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MGT 599 Strategic Management Strategy For The Internal Environment A combination of factors such as increased global competition, regulatory changes, fast changing technology, need for faster growth and industry excess capacity has made Mergers and Acquisitions one of the main features of the recent times business. The M&A phenomenon has been noticeable in developed markets and emerging markets. Like vertical integration and versification, a large merger or an acquisition is a strategic move since it can make or break a company. A merger involves unique challenges such as the valuation of the company being acquired and integration of the pre-merger entities. Valuation is a subjective matter, involving several assumptions.
Integration of the pre-merger entities is a demanding task and has to be managed skillfully. One of the most successful company is GE Capital, which has not been only the leader in the M&A process, but was the creator of so called The Pathfinder Model which helps to avoid fails using proper internal strategic planning. The Pathfinder Model includes five broad steps that successfully manage for results. They are follows: develop a strategic framework that identifies key results (outcomes); devise measures that explain achievement in a succinct, measurable way; agree on expected results, planned performance expectations or targets; identify and effectively report the contributions to achieving outcomes; and use the above outcome information to inform management decision-making. Specifying the received information it becomes possible to apply it for Business strategy: 1) the identification and specification of the departments vital few outcomes; 2) the measurement of the current situation for the target group of people or objects; 3) the selection of intervention options; 4) the delivery of interventions to these targeted groups; 5) the assessment of delivery and results against expectations. The key to creating a large diversified global financial institution under the Pathfinder Model is to apply principles typically associated with small business.
That mentality results in business units that can move more quickly than big companies to seize opportunities - and focus on market opportunities, not internally forced corporate "synergies. " The concept revolves around a structure that allows managers to keep distinct focuses on different markets. It also ensures that all the resources of the organization are geared to identifying the best opportunities for growth. How successful can such a strategy be shoes the results got by GE Capital. Last year, it produced profits of $ 1 billion on revenues of $ 13. 8 billion outside the U. S. it would be more accurate to say that the multiple businesses that make up GE Capital's galaxy of activities used similar approaches to move quickly into international markets with each achieving excellent financial results.
To make those approaches work, organizational structure had to reflect a focus on specific businesses and groups of customers. That's why GE Capital doesn't think of itself as being in a business - financial services. It has 28 different and distinct businesses which are organized that way. Application of the Pathfinder Model shifted the odds for success positively and gives five lessons for providing A&M successfully: 1. Start early. 2.
Implement restricting sooner rather than later. 3. Dedicate resources. 4. Integrate operations and cultures by focusing on results. 5. Communicate strategically. For instance GE Capital it was a pioneer in the A&M process. It started merging earlier than others and got the stunning results became the leader in many spheres.
With individual businesses responsible for finding their own growth opportunities, the whole organization can expand at a faster pace. GE Capital has done 300 acquisitions in the last nine years. That may sound risky, yet it's only about 1 per year for each of our 28 businesses. The policy of implement restricting sooner rather than later was proved to be correct.
In the company as a whole, there are probably more than 500 such people whose job it is to look for the next opportunity, the next acquisition, the next new product, or the next new geographic market. That explains why the GEs has made more acquisitions in Asia than any other financial institution. As a result, five of the eight acquisitions of Japanese institutions over the past five years were done by GE Capital. Treating markets this way means staying closely focused on what customers want, rather than selling them what you happen to have. GE Capital is in both aircraft finance and real estate finance.
But it would be wasting telling aircraft people to try to finance hangars. Financing the purchase of an automobile in Thailand takes a very specific set of skills: it is neseccery to understand what products the regulators will allow, what the consumer wants, how to borrow' money, how to train the staff. The Pathfinder Model organizational structure, with its emphasis on small business attitudes, provides a diverse, solid platform for growth. When compensation and career prospects are linked to finding new business opportunities-not just following corporate initiatives - employees quickly learn how to use their expertise to develop ideas. The Pathfinder Model approach has major implications for the much-ballyhooed concept of cross selling.
If it happens, it must happen naturally with the marketing forces "forcing" the movement. You can't force it from above; it has to be demanded from below. These resources and the Pathfinder Model framework are also allowing to take the next steps to ensure ample international growth in the future. With opportunities in Western Europe probably past their peak, they have targeted central and Eastern Europe, an emerging market with a total population 45 percent larger than the U.
S. They will create businesses there using our decentralized approach. Dedicate resources is one of the core steps in the Pathfinder Model. Many companies are confident about generating cost savings before the merger. But they underestimate the practical difficulties involved in realizing them. For example, a job may be eliminated, but the person currently on that job may simply be shifted to another department.
As a result, the head count remains intact and there is no cost reduction. Many a merger is finalized hoping that efficiency can be improved by combining the best practices and core competencies of the acquiring and acquired. So, companies must also look at the acquisition in terms of the impact it makes on competitors and the possibility of their retaliation. Some M&A experts consider revenue enhancement to be a soft synergy and discount it heavily while calculating synergy value. Companies making an acquisition not only have to meet the performance targets the market already expects, but also the higher targets implied by the acquisition premium. When they pay the acquisition premium, managers are essentially committing themselves to delivering more than what the market expects on the basis of current projections.
