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Mergers and acquisitions in the light of 1992 — Ensuring strategic good sense underpins corporate ambitions
Euro~wnn Mnnngement @
E7lnlpem
Mn77ngement
1SSN 0263-2373
/ournnl
Volume6 No 4
]ourt7nl
1988
$3.00
Mergers and Acquisitions Ensuring
in the Light of 1992 -
Strategic Good Sense Underpins Corporate Ambitions Alex Ren toul Director,
OC Samller Associates
The prospect of executing acquisitions in Europe currently generates more excitement than almost any other item on the corporate agenda. Venturing out of the home market is regarded once more as a test of management virility. Yet without sound strategic analysis coupled with a careful review of management capacity, ventures abroad are highly risky and may represent poor value for shareholders. This paper returns to the fundamentals required for a methodical review of the merits of expansion by acquisition in unfamiliar territory. It concludes that it is important to marry the theoretical analysis with the most careful commercial review.
Introduction
- The Not So Single Market
In the UK, the “single market” is rapidly becoming the :dol to which the government and its PR and advertising firms, ever enthusiastic for the snappily expressed totemic concept, demand that we all make obeisance. Those who dismiss the single market as a concept born more of fantasy than commercial realii:), and as a gross over-simplification of the likely look of Europe come 2000 (let alone 1992) are accu jed of short-sightedness and limited ambition. However, the difficulties and doubts remain: how to think of a single market far is it realistic throughout the EEC in barely four years’ time? It is clearly impossible to define a homogeneous market by listing a set of characteristics to which such a market will unquestionably conform. However, it is apparent that there is a simple trade-off between homogeneity and the complexity and variability of the factors required to service that market (Figure 1). Complexity in itself does not demonstrate multiple markets; nor even will multiple products in themselves define complexity. For instance, the replacement motorcycle exhaust market demands that
exhausts be customised for 70 or more different motorcycle models. Nonetheless, this remains emphatically a single market, where to concentrate on one or two models only would be absurd. By contrast, a computer company needing to make 70 different models would almost certainly be servicing a very wide range of end user requirements: in such a case, concentration on a subset of these models might in itself lead to greater competitive advantage and long-term rewards. Several variables can drive this diversity of products. Customisation (as of above) is one; different distribution accessories, channels, the result of custom, legislation, logistics and infrastructure are others. For each market, a detailed review is needed to uncover these key drivers.
Regulation:
The Key Variable
In the context of 1992 the most relevant driver is, clearly, regulation. Despite the theoretical harmonisation of regulations governing import and sale of goods across Europe which 1992 is intended to bring nation-specific regulations - designed to about, protect a particular industry, to assuage a vociferous
352
ALEX
RENTOUL Local
Iig h A
markets
(local
metropolitan
Homogeneous
Diverse
regions.
supplies, his manufacturing operations, his packaging, his administration, his distribution. Even if we adopt the sanguine view that the survival of these domestic regulations is only an issue of timing - in the sense that Europe 2002 might be more appropriate than Europe 1992, implying a longer and less pressurised window of opportunity for business to exploit - there remain a host of other reasons why the concept of a single market must be approached with care. For if the regulation seeks to control the supply of products and services, the nature of demand in the various geographies may not be equally susceptible to the single market concept.
states.
areas)
national
national
markets
markets
Mature
federal
(UK.
(Japan)
Fr, FDR)
markets
(USA)
\ Infant federal markets (EEC)
Geographical entities (S.E. Asia) Low Low
Figure 1
Complexity of market key success factors
Homogeneity/Complexity
b High
Trade-Off
lobby or to safeguard consumers using traditional means - will persist. Indeed, some EEC legislation has made specific provision for national regulatory regimes to be superimposed on Europe-wide standards; for instance, UCITS legislation on open-ended investment imposes a robust legal framework but allows each country to set its own marketing regulations. Even without these cases where national regimes will be enshrined, a number of other areas of “unofficial” regulation will need to be examined. For instance, no action has yet been taken on the provision of cross-border life insurance services; national restrictions make it effectively impossible for any such activity to take place as yet. The food and drink markets are notoriously hedged about with domestic regulation, with literally hundreds of barriers still in force across the different countries. Worringly, there seems little push towards dismantling most of these trade barriers; for every famous bastion which falls, such as the German beer ten regulations apparently purity laws, another remain safe from scrutiny. Supply-Side
Singularity,
Demand-Side
Multiplicity
Such regulations can impact the supplier’s business at all stages of business activity. They can affect his
Germans may be willing, perhaps even eager, to drink British or Dutch beer, Italians to eat imported pasta, the French to buy life insurance from the biggest and most secure life assurance company in the EEC, be it German, Italian or British, but there remain the cultural differences - in the widest sense - which militate against treating European countries as a homogeneous whole. Cultural differences, cover more than language or innate protectionism, though these may prove obstacles enough; rather they refer to the structure of industries and businesses in each country, the nature of worker participation or relationships, the network of shareholdings and cross-shareholdings; in short all of the difficulties companies may face in trying to do business elsewhere in the EEC. For example, UK unit trust management companies with experience and expertise in taking shares in small and medium sized quoted British companies will find that most such businesses are privately held in France and Germany. Given that such institutions are unable to replicate their domestic investment philosophy abroad, any foreign operations bear additional risks. Additionally, financial services products are sold even now through bank networks in Continental countries rather than through other, perhaps independent, intermediaries, as in Britain. This example illustrates the complex interdependence of many of these factors.
