Mergers

Mergers are inherently risky. A KPMG study carried out in the UK in 2002 found that “half of the (merger and acquisition) deals analysed either failed to deliver or actively destroyed shareholder value”. Beating the Bears, KPMG, 2002

One of the big risks to any business in contemplating a merger is the human factor yet it often receives little consideration. The commitment of the management team and employees is a key to any merger.

Differences in the culture of the organisations can be a make or break issue.  Merger Plus™ is a tool to help evaluate the key element of risk in exploring a merger and to assist in mitigating risk where the decision is to proceed.

Merger Plus™ focuses on understanding the differing cultures between organisations and using that knowledge to assist in making go/no go decisions and in adopting good management approaches where the decision is made to proceed with a merger.

It can take some of the “ego factor” out of merger decision making.

Using Merger Plus™ can provide:

  • a means of balancing the people risks along with other risks in evaluating a merger
  • for retaining what is special about each party to a merger as well as better consolidating forecast gains from the other synergies expected from the merger
  • a route for bringing about culture change in a consenting manner

Merger Plus™ is an approach developed by the Virtual Group in consultation with businesses involved in mergers.

For more information contact: Bruce Holland or Allan Frazer.

Strategy Perpetuates the Status Quo

“Strategic planners pride themselves on their rigor. Strategies are supposed to be driven by numbers and extensive analysis and uncontaminated by bias, judgment, or opinion. The larger the spreadsheets, the more confident an organization is in its process. All those numbers, all those analyses, feel scientific, and in the modern world, “scientific” equals “good.”

“Yet if that’s the case, why do the operations managers in most large and midsize firms dread the annual strategic planning ritual? Why does it consume so much time and have so little impact on company actions? Talk to those managers, and you will most likely uncover a deeper frustration: the sense that strategic planning does not produce novel strategies. Instead, it perpetuates the status quo.”

So starts the Harvard Review article (Sept. 2012), “Bring Science to the Art of Strategy.”

I agree entirely with their analysis of the problem; however, I agree less with their solution to the problem. In my view strategy needs logic and magic; the weighting of which depends mostly on the level of change the strategy will require in technology and changes it will require in people.

Logic and magic

In a more predictable market where there are few changes required in either technology or people, a weighting towards logic may be appropriate; however, in a less predictable market (and today most are) more magic is required.

What sort of strategy required?

Today the environment for most strategy processes is requiring a more
“Magic” (sometimes called Wicked) approach; despite this, most strategist rely on the “Classic/Management” approach described above.

There are two schools of thought about the Strategic Process

  1. Logic School – A linear or left brain school
  2. Magic School – A nonlinear or right brain school.

The Logic school is by far the most common, however, on its own it is seriously lacking. It is based on several unspoken assumptions that are highly questionable:

  1. That you can create a powerful vision of the future after thinking extensively about the present. In my experience, thinking too deeply about the present tends to limit the possibilities considered for the vision.
  2. That analysts are the best people to drive the Strategic Process. In my experience Line Managers are far better drivers of strategy because they understand the issues and reality in the market place. They are also the people who must execute the strategies and therefore their ownership is vital. Managers do not have sufficient ownership or understanding when strategies are presented to them by analysts.
  3. That the ideas needed to create a winning strategy do not exist within the organisation and need to be imported from outside. In my experience this is simply untrue. I think it’s vital to have an outsider to lead the Process so they can challenge thinking that is not strategic or innovative enough; but I’ve found the content is always available from within.

TWO SCHOOLS OF STRATEGY

1. LOGIC

Linear
Left Brain Thinking Starts With the Present

Sequence =
• where are we?
• where do we want to go?
• how are we going to get there?

Driven by Analysts Ideas must be imported

Extensive analysis determines strategies

2. MAGIC
Non-linear
Right Brain Thinking Starts With the Vision

Sequence =
• where do we want to go?
• where are we?
• how are we going to get there?

Driven by Line Managers Ideas exist within firm

Extensive analysis to test strategies

Conclusion

Both schools have their strengths and weaknesses. It would be wrong to disregard either; however, in my experience most New Zealand organisations rely far too much on the linear approach. As a result, many strategic workshops are boring, and not nearly as successful as they could be.

Bruce Holland

Why Not a ‘Rodent’ Economy?

1.    A ‘Rodent’ Economy?

Squirrels and mice are quick, intelligent and gregarious; and as species, adaptable, collaborative and virtually indestructible. 

They favour large families over individual size. 

They generally sustain themselves on the surpluses and inefficiencies of mankind. 