More often than not, acquirers fail to deliver this commitment. So if the Pathfinder Model has worked so well, and maintaining a small-business mentality is so important to the future, why it is necessary to have an umbrella organization at all? Ultimately, the answer comes down to the culture, methodology, and resources that large corporations are best suited to provide. The pursuit of new ideas, for instance, has been elevated at GE Capital to a level where it is one of the guiding forces in the company. Companies often pay premiums for their acquisitions because they themselves failed to spot market opportunities early on.
One of the companys slogan is: We do everything we can do to make sure that doesn't happen to us. The next necessary step for cussessful A&M process is integrate operations and cultures by focusing on results. As to corporate methodology, because of GE's excellent management culture, common, contemporary techniques can be shared throughout the organization. This is one of the areas with the greatest promise for any company that operates across borders and product categories. They have found uniform approaches that can work just as well in container leasing as in credit cards. They have included things like Six Sigma, the quality drive first developed by Motorola and all of GE's associates have embraced - to improve operating procedures.
There is also a systematic approach to adding new customers that they call "find, win, keep. " Developed internally, it has proved as applicable to aircraft finance as real estate. They even standardized the approach to acquisitions, producing a "best practice" manual based on their considerable experience and core strength in this area. The trick, of course, is to glean the virtues of uniformity without the drawbacks. And that means not letting rigidity creep in.
Companies have "policies, " which usually become lists of things not to do. GE Capital tries to develop without such bureaucratic strictures, while developing company-wide processes and standards that play to their strengths. The other value to operating under the aegis of a single group lies in resources - in the activities - knowledge and capital. And both are key to going global. Too many U. S.
firms have made the mistake of under-resourcing foreign activities: they don't put enough emphasis on them, aren't patient enough to permit success, and don't devote enough good people to run them. There's a natural resistance to going to new places. Most people are afraid of the risk. But it's like anything else to do: once they done it over and over again, it becomes commonplace. That's the sense people have to have about doing business outside the U. S.
While there's little competition in these countries, there's also a limited existing market for financial services. But they are confident that the expertise in key areas - transportation, consumer finance, commercial equipment - coupled with their ability to identify and meet the needs of customers - will allow them to position themselves extremely well within this emerging market. The last successful lesson confirmed in practise is communicate strategically. Communication plays an important role during the integration of the pre-merger entities. Genuine communication increases the perceived benevolence of the management and promotes trust. It minimizes the negative reactions of employees in the acquired company.
As a popular saying goes, the certainty of misery is better than the misery of uncertainty. Lack of communication increases uncertainty and weakens the confidence of employees in the management. A good communication strategy is necessary to ensure that rumors are not allowed to fill the information gap. Employees must be informed about the acquiring company, the proposed changes and the impact of these changes on the employees. All efforts should be made to reassure the employees of the acquired firm and familiarize them with the strategic intentions and philosophy of the acquiring company. In the case of cross-border acquisitions, the role of communication is even more critical.
Immediately after the acquisition, employees need to know what will happen to their job, their colleagues and their company. It is only through honest communication that their anxieties can be set at rest. Here, the quality of communication is the over-riding factor. Later, when employees have to adjust to the changes, frequency of communication becomes important. Frequent communication, however, does not imply that all details can be communicated, especially when the management itself is not clear about what will happen. Transparency and frankness will send the right signals to the employees even if all the information cannot be shared with them.
The effectiveness of the Pathfinder Model a market-driven, bottom-up approach guided by modern management approaches and surveillance simply could not be accomplished by a mega-merger. In fact, as GE Capital prepares for the next step in its own global expansion - entering 22 separate countries and dozens of sub-markets where the need for financial services is just beginning - the paradox of employing a small business orientation to take on the world makes more sense than ever. Bibliography R H Kilman, M J Saxton and R Sep, Gaining Control of the Corporate Culture, Jossey-Bass, 1985, pp. 145 - 167. Mark L Shower, The Synergy Trap, The Free Press, New York, 1997, pp. 89 - 97. Ronald A Ashkenas, Lawrence J De Monaco and Suzanne C Francis, Making the Deal Real, Harvard Business Review, January-February, 1998, pp. 165 - 175.
Robert G Eccles, Kersten L Lanes and Thomas C Wilson, Are You Paying Too Much for That Acquisition? Harvard Business Review, July-August, 1999, pp. 136 - 146. Toby J Tetenbaum, Beating the Odds of Merger & Acquisition Failure: Seven Key Practices that Improve the Change for Expected Integration and Synergies, Organizational Dynamics, Autumn 1999, pp. 22 - 36. Denis Carey, Lessons from Master Acquirers, Harvard Business Review, May-June 2000, pp. 145 - 154.
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