Management consulting

process demands a gradual approach to separating out the business, and a joint venture may be the right solution. Thus, the joint venture is more advantageous that a straight sale when the assets being liberated are intangible, such as consumer franchise, distribution relationships, human skills, and systems, which are especially difficult for outsiders to evaluate.

Tensions frequently arise between joint venture partners because their different goals may lead to different expectations of lifespan. To avoid the traps in managing the life-cycle of a joint venture, it is important to recognize that longevity is not a good measure of success. The potential gain from preserving the joint venture beyond the current project should be continuously monitored. If there is no further potential for complementarity and attractiveness to both partners, they should put in motion a process of graceful disengagement.

22.9 Mergers and acquisitions

Mergers and acquisitions (M&A), already discussed from a financial perspective in section 14.5, are widely used for transforming corporations. Smaller and younger companies bought for a specific capability can transform the acquirer into a more flexible and dynamic competitor. The purchase can help the established company reposition itself in the marketplace and the aggressive, entrepreneurial culture of the acquired firm spills over to the buyer organization. For example, Medtronic’s sales doubled in 18 months after a flurry of acquisitions. Cisco Systems provides another example of successful company transformation through acquisitions (box 22.3).

Box 22.3 Restructuring through acquisitions: the case of Cisco Systems

In the high-tech arena, Cisco has found a good solution: just buy. Between 1996 and 2000, it made more than 60 acquisitions, building itself into one of the world’s most valuable and admired companies. To integrate so many different cultures, Cisco has turned its expertise as a networking company inwards by building the most comprehensive internal communications network of any company in the world. Cisco Systems’ acquisition process has worked well because it has kept resources, processes and values in the right perspective. Between 1993 and 1997, it primarily acquired small companies that were less than two years old, early-stage organizations whose market value was built primarily on their resources, particularly their engineers and products. Cisco plugged those resources into their own development, manufacturing, logistics, and marketing processes, throwing away whatever nascent processes and values came with the acquisitions because those were not what it paid for. On a few occasions, when the company acquired a larger, more mature organization (like StrataCom in 1996), Cisco did not integrate it. Rather, it let it stand alone and infused Cisco’s substantial resources into StrataCom’s organization to help it grow more rapidly.

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Consulting in company transformation

To acquire capabilities is crucial. High-tech acquisitions particularly need a new orientation around people, not products, since high-tech products can become obsolete in a matter of months and replacing them needs knowledge, experience and capabilities. Once developed, technical capabilities are hard to imitate, so they provide a protective barrier, even against strong rivals. Smart acquirers want to obtain real human and systemic capabilities.

The first step, therefore, is to understand what capabilities the company really needs, and to decide what business it should be in over the next few years. After assessing market demands, managers need to identify the gaps in their product line and the products to bridge them. Finally they can outline the technological capabilities they will need. Once the capability gaps are known, companies can decide whether to develop the competence internally or acquire it from outside.

Advising clients on mergers and acquisitions has become an elitist area of consulting. This is not totally unjustified, as wide business knowledge, experience and sound judgement are required in these cases. The financial side of the scheme has to be examined carefully (see Chapter 14). However, the consultant should not confine himself or herself to the financial aspects of the acquisition proposal: a good strategic fit must come first. A scheme that is perfectly feasible and looks attractive from the financial point of view may involve unrealistic strategic choices as regards marketing, production capacity, staff capabilities or compatibility of organizational cultures; in such a case the looked-for synergy will not be realized.

There is, in fact, ample evidence that the services of skilled consultants are needed in this area of corporate activity. A number of studies, conducted by both academics and professional consultants in many countries over a period of three or four decades, have produced strikingly similar conclusions – that about 50 per cent of all mergers and acquisitions fail to produce the expected results. There appear to be two principal reasons. The first is that the price paid is often unjustifiably high. The other is that top management consistently fail to recognize the problems inherent in trying to bring together two organizations, each with its own history, values and culture. The problems are particularly intense when a large and perhaps bureaucratic organization is taking control of a smaller and more entrepreneurial one. Perhaps the most important single service that the consultant can provide in an acquisition is to try to give top executives of the acquiring company some idea of how things look from the other side. It is in the merger and acquisition context that an understanding of corporate culture is most important (see Chapters 5 and 12).

Another reason for difficulties is the failure to identify accurately the type of merger the parties will be dealing with. Transformational mergers, especially, must be managed quite differently from conventional ones because they are inherently more risky. The conventional M&A strategy relates to capacity transfer and is based on absorption, while transformational M&A relates to creating new capabilities to cope with revolutionary change.

Successful acquirers go out of their way to retain the best people, make their transition as smooth as possible, and keep their development energies focused.

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