Though none of these instances seem substantial, a clear message emerges. Europe 1992 should be seen only as an attempt to deregulate supply, likely to be beset by delays (both within the EEC and at national and regional level), protectionism, loopholes and inertia. Although partial liberalisation of supply undoubtedly will create some new opportunities and alter existing demand to some extent, it cannot suddenly spawn a set of similar markets across This has not happened in different geographies. North America, where at least there is a common language, and it is unlikely to be the case in Europe.
MERGERS
Revisiting The Business Dimension
Strategy - With a European
If tllis seems unduly negative, it is only in order to stress that an over-simplistic and hasty approach unless supported by to :992 can be dangerous, sound strategic underpinning. For example, many recent studies have revealed that two thirds of all acquisitions go awry, largely because an acquisition strategy is, all too often, a post-rationalisation of the actu,ll acquisition process. There is similarly a substantial risk that a 1992 acquisition strategy will be I-O more than a side product of frenetic corporate activity over the next 3 years; in these circumstances, there IS every reason to suppose that the failure rate for acquisitive adventures in Europe will be similarly high. Thi> suggests that the most appropriate thrust of corporate activity in response to 1992 should be to widen the strategic planning process, incorporating a deliberate attempt to consider the exploitation of the add) tlonal scope offered by 1992. It is not the purpose of this article to revise standard strategic planning objectives and processes; but it is important to adopt a specific approach to 1992. In analysing the potential opportunities of 1992, the business objectives is taken to be that of achieving greater value creation that could be achieved by focussing on a purely domestic strategy. As with all strategic planning exercises, a prerequisite is to revit!iv the competitive positioning, strengths and weaknesses of the base business. Where European expansion is under consideration, it is particularly important to gain an understanding of the expertise and skills required of how these requirements will evolire over time and how far expansion could be supported by existing resource levels. Every CEO, like .any army commander, must consider the length and strength of his supply lines. It is a fair generalisation that expansion overseas will involve greater, or at least very different, demands on the core business than a purely domestic strate:;y. It may pay rich dividends to employ outside resources to provide an objective view of the business: this is particularly the case if internal resources are already constrained or if there are early Sign i of opposing points of view developing at senior levels of the organisation. The next objective is to identify those actions which cou1t.l lead through international expansion to positions of sustainable competitive advantage for the business. Europe 1992 now becomes relevant; the busi-mess must be able to identify activities in geolr‘lphies which will be of interest. If one doesn’t
AND ACQUISITIONS
IN THE LIGHT OF 1992
353
already exist, a mechanism must be created to identify and order the relevant market sectors, so that time and effort is not wasted on pursuing impossibilities. This understanding of international markets comes, of course, from previous strategic within the review of the thinking and analysis business at a preliminary stage. Good activity analysis will necessitate segmentation of the market along several dimensions, leading to extensive data gathering and evaluation in order to understand the market requirements, competitive economics and the evolution of the industry in each of these segments. This objective of this work is to provide answers to basic questions concerning the company’s ability to compete in these segments: what are the critical success factors? This is no easy task. As all who have attempted it know well, a bald outline of the theoretical requirements gives no hint of the difficulty of carrying out effective analysis in an imperfect world with imperfect information. Unfortunately, the difficulties are further compounded when dealing with foreign markets. The temptation to take decisions when presented with inadequate data and analysis grows even more compelling, given the considerably greater resources (both in time and money) required to refine the analysis. Additionally, while sources of reputable professional advice are relatively easy to identify in the UK, finding and choosing competent advisors abroad can be costly and fraught with difficulties. There is no easy solution to these difficulties, other than to accept that entering an unknown market successfully will be an expensive and inherently risky venture for the inexperienced, demanding considerable caution and preparatory effort. Nonetheless, the more successful companies prosecute a process designed to reduce and manage risk without penalising ambition and limiting potential reward.
Shortlisting The Opportunities: Value Chain Analysis With a wide generic objective - identifying value creation opportunities in Europe - a high-level, brief overall analysis of the relevant markets is required. Thus it is important, for example, to discover such basics as GDP and GDP per capita, preferably regionally as well as nationally, to identify key differences within as well as between the various states (Figure 2), and to draw up a top-down view of industry structure and concentration and a personal sector balance sheet for the countries surveyed. This type of background information is often taken for granted in dealing in the domestic, established
354
ALEX RENTOUL
-00:5
.ux.
Figure 2
Den.
