in the industries with a high divergence between the companies’ size. The researchers also note that bigger bidders have more chances to acquire a target company even if the bids are equal.

The bulk of literature on the acquisition also includes various works based on the analysis of particular cases. For example, Gao (2015) explores the peculiarities of the takeover of Volvo. The case of the acquisition of the high-end car brand (Volvo) by a Chinese low-end car brand Geely is in the researcher’s lens. The study concentrates on the financial implications. Gao (2015) examines the financial, strategic, and market motives for the acquisition. It is stressed that the decisions were made in terms of these three basic dimensions.

It is possible to note that such growth strategy as acquisition has been well-researched. Researchers have applied various theoretical frameworks to identify and explain peculiarities of the process. Such areas as reasons for acquisitions have received particular attention in the academic world. Researchers focus on theory as well as practical examples of takeovers, which helps develop various models to implement the acquisition effectively.

Decision Making

The process of decision making has also acquired a considerable attention, and researchers have analyzed various factors affecting managers’ decisions related to acquisitions. One of the most important decisions to make is to choose the right growth strategy. Clearly, the acquisition is one of the possible options, and it can have different effects in different situations. This aspect of decision making is properly highlighted in the academia. For instance, Yin and Shanley (2008) claim that industry is the factor that has the most potent influence on acquisition-related decision making. The researchers concentrate on three dimensions that include “requirements for commitment”, “pressures for flexibility” and institutional (regulatory) forces (Yin & Shanley, 2008, p. 474). The authors state that the main effects within the dimension of commitment include capital intensiveness, human asset intensiveness, and tacit knowledge. The flexibility dimension encompasses technological uncertainty. The dimension of institutional constraints includes industry concentration, regulatory environment, and some other institutional factors (for example, the influence of high-status companies).

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Kayo, Kimura, Patrocínio and De Oliveira Neto (2010) also explore factors affecting companies’ choices related to growth strategies. The researchers focus on experiences of companies located in developing countries with the focus on Brazil. Kayo et al. (2010) stress that the primary factor that has an impact on companies’ choice (between an acquisition or alliance or another growth strategy) is the companies’ previous experiences. Thus, if a business managed to implement a particular growth approach (for example, acquisition) successfully, it is likely to choose the same method in other instances. Kayo et al. (2010) also claim that the degree of relatedness between the companies plays an important role in the process of decision making. Related companies are more likely to choose acquisition as their preferred growth strategy. For instance, if the acquirer and target operate in the oil industry, it is likely that the acquisition will be chosen rather any other growth strategy. Notably, the researchers argue that financial factors do not have any meaningful effect on the decision-making process.

Agarwal and Zeephongsekul (2011) describe a simulation model (two-person Merger & Acquisition model) that is instrumental in identifying the final price of the acquisition. Agarwal and Zeephongsekul (2011) emphasize that psychological pricing is an important aspect, but there is a lack of effective analysis tools. According to Agarwal and Zeephongsekul (2011), Corporate Finance models are not applicable when analyzing psychological pricing as well as its outcomes. Clearly, pricing is one the major decisions to make when negotiating a takeover. Agarwal and Zeephongsekul (2011) argue that the behavior of the acquirer should be considered within the dimension of risk taking or aversion. At the same time, the decision-making process of the target should be considered within the terrain of optimistic and pessimistic perspectives. The researchers state that the model developed can be a platform for the development of other paradigms and particular methods that will be applied during the decision-making process.

The volume of knowledge on peculiarities of the decision making is quite extensive. Researchers have identified factors affecting people’s decisions and behaviors. Numerous models that can help managers make correct choices that lead to a successful implementation of the acquisition. Researchers identify the most common decisions made and evaluate their effectiveness. Theoretical analysis, as well as estimation of specific takeovers, contributes to the development of the knowledge base on the matter.

Risk Management

Risk management is one of the most relevant aspects of the acquisition as the oil industry is associated with various risks and a significant degree of uncertainty. Clearly, it is vital to consider all possible risks to implement an effective acquisition process. Ofili (2014) examines the reasons for implementing acquisitions, some basic factors contributing to failures of such implementation as well as solutions to mitigate risks associated with the growth strategy. The author mentions such reasons for acquisition as the need to penetrate into new markets, reduce costs, expand the customer base, and so on. Ofili (2014) mentions such risks as geographic locations, cultural disparities, divergences between the companies’ technological systems and the disparities in organizational cultures (especially values). The researcher stresses that it is possible to mitigate the risks mentioned if the decision-makers take them into account when developing their acquisition strategies. It is noteworthy that the researcher provides particular examples of well-known companies, which makes the paper valid and illustrative.

