Business Organisation and Policy - Case Study Example

? Business organisation and policy BY YOU YOUR SCHOOL INFO HERE HERE Business organisation and policy Introduction It has been offered through considerable research studies that the majority of acquisitions and mergers fail. Porter (1987) provides knowledge that most acquisitions lead to poor performance and rapid divestiture of the acquired unit due to ongoing failures with concept and strategy. Despite this, many Board members and executives continue to find this a viable strategy for pursuit. Why is this? The fundamental basis for seeking mergers and acquisitions is to produce synergies, benefits financially, related to marketing and promotion, or through consolidation that provide more efficiency and market competitiveness through a blended company approach. Furthermore, Board members believe that acquisitions or mergers will have long-run benefits for improving innovation or expanding product line to ensure higher revenues and thereby make the company more attractive to investors through bond issuance or stock purchasing. Despite this rationale, there are several different factors that lead to failures in merger and acquisition failures: cultural integration problems, direct management failures in execution and leadership, the current position of either company as it relates to product/service life cycle and the speed by which changes are made within the new blended organisation. This report gives perspective on these failures and potential successes to justify why Board members continue to pursue this strategy, using real-world case studies as reference for analysis. 2. Failed merger: Hewlett Packard and Compaq Both Hewlett Packard and Compaq believed a blended company would achieve synergies in relation to cost, research and development, innovation and time to market, as well as consolidation of service and technical support which were significant expenditures as self-operated firms. Compaq had a well-established brand, however complexities in the consumer market, along with emerging competition offering similar services and products, continued to erode brand loyalty and sales revenues. At the time of the merger, Compaq experienced a net income of only $78 million, a decline from 2000 of $296 million (Compaq 2001). This was significantly low considering Compaq sustained revenues of 1.1 billion dollars in 2001. Compaq maintained significantly high operating expenses and credit/loan repayments that continued to erode cash flow and shareholder equity. HP, on the other hand, maintained a much stronger balance sheet and sustained a healthier brand loyalty in consumer markets and thus intended to strengthen the positioning of Compaq and consolidate its over-financed operations to ensure synergistic outcomes. However, executives at HP failed to consider that both Compaq and Hewlett-Packard were in the maturity stage of the service and product life cycle and would both be moving toward sales declines without innovative service and product launches. At the time of merger, Hewlett Packard was having a significantly difficult time competing with the B2B market alongside competition such as IBM and Sun in relation to server product purchases to sustain business information technology infrastructures (Hoopes 2004). This was a very profitable market for competition and for HP if they managed to position themselves properly on the B2B market. Investors found that the inability to gain target market business customers would only be further sustained by blending Compaq’s already troubled brand into its corporate sales and marketing strategies. HP and Compaq were already both experiencing the maximum profit expected without modernising services in the maturity stage and, at the time, neither company were working on significantly differentiated product developments to expand revenues and avoid eventual sales declines. Hewlett Packard also maintained a very rigid, top-down hierarchy that was highly centralized whilst Compaq had a more liberal system of governance that fostered more innovation and free expression of creativity to improve service and product relevancy. Since Hewlett Packard would be the main brand in the new corporate strategy, Compaq culture would have to adjust to a vertical hierarchy structure. Post-merger, there were problems with resistance to change and an inability to create a single mission for cultural unity that would take the new company on the right path toward vision and the goal of efficiency. Investors believed that lack of cultural unity would create revenue risks that were not sufficient enough to offset cost consolidation gains (Hoopes) and thus stock in the company plummeted after making the merger announcement. Furthermore, HP and Compaq did not anticipate the existing external market to consider stakeholders or scenarios that would impact the merged company during a period where technological revolutions were occurring all over the globe. The early 2000s were a period of transition from domestic information technology production to more efficient and innovative foreign manufacture. The ability to procure low cost parts from foreign nations removed some of the entry barriers into the PC market and thus new competition emerged such as Gateway and other smaller manufacturers. If HP had conducted more market research in the form of competitor analysis, the business would have restructured the organisation to provide more innovative products and services and also be the first to market to promote its ingenuity and modernisation efforts. Though HP and the blended Compaq organisation now boast billions of dollars in revenue, the period of transition from inefficiency during the early 2000s to world-class technology leadership experienced today was wrought with cultural challenges, financial capital investments that eroded cash position, and trying to establish a brand associated with quality and innovation. The problems that occurred during the first several years post-merger eroded share value, investor approval, and did not immediately find results with consumer or B2B markets that left the merged company with high losses in key operations divisions. Deming (2002) argues that success and failures in the organisation are directly linked with management. According to the respected business researcher, “All business processes in an organization are subject to problems through statistical variations, and management is responsible for 85 percent of that variation” (Deming, p.68). In the case of HP and Compaq, the executive or Board leadership did not conduct competent qualitative or quantitative market and competitive research studies to determine trends in competitor research and development or prepare the firms for the technological revolution or cheaper pricing structures within supply chains to recognise growth impending in competition. If the management teams had created effective control and audit systems to evaluate risk, they would have discovered changing manufacturing processes occurring throughout other companies’ value chains and responded accordingly to improve quality and adjust its pricing structure to make products more appealing to the B2B and consumer markets. The failures associated with HP and Compaq, as was supported by Deming, were significant management oversight caused by ineffective strategic leadership and strategic philosophy. 