Jerry Levin, who sold Time Warner to AOL, has recently described the $124 billion (GBP 77 billion) deal as the ‘worst of the century’.
The title could also go to Vodafone’s hostile acquisition of Mannesmann in 2000 (debatably last century) when the UK mobile giant used overvalued shares to buy even more over-priced German equity. However,
the carve-up of ABN AMRO in 2007, which nearly sank both the Royal Bank of Scotland and Fortis, is also a contender.
Levin said many banks need to apologise.
‘Let’s hear publicly from Lehman Brothers, Bear Stearns, Merrill Lynch and on and on,’ he said.
Source: Sunday Express, January 10, 2010
The same thing is happening at the international level. Google has bought YouTube, J. P.
Morgan has incorporated Cazenove, Cyrte Investment has bought Bol.com, Unilever has bought Sanes and Zwitsal, Kraft (the owner/producer of Philadelphia Cream Cheese and Milka and Toblerone chocolate) has bought up Cadbury (known for its chewing gum brands
Stimorol and Trident) for €13.6 billion after first having made a hostile bid, and following the
takeover fever
Chinese companies
investment companies
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takeover of XTO Energy (one of the biggest natural gas producers in the US) by Exxon Mobil in a megadeal involving $41 billion, more takeovers can be expected in the energy sector.
Recently (in 2009) Cisco lifted the offer for Tandberg (Norway) to $3.4 billion, Canon made a bid for Océ, the Dutch printer and photocopier company, and BA and Iberia reached a
preliminary agreement on a merger that would create Europe’s third largest airline in terms of revenue. Xerox, Dell and Friesland Campina are looking out for takeovers and the
pharmaceutical giants are hoping to grow by scaling-up: for example, Roche, the Swiss pharmaceutical concern, has taken a ‘bio-farm’ approach and bought up the American company Genentech, the world’s biggest biotech company.
While the profits will often only be evident in the long term, the costs will often be immediately apparent. 80% of the mergers and takeovers that have occurred during recent years will turn out not to have created any value or barely so. These companies will often have thrown away many of their resources. That magic synergy will often turn out to be illusory.
Despite this, the wave of merger and takeovers continues unabated, as it has been doing since 2009/2010. Analyses have shown this pattern to repeat itself every five years.
The top managers of our biggest organizations are now claiming that they spend half of their time on merger and acquisition cases. With new mergers and acquisitions being reported daily, the terms ‘merger-euphoria,’ ‘merger mania’ and ‘macho-acquisitions’ have been coined.
The ‘mega-merger,’ aimed particularly at getting additional market leverage, has come into existence. According to research, this extra market leverage is not being translated into higher profit levels: generally speaking, production is not being done more efficiently and the ‘post merger’ period is not characterized by better scores in the area of research and development.
Mergers are primarily defensive moves, though other considerations also play a role. The large organization collapses less frequently than the small organization and the top managers of large companies have more status (and income via salary, bonuses, stock options etc.) than those of smaller companies.
Simultaneously with the increase in ‘mammoth mergers,’ conglomerates seem to be breaking up (in the USA, this is a process that has been underway since the end of the 80s), as evidenced by the splitting up of AT&T and TT (in the USA), ICI (in the UK), and Akzo Nobel and Philips (in the Netherlands). Throughout the world, organizations like these are
continually reorganizing their operations, with cost reduction the main goal. Such reorganizations often involve many jobs being cut.
Philips has been considering splitting up the concern for a long time; ABN Amro has not excluded the possibility of splitting up, and for Akzo Nobel, splitting up its operations into independent pharmaceutical and chemical activities had been under consideration as a serious strategic option since 2000. The splitting up took place in 2007.
Since 2009, there has been open speculation that General Electric will also be split up in order to avoid having its industrial and its financial activities both housed under the same roof. Unilever has also been mentioned as a candidate for being split up, and at the end of 2009, a hedge fund was putting pressure on TNT to split itself up.