FDR
6126’ - 7
5
I
571: -
0156
- 1
Fr.
i52 -
-
NI
UK
:
l-l Ir.
EEC Member Stafse (12) National Income Per Capita 1985
market place, but must be considered new and unfamiliar markets.
explicitly
in
In order to answer the single question for each activity in each market sector considered in each geography - “Is there an opportunity to create a sustainable position to competitive advantage in this market place?” - several subsidiary steps can be outlined in turn. Figure 3 shows the essential processes. The three steps covering the initial segmentation, the establishment of appropriate criteria for identifying opportunities and detailed analysis of these opportunities are all crucial to the success of this strategy formulation process. Market segmentation an understanding of the value chain requires concept, which breaks down the logical sequence of steps involved in supplying a product or service into a set of discrete activities, each of which can be considered as a value added step - and hence, typically, a business proposition - in its own right. So, for example, a personal savings product might be characterised by product design, investment, administration, marketing and distribution: a typical manufactured product by R&D, design, component supply or manufacture, testing, marketing, distribution and servicing. Value chain analysis immediately points up the folly of assuming that a European presence - often regarded as synonymous with pan-European delivery ability - is necessary to exploit successfully the opportunities offered by Europe 1992. For value of the chain analysis, allied to an understanding levers to competitive advantage in each of the activities examined, forces decisions as to the appropriateness of each value added segment as an
activity of economic benefit to the company. And, provided the value chain analysis has been performed logically, the activities represent a set of independent business propositions, from which a portfolio of possible activities by geography can be built up. The examples in Figures 4 and 5 are hypothetical, but drawn from experience: such experience shows that, all too often, the drivers of competitive advantage are at best unquantifiable, at worst almost indefinable. “Reputation”, “brand name”, “investment skills” and so on pose problems in as much as they are difficult to rank on absolute scales - but even here value chain analysis does focus attention on their role if a competitive position is to be established and SLIStained. The recent battle for Rowntrees highlighted the importance of understanding “goodwill” in the fullest sense, as represented by established brand positions. Examples of overlap between some of the activities in the chain are obvious; the focus of the activity should be captured in the analysis, so that an understanding of the business system built around those activities is developed. It is an over-simplification to suggest that activity value analysis reduces the complex process of establishing decision making criteria and of assessing opportunities to an easy process of measuring the business strengths against the critical success factors. However such a process is an important adjunct to the added value analysis. By dovetailing the profile of the existing business’ strengths and resource limitations in to the analysis of drivers of competitive advantage it is possible to gain a first cut overview of potentially viable business activities. Value chain analysis shows where the company’s strengths can best be exploited, and where weak-
MERGERS
AND
ACQUISITIONS
IN THE LIGHT
OF 1992
Audit of existing business strengths
COMPANY
INFORMATION
- Weaknesses - Competitive
positioning
- Management
resources
- Genetic
strategic
objectives
I
Top level analysis external markets
Background
information
of
on:-
population industrial
structure
logistics financial
systems
etc
7
Establishment of criteria for benchmarking opportunities
Assessment of opportunities against criteria
1 Strategic vision and objectives for Europe 1992
Tactical
Figure 3
Steps to Market Competitive
Advantage
operating
plan
355
356
ALEX RENTOUL
Value chain analysis - Examples PERSONAL
SAVINGS
PRODUCTS
Activities
ADMINISTRA-
Drivers of competitive
advantage
- Culture-specific knowhow
- Investment performance
- Systems
- Research teams in country
- Legal/ compliance skills
- Intermediary relationship management
- Reputation
competence
- Brand
name
- Direct sales capability - Direct mail experience - Need for links with nationally known brand
Figure 4
Value Chain Analysis:
Personal Savings Products
Value chain analysis - Examples MANUFACTURED
PRODUCT
Activities
MANUFACTURE
COMPONENTS
------J-Drivers of competitive - Skilled personnel - Facilities
>
advantage
- Skilled personnel (engineering) - Innovation - Expensive systems
Figure 5
TESTING )I
)I
- Cost (make or buy criteria) - Quality - Supplier dependance
Vulue Chain Analysis: Manufactured
- Quality
- Quality
- Brand
- Customisation ability
- cost
- Scope for differentiation
- Cost per unit
name
- Retailer manufacturer relationship - Own Branding
- Quality - Reliability - Speed of resoonse - cost
Product
MERGERS
necses make it unable to compete resources, skills and organisation.
with its existing
Clearly this is only the first - and easier - part of a two stage process. Assessing the business’s current abi’lty to compete in certain segments is one thing. Prioritising different value chain activities and choosing suitable participation routes where organic growth is impossible, are often more difficult, yet eqlkally critical tasks.
Participation
Routes:
Covering
The Spectrum
Participation routes within activities can be classified into two groups: those which demand active involvement of another company or other companies, and “gc it alone” entry routes. Into the latter category fall organic growth and greenfield entry, into the former acquisition, joint ventures, strategic alliances. By structuring the value chain analysis to develop a sin:;le matrix of attractive business segments versus possible participation routes, a company can create a portfolio of desirable and acceptable alternatives.