Thus, Chui (2011) provides a description of a risk management model for an effective acquisition process. The proposed model consisted of two stages. The first stage, risk identification, implies the use of the fishbone method. At this stage, it is important to examine all possible risks as well as their causes and possible outcomes. The fishbone framework enables the manager (or a team) to place numerous ideas generated during brainstorming into explicit categories that will be later analyzed and quantified. The second stage, risk quantification, is based on the utilization of the Fuzzy-AHP method. The AHP (Analytic Hierarchy Process) developed in the 1970s has been widely used since then (Chui, 2011). This approach involves the implementation of quantitative and qualitative analysis that results in the identification of goals, criteria and methods of evaluation. The results are presented in a form of the multilevel tree structure. Chui (2011) notes that the approach is quite effective and can be used in many industries. The model helps assess major risks and choose the most appropriate target company, which often defines the success of the acquisition process.

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Apart from works on the pre-acquisition stage, some researchers focus on the post-acquisition activities that mitigate various risks associated with the takeover. Savovic (2012) provides a detailed analysis of the necessary steps that ensure successful implementation of the acquisition. Importantly, the paper includes a comprehensive description of different types of companies’ integration. The integration type often defines the barriers to successful implementation of the acquisition. The researcher stresses that improper communication and cultural differences (people’s values and beliefs as well as organizational values) are basic factors contributing to the failure. The author states that proper planning of the post-acquisition measures can mitigate these risks. The speed of the process is also essential as slow acquisition (and especially integration) procedures are associated with more risks.

It is possible to state that risk mitigation is also an important area that has been researched in detail. The risks companies may encounter before, during and after the takeover have been in the researchers’ lens. Apart from describing possible risks, researchers come up with effective solutions for every stage of the acquisition process. These solutions can be applied in different industries, which is essential for practitioners.

Value for Practitioners

It is important to add that the literature available on the growth strategy in question provides numerous helpful insights for practitioners. First, the papers include comprehensive theoretical frameworks that are instrumental in the process of acquisition planning, implementation, and evaluation. It is essential to understand the nature of acquisitions, its benefits and barriers to its successful implementation to come up with effective strategies. Moreover, researchers have developed certain methods and tools that can be applicable in some settings (some industries or even companies). The academic discourse facilitates the discussion in the business world, which leads to the development of many new strategies and approaches.

Existing Gaps

Although many aspects of the issue have been well-researched, there are still a number of gaps in the existing literature. One of the major limitations is the lack of interdisciplinary approach (Reddy, 2014). Reddy (2014) stresses that researchers tend to employ a particular theoretical framework when analyzing some aspects of the matter. There is often a focus on a specific industry or company as researchers often prefer case study methodologies. This precision enables the researchers to unveil a plethora of aspects of the issue, but the existing academic inquiry seems to miss an interdisciplinary paradigm. However, the interdisciplinary approach is instrumental in uncovering effective solutions that can be employed in many settings. Reddy (2014) stresses that the contemporary business world is an integrated system where all elements are interrelated, which makes it essential to have a broader perspective when looking into issues related to growth strategies.

It is also clear that scholars focus on the theory and the development of theoretical models and frameworks while practitioners are more concerned with specific strategies to utilize. However, there is a clear lack of alignment of the theory and practice. Only several works provide models developed with the use of certain theories while there is little information on the efficiency of these strategies and models. The lack of quantitative data on the matter can also be regarded as a significant limitation. As has been mentioned above, researchers often utilize qualitative tools (especially case studies). However, apart from developing specific methods and strategies, it is essential to examine the extent to which the strategies developed are effective. The two limitations mentioned above (the lack of quantitative data and alignment between theory and practice) are especially evident in the terrain of decision making and risk management. These aspects of the acquisition process require the utilization of particular skills and tools, but practitioners may often have to rely on their experience rather than sound research in the field.

The Place of the Present Research

It is possible to state that this research will fill in some of the gaps mentioned above. This study will attempt to analyze the way academic knowledge impacts practitioners’ decision making. As has been mentioned above, the lack of the alignment between theory and practice contributes to the lack of sound strategies and frameworks that practitioners could use when making decisions related to the acquisition process. This trend may also correlate with the number of failed acquisitions as well as the degree of uncertainty in the business world. This research will be the first step in the development of the interdisciplinary platform where inputs of researchers and practitioners will be aligned. It is essential to identify the degree to which practitioners learn about and utilize the knowledge accumulated by researchers. It is also important to examine particular ways practitioners employ the knowledge they obtained from academic papers when making decisions concerning acquisitions. These data can be later used when developing strategies aimed at the alignment of theory and practice.

Conclusion

In conclusion, it is possible to note that the acquisition has long been in the lens of researchers who have examined the peculiarities of the growth strategy, its benefits as well as possible barriers to its successful implementation. At the same time, the literature review reveals a number of existing gaps in the literature. These limitations include the lack of the evaluation of particular strategies especially in the area of decision-making and risk management. The field would also benefit from the development of an interdisciplinary approach and the incorporation of practices used in different industries. Nonetheless, it is important to note that practitioners should make use of the literature available as well as participate in the academic discourse, which will lead to the development of various tools and instruments applicable in diverse settings. The present research will complete one of the existing gaps as it will shed light on the process of alignment of theory and practice. The understanding of the way theory is applied in the real-life business context will identify the role of theory and its applicability as well as develop strategies concerning the use of theoretical frameworks and certain models crafted by researchers.