Developments in information technology
Developments in the field of information technology provide opportunities for improved efficiency and effectiveness. More sophisticated telecommunication networks and management information systems have improved the possibilities for decentralized decision making, while at the same time allowing management to maintain an overview at the center. If organizations are to exploit these opportunities, change will be inevitable. This change may take the form of an increase in e-commerce and multi-channel marketing and sales, or in traditional industries, ICT-related changes through ‘unbundling’ and ‘rebundling’ through the processes of
intermediation and disintermediation respectively (see also sections 2.4.7 and 10.6).
mammoth mergers conglomerates breaking up
reorganizations
e-commerce multi-channel
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In this connection, social networking – for example, the creation of communities, and not only those in the area of supply chain analysis, sales and marketing, but also in the area of R&D, recruitment and selection and so on (see also 10.4.6.) – could certainly prove to be an important business tool. Technologies such as blog and wiki software are symptoms of an increasing and omnipresent desire for information.
Greater employee mobility and autonomy
There is a trend in organizations towards increasing the involvement and autonomy of employees who wish to have a say in the allocation of work and are also prepared to change jobs.
Consequently, employee mobility and skill levels have become important issues for management.
WOULD YOU LIKE A McPhD WITH THAT?
McDonald’s hopes to offer its own PhD, throwing down the ultimate challenge to the popular wisdom that the high-street fast-food chain creates nothing but low-paid, low- quality ‘McJobs’ to replace high-skilled work in old manufacturing industries.
The company’s ambition is not as bizarre as it might sound to the average visitor to a McDonald’s restaurant. The company has developed a reputation over recent years for its training. It took a further step towards educational respectability last year when it became one of Britain’s first employers to win the power to award its own nationally recognised qualifications. McDonald’s has taken advantage of this to start offering courses in basic shift management that are equivalent to A-levels.
These teach ‘the whole dynamics about customer interactions’, stretching even to the hardships of ‘dealing with aggressive customers’ and ‘safety during the night-time
shift’. They also deal with less dangerous but equally sensitive matters, such as how to approach and aid unserved customers wandering around at the front of the restaurant.
The CPO said McDonald’s had become an attractive employer both to graduates and other workers, in large part because of its training, with its status as an awarding body adding to the prestige of its qualifications.
The company also offers a ‘flexibility’ that suited young people studying at university, including ‘McTime’ – a system that allows workers to change their shifts via their mobile phones.
Aside from McDonald’s, eight employers and employer groups have won the right to award their own qualifications since last year. The government has encouraged them because it wants more workers to have nationally recognised certificates that increase their employability across the economy.
Source: Financial Times, May 11, 2009
As a result of rapid demographic changes, a lot of employees will retire in the coming years, potentially leading to a loss of essential knowledge and skills. A focus on expanding the productivity of every employee would thus seem advisable. If, as predicted, more than 60% of the world’s population is living in cities by 2030 a focus on products and services that mainly take advantage of the effects of urban concentration would seem advisable in the long term.
autonomy
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Turbulence in demand
Consumer behavior is constantly changing and consumer needs are becoming increasingly varied. Organizations are thus forced to provide the various customer groups with a variety of products. They also need to react increasingly quickly to changes in taste and preferences. The Internet via Web 2.0-technology is expected to change demand patterns dramatically.
There is clear evidence of this in the ‘fast fashion’ area, with its extremely short product cycles for fashion with mass appeal (fashion as sold by such fashion chains as Zara, H & M, Benetton and Topshop). ‘Fast’ may sometimes have to be very fast indeed: fashion items to meet new trends must sometimes be made available within a matter of weeks. To this end, designers, market specialists and buyers analyze almost real-time marketing data. If the news items prove popular, local production networks must be able to manufacture and supply to order.
Decisions are being made faster than ever and to short decision-making processes; the required information needs to be made available very quickly, which demands real-time achievement-oriented management. Innovative (‘first-move’) products are dominating the market for increasingly shorter period of time, with new products following in quick succession, making it even more difficult to turn a profit. The rapid expansion of free services (including Internet services and search engines such as Google) are complicating things even more (see also Section 10.4.6).