The objective is to build a coherent and consistent bu:;iness system which offers high-quality, high potential opportunities for creating competitive advalltage. By opportunistic buying of undervalued by bringing complementary strengths companies, anti skills to joint ventures and strategic alliances, or by exploiting key leverageable strengths of the company, the business can maximise the chances of suvxss within each activity selected in each geography. For instance, the business offering retail sa\?ngs products might imitate greenfield investment management, while establishing joint ventures or str<egic alliances with distributors in different geographies. The manufacturer may choose to exploit his marketing strengths in selected countries, his products not only from his own sourcing increased volumes but also from other companies. If thy apparent range of options seems vast, the feasible activity/entry portfolio will be much more restricted. From the universe of acquisition possibilitie:;, a very limited number will be targets; of the many theoretical joint venture candidates, only two will bring sufficiently complementary skills; regulations governing foreign operations or capital inflows in ic>me countries may severely restrict the room for manoeuvre. These are merely examples which bear OUI: a crucial observation; the analysis is only worthwhile in so far as it is tempered by pragmatism and commercial reality.
AND ACQUISITIONS
After the Analysis:
IN THE LIGHT OF 1992
Introducing
Commercial
357
Reality
Many domestic acquisitions fail because the obvious has been overlooked: proportionally, this failure rate rises with expeditions abroad. Few businesses would consider opening a factory hundreds of miles distant within the UK itself without an analysis of alternative locations, yet foreign activities are often established on the basis of little or no analysis. Commercial data, communications and culture must all be reviewed. The commercial realities inherent in doing business in foreign countries must be considered in terms of data in advance of any bid for an overseas target. This centres not just around the mechanics of adequate geography and an excellent command of the local language: it requires economic knowledge. For instance, where are the urban centres of wealth in Germany? In this case the original GDP data shown in Figure 2, which may have been sufficient to point towards Germany as a wealthy country, is suddenly insufficient for the planning of tactical operations. Further information on GDP per capita in each major land or urban centre will assist in targetting sales and marketing efforts. Even this is probably inadequate. Most companies, particularly in the leisure, finance and service industries, are anxious to track disposable earned wealth. Given only limited variations across Germany in the the GDP per employee suddenly tax burden, becomes a far more useful commercial indicator. Such data is basic, raw and only to be seen as the beginning of any database; but it does at least show that even elementary analysis can reveal marked variations of commercial significance. Secondly, commercially successful integration derives from honest and effective communications. In a recent cross-border project, the (foreign) purchasing company was confident of its ability to manage the acquired group over the telephone through discussions with senior management. Their command of the vernacular was near perfect: however, in the course of the negotiations it became clear that the very strong local accent rendered the target management virtually incomprehensible to the acquirer. Risk levels were therefore considerably higher and the transaction only regained its momentum when a junior member of staff was found who could comprehend the regional dialect. This is but one aspect of communications. Another is geographic scale. An acquisition in Paris is easy to monitor from London: Paris is only just over an hour distant by air: By contrast, an acquisition in Greece to access that country’s development as it integrates in to the EEC will force an executive to devote 2-3 days each week to the acquisition after travel has
358
ALEX RENTOUL
been accounted for. If the economic returns appear questionable during the initial analysis, a hard look at the servicing and management requirements may provide the answer. This problem is not new, and it is exacerbated where the quantum of management input required is large. At its simplest, the banks have faced this problem in the control of their offshore subsidiaries (eg. Midland and Cracker). Similarly, the UK based Imperial Group’s absorption of the Howard Johnston motel chain in the US posed potentially disastrous problems. Cross-border acquisitions should only be considered by a management team which is wholly confident of its ability to deal with the unknown. The third factor to consider is cultural difference. This should not be underestimated. Legally, the consolidation paid may secure an acquisition. In commercial practice, however, the payment of an appropriate sum is often insufficient without the partnership and co-operation of the key members of the acquiree’s management, its suppliers and its distributors. Here culture may well be an obstacle to overcome: the ability to forge links across cultures and to recognise cultural differences in the marketplace are important factors in maximising the
chances of success. The initial advance of the major Japanese banks and security houses on Wall Street was not limited by lack of financial muscle. However in several cases, attempts to impose unfamiliar management techniques on senior management steeped in the culture of New York’s financial markets almost proved disastrous in terms of retaining key clients and staff.
Conclusion 1992 offers real opportunities to penetrate and build positions of sustainable competitive advantage in new markets. Though the concept of a single market in Europe come 1992 is too simple, the chances for companies to succeed will diminish as other rivals move to exploit new opportunities. The greatest rewards will come, not to those companies who rush headlong into a programme to achieve maximum presence quickly, but to those who adapt their strategy formulation to include the new opportunities in Europe. Sound strategic thinking and thorough analysis, bound together with a pragmatic, realistic approach will be the keys to lasting success and substantial value creation.