The process of decision making depends on the availability of the necessary information. Bazerman and Moore (2008) stress that there is another crucial element. The availability of information does not necessarily translate into correct decisions if bounded awareness comes into play. Bounded awareness can be defined as the decision maker’s inability to take into account all possibilities. Bazerman and Moore (2008) note that people tend to fail to consider even those possibilities that can be easily predicted. Clearly, decision makers are often unprepared to various changes that are taking place. More so, managers may often ignore some details that seem irrelevant but turn out to be crucial in the long run.

The Ford Motor’s venture Edsel can be regarded as a conventional illustration of the impact of the bounded awareness on the effectiveness of a decision made. In the case of the car (which is a symbol of a business failure), the decision makers could not predict (or rather did not notice the trend of) the coming recession in the USA. The company developed a costly product in the times when people tried to reduce their expenditures. The overly-priced car did not sell well, and the company lost millions.

The decision makers tried to create a car in the medium-priced car, but this niche was very competitive. The changes in the country’s economy contributed to the change in people’s preferences and expectations. The car industry is quite vulnerable to changes in the economic sphere as buying a car is associated with a significant investment. Therefore, it is advisable to take into account the trends existing in the business environment with a focus on the state of the economy. This information can help in predicting customers’ expectations, desires, needs, preferences, and so on. More so, the decision makers did not implement any research concerning potential customer’s ideas as regards the new product. Clearly, the lack of research on customer’s expectations and preferences resulted in the decision makers’ failure to take into account a myriad of possibilities.

I have also experienced the negative effects of the bounded awareness. I was involved in a project that involved a collaboration of several subsidiaries. I was to present a report and obtain some employees’ feedback. I have prepared the report and all the necessary materials to help the participants grasp the information better. I knew I was to address a diverse audience and tried to take into account all possible cultural differences. I sent the materials and asked the people concerned to respond as soon as possible. However, I did not take into account the urgency and importance of the report and the project evaluation for different departments. I did not imagine that the report (and the working group’s decision based on its evaluation) was one of the milestones in the work of one of our subsidiaries. The subsidiary has been undergoing a process of acquisition, and the communication channels were still inappropriate. The employees in the subsidiary assumed that the procedures were quite lasting and did not want to make the rest of the working group hurry with their feedback. As a result, one of the projects was late, which negatively affected the development of the subsidiary. I believe I should have assessed the urgency of the report for all the parties. I would have changed my decision, and I would have arranged an online discussion of the report, which would have led to a more rapid decision.

Reference List

Agarwal, N., & Zeephongsekul, P. (2011). Psychological pricing in mergers & acquisitions using game theory. In 19th International Congress on Modelling and Simulation held 12-16 December 2011 in Perth, Australia (pp. 1437-1443). Perth, Australia: Modelling and Simulation Society of Australia and New Zealand.

Bazerman, M.H., & Moore, D.A. (2008). Judgment in managerial decision making. Chichester, UK: Wiley.

Chui, B.S. (2011). A risk management model for merger and acquisition. International Journal of Engineering Business Management, 3(2), 37-44.

Dilshad, M.N. (2013). Profitability analysis of mergers and acquisitions: An event study approach. Business and Economic Research, 3(1), 89-125.

Gao, Z. (2015). The enterprise merger and acquisition effect on firm value. Modern Economy, 6(1), 717-726.

Hackbarth, D., & Miao, J. (2012). The dynamics of mergers and acquisitions in oligopolistic industries. Journal of Economic Dynamics & Control, 36(1), 585-609.

Kayo, E.K., Kimura, H., Patrocínio, & De Oliveira Neto, L.E. (2010). Acquisitions, joint ventures or arm’s-length alliance? Analyzing the determinants of the choice of growth strategy in Brazil from 1996 through 2007. Brazilian Administration Review, 7(4), 397-412.

Ofili, O.U. (2014). Review of risk management techniques in mergers & acquisitions. European Journal of Business and Social Sciences, 3(6), 1-11.

Reddy, K.S. (2014). Extant reviews on entry-mode/internationalization, mergers & acquisitions, and diversification: Understanding theories and establishing interdisciplinary research. Pacific Science Review, 16(4), 250-274.

Savovic, S. (2012). The importance of post-acquisition integration for value creation and success of mergers and acquisitions. Economic Horizons, 14(3), 195-207.

Yin, X., & Shanley, M. (2008). Industry determinants of the “merger versus alliance” decision. Academy of Management Review, 33(2), 473-491.

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