C.K. Prahalad, a management guru from India, has drawn attention to the change in demand volume in relation to the dramatic change in demand patterns. Briefly, his theory is as follows:
the greatest purchasing power lies with the millions of poor people and the ‘Bottom of the Pyramid’ (BOP) (his term) is the driving force behind demand changes, innovation and prosperity, and even revolutionary change. The bottom of the economic pyramid is formed by the 4 billion people who live on less than $2 a day. The World Bank, several donor nations, several aid organizations, national governments and civilians have done their utmost for more than 50 years, but have not been able to eradicate poverty. Prahalad contends that thinking about the poor as victims or as a burden should stop. Instead, we should start seeing them as resilient and creative entrepreneurs and as quality-conscious consumers. In the 18 largest developing countries, some 680 million families with an income lower than $6,000 are involved. A whole new world of opportunities will arise here and they will be a new source of world trade, prosperity and innovation. In other words, the four billion people at the bottom of the economic pyramid – at the BOP – are rearing to become a part of the globalization process.
To ignore this market means missing out on great commercial possibilities. BOP consumers also want brand products, not cheap rubbish. For them too – the billions of consumers in China, India, Brazil, Mexico, Russia, Indonesia, Thailand and South Africa – innovation is the key to change and growth. This will eventually cause a complete turnabout in the economic structure. Companies (multinationals included) will find themselves forced to take a closer look at the poorest people in the world and at their needs and possibilities. (See Prahalad, The Fortune at the Bottom of the Pyramid: Eradicating Poverty through Profits).
Some of these developments – namely, internationalization, repositioning, sustainable business, industrial transformation, outsourcing, off-shoring and shared services, unbundling and rebundling, cultural differences, strategic alliances, and network organizations – will now be examined in some detail. The influence of IT, changes in employee attitudes and corporate behavior are covered in chapters 7 and 10.
Bottom of the Pyramid (BOP)
globalization
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2.4.1 Repositioning and industrial transformation
Globalization and increasing competition are the driving forces behind industrial
transformation and the repositioning of many industrial companies. The production industries are searching for higher margins and are increasingly focused on providing service activities, though they are going about the ‘revolution’ silently. Océ, the producer of photocopying machines and printers, has created a new organization, one based not on the devices themselves but on these devices being used by the customer. The consumer does not only want to buy a product, but also wants to be relieved of the responsibility of looking after it. If the producer takes this problem off their hands, they can concentrate on their core activities.
In response to this need, DAF is now not only delivering the truck, but also seeing to it that it is always ready to operate: that is, that it fulfills the function of providing transport. In
addition to providing maintenance and repair, leasing may also be part of the terms, and those who operate the devices may be included too. In the United States, where companies like General Electric, IBM and Boeing are leading the way in transforming traditional industrial companies into industrial service providers, Océ has been attracting attention for the last two years by providing a broader service package than its competitors. Several thousand employees of this Dutch-based company are concentrating on providing so-called ‘document services’.
These services encompass the organization’s entire paperwork flow: providing and
maintaining the entire printer and photo copying machine network as well as the staff that carry out the activities involved.
Providing functional services as a differentiation tactic and to strengthen brand loyalty demands a different kind of business approach by the company. The accent comes to lie on providing full service and ‘total care’ instead of sales. In other words, there is a trend within industry towards a service approach (it has been described as the ‘servicization’ of industry).
Even though the trend seems to be unmistakable, not all companies are taking the approach of providing activities to placate customer desires and thereby obtain higher margins. For industrial organizations, it may even make sense to oppose this trend and focus solely on the manufacturing side. The search for higher margins by such concerns as Océ or DAF represents, in fact, real opportunities for quintessentially manufacturing companies, because device and machine builders are outsourcing the production of components and parts to an increasing degree. However, in the ‘put it together’ industry, with its high percentage of electronics, software engineering, electro technology and mechanical engineering (in other words,
‘mechatronics’), cooperation between end producers of systems and modulus is unavoidable if a company wants to stay in the business at a global level.