E7lnlpem
Mn77ngement
1SSN 0263-2373
/ournnl
Volume6 No 4
]ourt7nl
1988
$3.00
Mergers and Acquisitions Ensuring
in the Light of 1992 -
Strategic Good Sense Underpins Corporate Ambitions Alex Ren toul Director,
OC Samller Associates
The prospect of executing acquisitions in Europe currently generates more excitement than almost any other item on the corporate agenda. Venturing out of the home market is regarded once more as a test of management virility. Yet without sound strategic analysis coupled with a careful review of management capacity, ventures abroad are highly risky and may represent poor value for shareholders. This paper returns to the fundamentals required for a methodical review of the merits of expansion by acquisition in unfamiliar territory. It concludes that it is important to marry the theoretical analysis with the most careful commercial review.
Introduction
- The Not So Single Market
In the UK, the “single market” is rapidly becoming the :dol to which the government and its PR and advertising firms, ever enthusiastic for the snappily expressed totemic concept, demand that we all make obeisance. Those who dismiss the single market as a concept born more of fantasy than commercial realii:), and as a gross over-simplification of the likely look of Europe come 2000 (let alone 1992) are accu jed of short-sightedness and limited ambition. However, the difficulties and doubts remain: how to think of a single market far is it realistic throughout the EEC in barely four years’ time? It is clearly impossible to define a homogeneous market by listing a set of characteristics to which such a market will unquestionably conform. However, it is apparent that there is a simple trade-off between homogeneity and the complexity and variability of the factors required to service that market (Figure 1). Complexity in itself does not demonstrate multiple markets; nor even will multiple products in themselves define complexity. For instance, the replacement motorcycle exhaust market demands that
exhausts be customised for 70 or more different motorcycle models. Nonetheless, this remains emphatically a single market, where to concentrate on one or two models only would be absurd. By contrast, a computer company needing to make 70 different models would almost certainly be servicing a very wide range of end user requirements: in such a case, concentration on a subset of these models might in itself lead to greater competitive advantage and long-term rewards. Several variables can drive this diversity of products. Customisation (as of above) is one; different distribution accessories, channels, the result of custom, legislation, logistics and infrastructure are others. For each market, a detailed review is needed to uncover these key drivers.
Regulation:
The Key Variable
In the context of 1992 the most relevant driver is, clearly, regulation. Despite the theoretical harmonisation of regulations governing import and sale of goods across Europe which 1992 is intended to bring nation-specific regulations - designed to about, protect a particular industry, to assuage a vociferous
352
ALEX
RENTOUL Local
Iig h A
markets
(local
metropolitan
Homogeneous
Diverse
regions.
supplies, his manufacturing operations, his packaging, his administration, his distribution. Even if we adopt the sanguine view that the survival of these domestic regulations is only an issue of timing - in the sense that Europe 2002 might be more appropriate than Europe 1992, implying a longer and less pressurised window of opportunity for business to exploit - there remain a host of other reasons why the concept of a single market must be approached with care. For if the regulation seeks to control the supply of products and services, the nature of demand in the various geographies may not be equally susceptible to the single market concept.
states.
areas)
national
national
markets
markets
Mature
federal
(UK.
(Japan)
Fr, FDR)
markets
(USA)
\ Infant federal markets (EEC)
Geographical entities (S.E. Asia) Low Low
Figure 1
Complexity of market key success factors
Homogeneity/Complexity
b High
Trade-Off
lobby or to safeguard consumers using traditional means - will persist. Indeed, some EEC legislation has made specific provision for national regulatory regimes to be superimposed on Europe-wide standards; for instance, UCITS legislation on open-ended investment imposes a robust legal framework but allows each country to set its own marketing regulations. Even without these cases where national regimes will be enshrined, a number of other areas of “unofficial” regulation will need to be examined. For instance, no action has yet been taken on the provision of cross-border life insurance services; national restrictions make it effectively impossible for any such activity to take place as yet. The food and drink markets are notoriously hedged about with domestic regulation, with literally hundreds of barriers still in force across the different countries. Worringly, there seems little push towards dismantling most of these trade barriers; for every famous bastion which falls, such as the German beer ten regulations apparently purity laws, another remain safe from scrutiny. Supply-Side
Singularity,
Demand-Side
Multiplicity
Such regulations can impact the supplier’s business at all stages of business activity. They can affect his
Germans may be willing, perhaps even eager, to drink British or Dutch beer, Italians to eat imported pasta, the French to buy life insurance from the biggest and most secure life assurance company in the EEC, be it German, Italian or British, but there remain the cultural differences - in the widest sense - which militate against treating European countries as a homogeneous whole. Cultural differences, cover more than language or innate protectionism, though these may prove obstacles enough; rather they refer to the structure of industries and businesses in each country, the nature of worker participation or relationships, the network of shareholdings and cross-shareholdings; in short all of the difficulties companies may face in trying to do business elsewhere in the EEC. For example, UK unit trust management companies with experience and expertise in taking shares in small and medium sized quoted British companies will find that most such businesses are privately held in France and Germany. Given that such institutions are unable to replicate their domestic investment philosophy abroad, any foreign operations bear additional risks. Additionally, financial services products are sold even now through bank networks in Continental countries rather than through other, perhaps independent, intermediaries, as in Britain. This example illustrates the complex interdependence of many of these factors.