3. Successful merger: Air France and KLM Air France and KLM decided that a merger would be in their best interests as a means to consolidate traffic and scheduling, information systems technology, and improve their presence internationally to target new customers for enhanced revenue growth. Outside of the financially-based synergies that would be outcomes of the merger, the two organisations invested considerable preliminary and post-merger efforts into bridging the gap between two very radically-different national and professional cultures. Human capital investment, right from the very start of the merger, was a priority for Air France and KLM by tapping into human resources insight and creating cooperative HR strategies. To develop a culture dedicated and motivated to achieving goals, they must be transformational. This entails being visionary, a solid role model for behaviour, communicate with employees regularly, and consistently reinforce the vision and mission of the organisation (Fairholm, 2009). KLM recognised that investors are attracted to companies that have highly-efficient and dedicated organisational cultures and thus these businesses, post-merger, did not experience the type of investor backlashes as in the HP/Compaq case analysis and thus no loss of stock valuation. Air France and KLM both prior to the merger and afterward used public relations materials to illustrate to consumers and investors that the business was focused on building a singular, unified culture thus giving a positive brand perception of strong focus in corporate social responsibility. This opened the proverbial door for more alliances post-merger that assisted in growth and resource-sharing for improving outsourcing and other operational costs and systems development. Air France/KLM also did not rush changes to their model until they were certain they had achieved synergies in other areas of development. Under the concept of logical incrementalism, the newly-merged business made changes slowly and deliberately over time as a means of producing autonomous work systems (Brews and Hunt, 2008) and giving these groups time to familiarise themselves with change and adapt to the change philosophies. As such, Air France/KLM managed to find success in implementation and control in virtually all projects launched that required interaction between diverse staff members and project leaders without considerable resistance to change. Air France/KLM is a prime example supporting Deming’s (2002) notion that it is management, themselves, that create problems within the process of planning and implementing strategic changes post-merger or post-acquisition. This particular study was a phenomenal success in terms of cost synergies achieved, cultural development and proper promotion of corporate social responsibility to gain market and investor support. The management teams were highly proactive in assessing the internal and competitive environments, identifying all stakeholders, and then developing incremental policies that would lead to success before burdening operational systems with further change principles. Management competency was the primary driver for the immediate and long-last successes in the Air France/KLM merger that could be benchmarked for effective strategic leadership and approach to controlling change. 4. A discussion of Board-pursuing strategy Since the majority of failures associated with failed mergers or acquisitions lie in the competency and control systems of management, there are not considerable risks in pursuing these strategies for improving business and finance. Board members have the ability to remove ineffective managers and replace them with more proven executives that have more prowess for future-thinking strategic philosophy and can delegate appropriate preliminary and post-merger, post-acquisition processes and systems that provide worth to the entire value chain. Board members like understand that many failures in business are directly related to managerial incompetence or failing to assess risks and can therefore exert control measures to make acquisitions viable long-term. The fundamental concepts of diversification, consolidation, and cost savings overall are well-founded in real-life case studies of successful mergers and acquisitions, therefore Board members recognise their talents in approving or disapproving current executive leadership in the business to ensure that the appropriate management team is in place to secure the interests of the organisation. This is why it is still a viable and routine strategy for many Board members internationally. 5. Conclusion The case study examples illustrating failures at HP and Compaq clearly depict a lack of strategic management capabilities as it relates to planning and risk assessment. These companies were not very future-forward in recognising trends today that would impact tomorrow’s business model and relied on their long-standing history of brand recognition to carry their endeavours forward with success. This, however, did not occur for many years after the merger when sales and costs began to balance out and innovations were routinely launched in the consumer and business marketplaces. The Air France/KLM merger illustrated that mergers and acquisitions can have very positive results so long as there are proactive steps taken to ensure viability of the reorganisation or integration plan. This case illustrated that management is capable of understanding process systems and ensuring that the complexities of business inter-dependencies are not bogged down with excessive and rapid changes to acclimate management and subordinates to function well, and unified, in an ever-changing technological environment. All of the case study and theorist perspectives on mergers and acquisitions indicate that this should be a reliable strategy and Board members can continue to successfully pursue these strategies for synergy accomplishments and to improve competitive position. Once the business understands all of the externalities and internal conditions that will impact success or add risk to the business model, the organisation is ready to successfully begin merger or acquisition strategies to achieve long-run results in sales, culture, finance and investor relations. 6. References Brews, P. and Hunt, M. (2008), Learning to plan and planning to learn: resolving the planning school/learning school debate, Strategic Management Journal, 20(2), pp.889-913. Compaq. (2001). Annual report and statements, Compaq Company. [online] www.hp.com/hpinfo/newsroom/press/2002pmc/pr2002011601.html (accessed August 4, 2012) Deming, W.E. (2002) Chapter 6 in J. Beckford (eds) Quality: An Introduction, p.65-83, London: Routledge Fairholm, M. (2009), Leadership and Organizational Theory, The Public Sector Innovation Journal, 14(1), pp.26-27. Hoopes, C. L. (2004), The Hewlett Packard and Compaq Merger: A case study in business communication, Marriott School of Management. [online] http://www.awpagesociety.com/images/uploads/HP-Compaq-case.pdf (accessed August 5, 2012). Komninos, I. (2002), Product life cycle management, Urban and Regional Innovation Research Unit, p.8 [online] http://www.urenio.org/tools/en/Product_Life_Cycle_Management.pdf (accessed August 4, 2012). Porter, M.E. (1987), From competitive advantage to corporate strategy, Harvard Business Review, 65(3), pp.43-59 Read More