Is this a useful analogy for a versatile business economy?

A ‘rodent’ business might acknowledge limits to growth and use its energies to succeed within them.  It might be more agile than its larger competitors, employ few people and little capital, but have a profitable niche and a satisfactory return on investment. 

Rodent businesses might be successful in exporting (like the smaller dairy companies), importing (like used Japanese cars) or local services (like regional law firms).  A country with an economy that largely consisted of rodent businesses might find that per capita, it had generally a high level of business ownership, high levels of employment, a culture of innovation and strong regional activity.  

The limits to growth of a business are both internal and external, determined by its owners and its trading environment.

2.    Owner (internal) Constraints on Business Size

·         Intellectual property – allows product differentiation;
·         Skills –to successfully recognise, take and build on growth opportunities; 
·         Ambition to grow – which may be large or small, inwards (about the person in control) or outwards (about staff, suppliers, customers and the wider public).

3.    Trading Environment (External) Constraints on Business Size

External factors may over-ride ambition, skills and IP.  Businesses may be small when there is one or more of 

·         Low barriers to entry – allowing many competitors (corner dairies);
·         Low storage capability – perishable items (fish, flowers, vegetables);
·         Low demand – limited earnings (performing arts); 
·         High demand but strong competition – encouraging boutique suppliers (food, clothing, recreation, art, housing etc); 
·         A rapidly changing situation demanding constant innovation (computer maintenance, mobile phone applications).

Businesses may be large when there is one or more of

·         Readily available capital – from historic earnings or confident shareholders;
·         Capital intensive products or services (refineries, airlines, insurance); 
·         Market stability – discouraging innovation (food processing);
·         High competition –encouraging economies of scale (consumer electronics); 
·         High demand – makes growth easier (Trade Me); 
·         High reliance – clients demanding high standards of compliance (legal, accounting, aerospace, military contractors).

4.    How Common is ‘Small’?

‘Small’ businesses, in broad terms, make up more than 99% of all companies in NZ.  The Companies’ Office registers around 45,000 new companies each year of which around 450 (1%) issue a prospectus, suggesting they plan to be large. 

The other 99% are either constrained to, or choose to, start small.  There were 592,350 companies in NZ at 30 June 2013. 

From the 2011 census, Statistics NZ confirms that the top 1,000 companies contributed 94% by value of the country’s exports and 80% of its imports. 

The other 591,000 companies in New Zealand (99.8%) contributed only 6% of exports in total.

5.    How ‘desirable’ is large?

Large businesses tend to have high ratios of employees to ‘controllers’ (Boeing for example has 10 corporate executives and 169,000 employees). 

The higher the ratio, the more isolated the ‘controllers’ are from the workforce.  

The ratios of top pay to lowest pay of businesses also correlate broadly with company size.  There is growing resentment about the extremes of pay ‘inequality’ now being discovered. 

Big businesses may also be vulnerable to changing conditions. 

For example the recorded music industry has suffered big declines in revenues and large scale lay-offs since the introduction of electronic file sharing. 

On the other hand, big businesses are more successful at exporting than small businesses, and NZ needs to generate a positive balance of payments.  Hence government support for big businesses (e.g. the Bluff aluminium smelter).

6.    Combining small and large

Small businesses with a common interest may assemble into large businesses to gain some of the advantages of size while working within the owners’ constraints. 

These may take the form of cooperatives such as Fonterra, Foodstuffs and Mitre 10; franchises such as Versatile Homes and Buildings and Postshop-Kiwibank; or “coopetition” where businesses in the same market work together in research while competing for market-share.

7.    Do we have a ‘rodent’ economy?

Given that we have over half a million companies in New Zealand and that we enjoy a relatively open market, we might assume that our national economy has evolved into both ‘large’ and ‘small’ businesses in statistically valid ways. 

That is, because our businesses are free to identify and service markets anywhere, and to form, grow, decline and dissolve without interference from Government, our overall mix of business sizes fairly reflects our culture and trading environment. 

This is not quite true of course as the Government influences the economy in many ways, through controls on investment, taxation, education, health, employment and (in some cases) resources; but perhaps in broad terms we generally have a ‘rodent economy.’  Is that good?

Well, yes.  Rodents are survivors. 

They are smart and fast and don’t feel guilty or inadequate about their size.  Our ‘rodent’ businesses meet customers’ needs, create dispersed employment, enjoy high levels of ownership, help income equality and contribute to a resilient and durable national economy.  I think we should celebrate that. 

Howard Moore, August 2014