Though none of these instances seem substantial, a clear message emerges. Europe 1992 should be seen only as an attempt to deregulate supply, likely to be beset by delays (both within the EEC and at national and regional level), protectionism, loopholes and inertia. Although partial liberalisation of supply undoubtedly will create some new opportunities and alter existing demand to some extent, it cannot suddenly spawn a set of similar markets across This has not happened in different geographies. North America, where at least there is a common language, and it is unlikely to be the case in Europe.
MERGERS
Revisiting The Business Dimension
Strategy - With a European
If tllis seems unduly negative, it is only in order to stress that an over-simplistic and hasty approach unless supported by to :992 can be dangerous, sound strategic underpinning. For example, many recent studies have revealed that two thirds of all acquisitions go awry, largely because an acquisition strategy is, all too often, a post-rationalisation of the actu,ll acquisition process. There is similarly a substantial risk that a 1992 acquisition strategy will be I-O more than a side product of frenetic corporate activity over the next 3 years; in these circumstances, there IS every reason to suppose that the failure rate for acquisitive adventures in Europe will be similarly high. Thi> suggests that the most appropriate thrust of corporate activity in response to 1992 should be to widen the strategic planning process, incorporating a deliberate attempt to consider the exploitation of the add) tlonal scope offered by 1992. It is not the purpose of this article to revise standard strategic planning objectives and processes; but it is important to adopt a specific approach to 1992. In analysing the potential opportunities of 1992, the business objectives is taken to be that of achieving greater value creation that could be achieved by focussing on a purely domestic strategy. As with all strategic planning exercises, a prerequisite is to revit!iv the competitive positioning, strengths and weaknesses of the base business. Where European expansion is under consideration, it is particularly important to gain an understanding of the expertise and skills required of how these requirements will evolire over time and how far expansion could be supported by existing resource levels. Every CEO, like .any army commander, must consider the length and strength of his supply lines. It is a fair generalisation that expansion overseas will involve greater, or at least very different, demands on the core business than a purely domestic strate:;y. It may pay rich dividends to employ outside resources to provide an objective view of the business: this is particularly the case if internal resources are already constrained or if there are early Sign i of opposing points of view developing at senior levels of the organisation. The next objective is to identify those actions which cou1t.l lead through international expansion to positions of sustainable competitive advantage for the business. Europe 1992 now becomes relevant; the busi-mess must be able to identify activities in geolr‘lphies which will be of interest. If one doesn’t
AND ACQUISITIONS
IN THE LIGHT OF 1992
353
already exist, a mechanism must be created to identify and order the relevant market sectors, so that time and effort is not wasted on pursuing impossibilities. This understanding of international markets comes, of course, from previous strategic within the review of the thinking and analysis business at a preliminary stage. Good activity analysis will necessitate segmentation of the market along several dimensions, leading to extensive data gathering and evaluation in order to understand the market requirements, competitive economics and the evolution of the industry in each of these segments. This objective of this work is to provide answers to basic questions concerning the company’s ability to compete in these segments: what are the critical success factors? This is no easy task. As all who have attempted it know well, a bald outline of the theoretical requirements gives no hint of the difficulty of carrying out effective analysis in an imperfect world with imperfect information. Unfortunately, the difficulties are further compounded when dealing with foreign markets. The temptation to take decisions when presented with inadequate data and analysis grows even more compelling, given the considerably greater resources (both in time and money) required to refine the analysis. Additionally, while sources of reputable professional advice are relatively easy to identify in the UK, finding and choosing competent advisors abroad can be costly and fraught with difficulties. There is no easy solution to these difficulties, other than to accept that entering an unknown market successfully will be an expensive and inherently risky venture for the inexperienced, demanding considerable caution and preparatory effort. Nonetheless, the more successful companies prosecute a process designed to reduce and manage risk without penalising ambition and limiting potential reward.
Shortlisting The Opportunities: Value Chain Analysis With a wide generic objective - identifying value creation opportunities in Europe - a high-level, brief overall analysis of the relevant markets is required. Thus it is important, for example, to discover such basics as GDP and GDP per capita, preferably regionally as well as nationally, to identify key differences within as well as between the various states (Figure 2), and to draw up a top-down view of industry structure and concentration and a personal sector balance sheet for the countries surveyed. This type of background information is often taken for granted in dealing in the domestic, established
354
ALEX RENTOUL
-00:5
.ux.
Figure 2
Den.
FDR
6126’ - 7
5
I
571: -
0156
- 1
Fr.
i52 -
-
NI
UK
:
l-l Ir.
