Strategic fit expresses the degree to which an

organization An organization or organisation (Commonwealth English; see spelling differences), is an entity—such as a company, an institution, or an association—comprising one or more people and having a particular purpose. The word is derived f ...

is matching its

resource Resource refers to all the materials available in our environment which are technologically accessible, economically feasible and culturally sustainable and help us to satisfy our needs and wants. Resources can broadly be classified upon thei ...

s and capabilities with the opportunities in the external environment. The matching takes place through

strategy Strategy (from Greek στρατηγία ''stratēgia'', "art of troop leader; office of general, command, generalship") is a general plan to achieve one or more long-term or overall goals under conditions of uncertainty. In the sense of the " ...

and it is therefore vital that the company has the actual resources and capabilities to execute and support the strategy. Strategic fit can be used actively to evaluate the current strategic situation of a company as well as opportunities such as

mergers and acquisitions Mergers and acquisitions (M&A) are business transactions in which the ownership of companies, other business organizations, or their operating units are transferred to or consolidated with another company or business organization. As an aspec ...

(M&A) and divestitures of organizational divisions. Strategic fit is related to the resource-based view of the firm which suggests that the key to profitability is not only through positioning and industry selection but rather through an internal focus which seeks to utilize the unique characteristics of the company's portfolio of resources and capabilities. A unique combination of resources and capabilities can eventually be developed into a

competitive advantage In business, a competitive advantage is an attribute that allows an organization to outperform its competitors. A competitive advantage may include access to natural resources, such as high-grade ores or a low-cost power source, highly skilled ...

which the company can profit from. However, it is important to differentiate between resources and capabilities. Resources relate to the inputs to production owned by the company, whereas capabilities describe the accumulation of learning the company possesses.

Class

Resources can be classified both as tangible and intangible: Tangible: *Financial (cash, securities) *Physical (Location, plant, machinery) Intangible: *

Technology Technology is the application of knowledge to reach practical goals in a specifiable and reproducible way. The word ''technology'' may also mean the product of such an endeavor. The use of technology is widely prevalent in medicine, scien ...

(

patent A patent is a type of intellectual property that gives its owner the legal right to exclude others from making, using, or selling an invention for a limited period of time in exchange for publishing an enabling disclosure of the invention."A ...

copyright A copyright is a type of intellectual property that gives its owner the exclusive right to copy, distribute, adapt, display, and perform a creative work, usually for a limited time. The creative work may be in a literary, artistic, educatio ...

s) *

Human resources Human resources (HR) is the set of people who make up the workforce of an organization, business sector, industry, or economy. A narrower concept is human capital, the knowledge and skills which the individuals command. Similar terms includ ...

( tacit knowledge) *Reputation (Brands) *Culture Several tools have been developed one can use in order to analyze the resources and capabilities of a company. These include

SWOT SWOT may refer to: * ''SWOT'' (manga), a Japanese media franchise * Cramming (education) In education, cramming is the practice of working intensively to absorb large volumes of information in short amounts of time. It is often done by studen ...

value chain A value chain is a progression of activities that a firm operating in a specific industry performs in order to deliver a valuable product (i.e., good and/or service) to the end customer. The concept comes through business management and was f ...

analysis,

cash flow A cash flow is a real or virtual movement of money: *a cash flow in its narrow sense is a payment (in a currency), especially from one central bank account to another; the term 'cash flow' is mostly used to describe payments that are expected ...

analysis and more.

Benchmarking Benchmarking is the practice of comparing business processes and performance metrics to industry bests and best practices from other companies. Dimensions typically measured are quality, time and cost. Benchmarking is used to measure performanc ...

with relevant peers is a tool to assess the relative strengths of the resources and capabilities of the company compared to its competitors. Strategic fit can also be used to evaluate specific opportunities like M&A opportunities. The strategic fit would, in this case, refer to how well the potential acquisition fits with the planned direction (strategy) of the acquiring company. In order to justify growth through M&A transactions the transaction should yield a better return than organic growth. The differential efficiency theory states that the acquiring firm will be able to increase its efficiency in the areas where the acquired firm is superior. In addition, the theory argues that M&A transactions give the acquiring firm the possibility of achieving positive

synergy Synergy is an interaction or cooperation giving rise to a whole that is greater than the simple sum of its parts. The term ''synergy'' comes from the Attic Greek word συνεργία ' from ', , meaning "working together". History In Christian ...

effects meaning that the two merged companies are worth more together than the sums of their parts individually. This is because merging companies may enjoy from

economies of scale In microeconomics, economies of scale are the cost advantages that enterprises obtain due to their scale of operation, and are typically measured by the amount of output produced per unit of time. A decrease in cost per unit of output enables ...

and economies of scope. However, in reality, many M&A transactions fail due to different factors, one of them being lack of strategic fit. A CEO survey conducted by

Bain & Company Bain & Company is an American management consulting company headquartered in Boston, Massachusetts. The firm provides advice to public, private, and non-profit organizations. One of the Big Three management consultancies, Bain & Company was fo ...

in 1997 showed that 94% of the interviewed CEO's considered the strategic fit to be vitally influential in the success or failure of an acquisition. A high degree of strategic fit from can potentially yield many benefits for an organization. Best case scenario a high degree of strategic fit may be the key to a successful

merger Mergers and acquisitions (M&A) are business transactions in which the ownership of companies, other business organizations, or their operating units are transferred to or consolidated with another company or business organization. As an aspec ...

, an efficient organization, synergy effects or

cost reduction Cost reduction is the process used by companies to reduce their costs and increase their profits. Depending on a company’s services or products, the strategies can vary. Every decision in the product development process affects cost: desig ...

s. It is a vital term and it should be taken into consideration when evaluating a company's strategy and opportunities.

References

{{DEFAULTSORT:Strategic Fit Strategic management