Being in a regional chain of business clusters is profitable when times are good, but when they are not (as in the recent crisis), the mutual interdependency of companies can be a disadvantage and there will not be enough work for everybody. Expenditure cutbacks, retrenchments and shorter working hours have an immediate flow-on effect within such chains. ‘Clustering’ has also helped the aviation industry in its battle for existence. The aviation industry came under great pressure during 2008, and this has had consequences for suppliers and maintenance companies.
2.4.2 Outsourcing, nearshoring, offshoring and shared services
Present developments are encouraging companies to concentrate on their core activities (the activities that play the key role in their business), meaning that the business chain is
undergoing a change. An increasing part of the production process is being outsourced, because product life cycles are becoming increasingly shorter and investments in research and development and in fixed assets are having to be depreciated within an increasingly short time span. Outsourcing brings the added advantage of greater flexibility during periods of rapid changes in market demand and of being able to transfer a part of the business management,
production industries
providing functional services
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with its ever increasing complexity (a consequence of the broader range of products) to the supplier.
Outsourcing of production often results in the outsourcer economizing on capital expenditure and on the budgets for product development and research. During the course of time a situation of dependency could arise because the partner has control of both product development and production initiative. The partner will have learnt a lot about the desires of the end consumer in the meantime, and will have obtained a great deal of experience in product development.
The introduction by the partner of a competing product on the market will only be a matter of time. This constitutes an important strategic risk. In the reverse direction along the chain, the supplier will not want to be too dependent on a major client. A new and successful supplier is frequently required not only to have the knowledge and the skills to participate in the design and development of his client’s new target systems, but also to carry some of the development costs, risks and investments. This is the case with many industrial firms: for instance, firms in Brabant and Limburg that work for big clients such as Philips, Medical, ASML, DAF, Stork and Océ. A striking number of the hundreds of industrial suppliers in that region are considering forming close collaborative ties or even merging to increase capacity and so keep up with the internationalizing of their clients, thus exercising greater market power and reaching a certain equality with them.
Outsourcing and offshoring
The terms ‘outsourcing’ and ‘offshoring’ are very often used as synonyms. Offshoring and nearshoring always implies that the activities are transferred to a supplying unit in another country, which is at the same time a low-wage country nearby or far away, such as India, China, South Africa, the Philippines, Poland or Turkey. In other words, offshoring is a global process, a way of transferring activities to a low-wage country, often ICT-based and often involving long physical distances. Océ, who has transferred machines and/or software production to Malaysia, China, India and the Czech Republic, forms a good example of this.
However, offshoring does not necessarily involve the transfer of activities to another business:
this is outsourcing. Offshoring of activities to the company’s own branch in a low-wage country will, of course, only occur if activities can be carried out far more cheaply there. The activities could theoretically be farmed out to an independently operating supplier, but offshored processes are normally carried out in-house and under the company in question’s own supervision.
Offshoring is particularly popular for the service activities of companies (a Wehkamp call center in South Africa, for example), in telecommunication and in financial services – processing and administration – (ABN Amro in Chennai, Madras), or for the purposes of software development, IT services and contract support (Oracle, Deloitte research, IBM and Siemens), and the like. Reduction of expenses, quality improvement, flexibility, retraining advantages and resilience are usually regarded as the main advantages.
Experiences in outsourcing, nearshoring and offshoring
The envisaged advantages of outsourcing and offshoring are often overestimated.
Investigations show that many businesses are dissatisfied with the results. The Financial Times (2003 and 2004) repeatedly referred to the fact that 66% of businesses were either
disappointed about the results of outsourcing, or were of the opinion that there had been no advantage at all. Reports from India, to name just one country, have shown the other
perspective: that Western businesses had spent too little effort on maintaining the relationship.
Apparently it was thought that once a certain activity was contractually organized, no further effort was required. In fact the opposite is the case.
outsourcing of production
strategic risk
outsourcing offshoring nearshoring
dissatisfied with the results