EEC Member Stafse (12) National Income Per Capita 1985
market place, but must be considered new and unfamiliar markets.
explicitly
in
In order to answer the single question for each activity in each market sector considered in each geography - “Is there an opportunity to create a sustainable position to competitive advantage in this market place?” - several subsidiary steps can be outlined in turn. Figure 3 shows the essential processes. The three steps covering the initial segmentation, the establishment of appropriate criteria for identifying opportunities and detailed analysis of these opportunities are all crucial to the success of this strategy formulation process. Market segmentation an understanding of the value chain requires concept, which breaks down the logical sequence of steps involved in supplying a product or service into a set of discrete activities, each of which can be considered as a value added step - and hence, typically, a business proposition - in its own right. So, for example, a personal savings product might be characterised by product design, investment, administration, marketing and distribution: a typical manufactured product by R&D, design, component supply or manufacture, testing, marketing, distribution and servicing. Value chain analysis immediately points up the folly of assuming that a European presence - often regarded as synonymous with pan-European delivery ability - is necessary to exploit successfully the opportunities offered by Europe 1992. For value of the chain analysis, allied to an understanding levers to competitive advantage in each of the activities examined, forces decisions as to the appropriateness of each value added segment as an
activity of economic benefit to the company. And, provided the value chain analysis has been performed logically, the activities represent a set of independent business propositions, from which a portfolio of possible activities by geography can be built up. The examples in Figures 4 and 5 are hypothetical, but drawn from experience: such experience shows that, all too often, the drivers of competitive advantage are at best unquantifiable, at worst almost indefinable. “Reputation”, “brand name”, “investment skills” and so on pose problems in as much as they are difficult to rank on absolute scales - but even here value chain analysis does focus attention on their role if a competitive position is to be established and SLIStained. The recent battle for Rowntrees highlighted the importance of understanding “goodwill” in the fullest sense, as represented by established brand positions. Examples of overlap between some of the activities in the chain are obvious; the focus of the activity should be captured in the analysis, so that an understanding of the business system built around those activities is developed. It is an over-simplification to suggest that activity value analysis reduces the complex process of establishing decision making criteria and of assessing opportunities to an easy process of measuring the business strengths against the critical success factors. However such a process is an important adjunct to the added value analysis. By dovetailing the profile of the existing business’ strengths and resource limitations in to the analysis of drivers of competitive advantage it is possible to gain a first cut overview of potentially viable business activities. Value chain analysis shows where the company’s strengths can best be exploited, and where weak-
MERGERS
AND
ACQUISITIONS
IN THE LIGHT
OF 1992
Audit of existing business strengths
COMPANY
INFORMATION
- Weaknesses - Competitive
positioning
- Management
resources
- Genetic
strategic
objectives
I
Top level analysis external markets
Background
information
of
on:-
population industrial
structure
logistics financial
systems
etc
7
Establishment of criteria for benchmarking opportunities
Assessment of opportunities against criteria
1 Strategic vision and objectives for Europe 1992
Tactical
Figure 3
Steps to Market Competitive
Advantage
operating
plan
355
356
ALEX RENTOUL
Value chain analysis - Examples PERSONAL
SAVINGS
PRODUCTS
Activities
ADMINISTRA-
Drivers of competitive
advantage
- Culture-specific knowhow
- Investment performance
- Systems
- Research teams in country
- Legal/ compliance skills
- Intermediary relationship management
- Reputation
competence
- Brand
name
- Direct sales capability - Direct mail experience - Need for links with nationally known brand
Figure 4
Value Chain Analysis:
Personal Savings Products
Value chain analysis - Examples MANUFACTURED
PRODUCT
Activities
MANUFACTURE
COMPONENTS
------J-Drivers of competitive - Skilled personnel - Facilities
>
advantage
- Skilled personnel (engineering) - Innovation - Expensive systems
Figure 5
TESTING )I
)I
- Cost (make or buy criteria) - Quality - Supplier dependance
Vulue Chain Analysis: Manufactured
- Quality
- Quality
- Brand
- Customisation ability
- cost
- Scope for differentiation
- Cost per unit
name
- Retailer manufacturer relationship - Own Branding
- Quality - Reliability - Speed of resoonse - cost
Product
MERGERS
necses make it unable to compete resources, skills and organisation.
with its existing
Clearly this is only the first - and easier - part of a two stage process. Assessing the business’s current abi’lty to compete in certain segments is one thing. Prioritising different value chain activities and choosing suitable participation routes where organic growth is impossible, are often more difficult, yet eqlkally critical tasks.
Participation
Routes:
Covering
The Spectrum
Participation routes within activities can be classified into two groups: those which demand active involvement of another company or other companies, and “gc it alone” entry routes. Into the latter category fall organic growth and greenfield entry, into the former acquisition, joint ventures, strategic alliances. By structuring the value chain analysis to develop a sin:;le matrix of attractive business segments versus possible participation routes, a company can create a portfolio of desirable and acceptable alternatives.
The objective is to build a coherent and consistent bu:;iness system which offers high-quality, high potential opportunities for creating competitive advalltage. By opportunistic buying of undervalued by bringing complementary strengths companies, anti skills to joint ventures and strategic alliances, or by exploiting key leverageable strengths of the company, the business can maximise the chances of suvxss within each activity selected in each geography. For instance, the business offering retail sa\?ngs products might imitate greenfield investment management, while establishing joint ventures or str<egic alliances with distributors in different geographies. The manufacturer may choose to exploit his marketing strengths in selected countries, his products not only from his own sourcing increased volumes but also from other companies. If thy apparent range of options seems vast, the feasible activity/entry portfolio will be much more restricted. From the universe of acquisition possibilitie:;, a very limited number will be targets; of the many theoretical joint venture candidates, only two will bring sufficiently complementary skills; regulations governing foreign operations or capital inflows in ic>me countries may severely restrict the room for manoeuvre. These are merely examples which bear OUI: a crucial observation; the analysis is only worthwhile in so far as it is tempered by pragmatism and commercial reality.
AND ACQUISITIONS
After the Analysis:
IN THE LIGHT OF 1992
Introducing
Commercial
357
Reality
Many domestic acquisitions fail because the obvious has been overlooked: proportionally, this failure rate rises with expeditions abroad. Few businesses would consider opening a factory hundreds of miles distant within the UK itself without an analysis of alternative locations, yet foreign activities are often established on the basis of little or no analysis. Commercial data, communications and culture must all be reviewed. The commercial realities inherent in doing business in foreign countries must be considered in terms of data in advance of any bid for an overseas target. This centres not just around the mechanics of adequate geography and an excellent command of the local language: it requires economic knowledge. For instance, where are the urban centres of wealth in Germany? In this case the original GDP data shown in Figure 2, which may have been sufficient to point towards Germany as a wealthy country, is suddenly insufficient for the planning of tactical operations. Further information on GDP per capita in each major land or urban centre will assist in targetting sales and marketing efforts. Even this is probably inadequate. Most companies, particularly in the leisure, finance and service industries, are anxious to track disposable earned wealth. Given only limited variations across Germany in the the GDP per employee suddenly tax burden, becomes a far more useful commercial indicator. Such data is basic, raw and only to be seen as the beginning of any database; but it does at least show that even elementary analysis can reveal marked variations of commercial significance. Secondly, commercially successful integration derives from honest and effective communications. In a recent cross-border project, the (foreign) purchasing company was confident of its ability to manage the acquired group over the telephone through discussions with senior management. Their command of the vernacular was near perfect: however, in the course of the negotiations it became clear that the very strong local accent rendered the target management virtually incomprehensible to the acquirer. Risk levels were therefore considerably higher and the transaction only regained its momentum when a junior member of staff was found who could comprehend the regional dialect. This is but one aspect of communications. Another is geographic scale. An acquisition in Paris is easy to monitor from London: Paris is only just over an hour distant by air: By contrast, an acquisition in Greece to access that country’s development as it integrates in to the EEC will force an executive to devote 2-3 days each week to the acquisition after travel has
358
ALEX RENTOUL
been accounted for. If the economic returns appear questionable during the initial analysis, a hard look at the servicing and management requirements may provide the answer. This problem is not new, and it is exacerbated where the quantum of management input required is large. At its simplest, the banks have faced this problem in the control of their offshore subsidiaries (eg. Midland and Cracker). Similarly, the UK based Imperial Group’s absorption of the Howard Johnston motel chain in the US posed potentially disastrous problems. Cross-border acquisitions should only be considered by a management team which is wholly confident of its ability to deal with the unknown. The third factor to consider is cultural difference. This should not be underestimated. Legally, the consolidation paid may secure an acquisition. In commercial practice, however, the payment of an appropriate sum is often insufficient without the partnership and co-operation of the key members of the acquiree’s management, its suppliers and its distributors. Here culture may well be an obstacle to overcome: the ability to forge links across cultures and to recognise cultural differences in the marketplace are important factors in maximising the
chances of success. The initial advance of the major Japanese banks and security houses on Wall Street was not limited by lack of financial muscle. However in several cases, attempts to impose unfamiliar management techniques on senior management steeped in the culture of New York’s financial markets almost proved disastrous in terms of retaining key clients and staff.
Conclusion 1992 offers real opportunities to penetrate and build positions of sustainable competitive advantage in new markets. Though the concept of a single market in Europe come 1992 is too simple, the chances for companies to succeed will diminish as other rivals move to exploit new opportunities. The greatest rewards will come, not to those companies who rush headlong into a programme to achieve maximum presence quickly, but to those who adapt their strategy formulation to include the new opportunities in Europe. Sound strategic thinking and thorough analysis, bound together with a pragmatic, realistic approach will be the keys to lasting success and substantial value creation.