Cross Functional Teams Purchasing and Acquisitions Management - Term Paper Example

Presented to of School or In Partial Fulfillment of the Requirement for of By of Individual submitting report Spring, 2011 Cross Functional Teams Purchasing and Acquisitions Management Introduction Organizations exist in a rapidly changing environment, necessitating responsive and often radical strategic capabilities. To realize potential, organizations can be beset with common difficulties, such as strategic confusion and occupation with day-to-day activities. Despite many attempts to push organizations forward, shareholder value often stagnates or even declines. The solution lies not in focusing on improving the current situation but rather in taking the step-changes necessary to realize the future requirements of the organization (Bebb, 2002).The incidence of M&A has continued to increase significantly during the last decade, both domestically and internationally. The sectors most affected by M&A activity have been service and knowledge based industries such as banking, insurance, pharmaceuticals, and leisure. Although M &A is a popular means of increasing or protecting market share, the strategy does not always deliver what is expected in terms of increased profitability or economies of scale. While the motives for mergers can variously be described as practical, psychological, or opportunist, the objective of all related M&A is to achieve synergy, or what is commonly referred to as the 2 +2 = 5 effect. However, as many organizations learn to their cost, the mere recognition of potential synergy is no guarantee that the combination will actually realize that potential (Cartwright, 1996). Understanding the Problems - Dysfunctional Organizations Most people have difficulty stating their organization’s strategy: what the organization wants to become, how it would like its people to behave, and what it will provide to which customers. In the future, the reality is that the organization’s business and operating units march to priorities different from, if not contradictory to, those implied by its strategy. The majority of the people in an organization focus on day-to-day operational matters and their individual aspirations. Consequently, the strategy is never realized. Frustrated by the lack of forward progress, executives launch new communication, reorganization, process redesign, or technology initiatives. Everyone is doing more, and yet performance stagnates or even declines (Hammer, et al. 2001). Losing the Value of Mergers and Acquisitions AKPMG report found that, though 82% of respondents believed the deal they had transacted was a success, 83% of the same mergers failed to increase shareholder value. Of these transactions, 30% produced no discernible difference in shareholder value and 53% actually reduced value. Acquiring, merging, and demerging companies need long-term ways of enhancing shareholder value once the initial and obvious savings have been taken. But they usually focus on tactical integration, such as, organizational structure, support service or policies rather than on strategic integration in regards to customers, products, people or systems. However, to succeed both are needed (Kaplan, at el., (2001). The burning question remains – why do so many mergers fail to live up to a shareholder expectations? In the short term, many seemingly successful acquisitions look good, but disappointing productivity levels are often masked by onetime cost savings, asset disposals, or astute tax maneuvers that inflate balance-sheet figures during the first few years. Merger gains are notoriously difficult to assess. There are problems in selecting appropriate indices to make any assessment, as well as difficulties in deciding on a suitable measurement period. Typically the criteria selected by analysts are Profit-to-earnings ratios Stock-price fluctuations Managerial assessments Irrespective of the evaluation method selected, the evidence on M&A performance is consistent in suggesting that a high proportion of M&A’s are financially unsuccessful. U.S. sources place merger failure rates as high as 80%, with evidence indicating that around half of mergers fail to meet financial expectations. A much cited McKinsey study presents evidence arguing that most organizations would have received a better return on their investment if they had merely banked their money instead of buying another company. Consequently, many commentators have concluded that the true beneficiaries from M&A activity are those who sell their shares when deals are announced and the marriage brokers – the bankers, lawyers, and accountants who arrange, advise, and execute the deals (Cooper, 2000). M&A is still regarded by many decision makers as an exclusively rational, financial, and strategic activity, and not as a human collaboration. Financial and strategic consideration, along with price and availability, therefore dominate target selection, overriding the soft issues, such as, people and cultural fit. Explanations of merger failure or underperformance tend to focus on reexamining the factors that prompted the initial selection decision, for example (Cooper2000): Payment of an overinflated price for the acquired Poor strategic fit Failure to achieve potential economies of scale because of financial mismanagement or incompetence Sudden and unpredicted changes in market conditions The Forgotten factor In M & A The false distinction that has developed between hard and soft merger issues had been extremely unhelpful in extending our understanding of merger failure, as it separates the impact of the merger on the individual from its financial impact on the organization. Successful M&A outcomes are linked closely to the extent to which management is able to integrate organizational members and their cultures and sensitively address and minimize individuals/ concerns. By representing sudden and major change, mergers generate considerable uncertainty and feeling of powerlessness. This can lead to reduced morale, job and career dissatisfaction, employee stress, and uncertainty. Weather than increase profitability, mergers have become associated with a range of negative behavioral outcomes such as Acts of sabotage and petty theft Increased staff turnover, and with rates reported as high as 60% Increased sickness and absenteeism Ironically, this occurs at the very time when organizations need and expect greater employee loyalty, flexibility cooperation and productivity. The Performance Management Gap There is a gap between business performance management and individual performance management in all businesses, leading to a gap between business performance and individual performance. Business performance management is usually driven through an annual business planning process, which sets financial targets without specifying how they are to be achieved. Individual performance management is conducted through a performance appraisal process that sets mainly nonfinancial personal targets without explaining how they link to financial targets. Both focus on improving the present situation rather than initiating the step change today’s organizations must make if they want to succeed in the future (Hammer at el, 2001). Business Alignment Business alignment gets everyone to specify what their organization needs to do to produce what it needs to deliver to stakeholder in the future. It defines precisely what needs to be done to extract value from a merger or acquisition once the initial cost savings have been taken, and so enables long-term growth in shareholder value. By applying business alignment before a merger, the organization goes into the merger negotiation knowing more precisely what it wants out of the merger, and thus is better prepared to extract value from the merger after the event (Bebb, 2002). Translating strategy into business results with the balance scorecard is a four-part process: 1. Leaders build and align around architecture for change. 2. Required outcomes are linked to the activities that will deliver them, and resources are allocated to carry out these activities. 3. Change architecture is cascaded and the organization mobilized for action. 4. A feedback and learning system is built to make strategy development and implementation a continuous adaptive process (Kaplan, 1996). Building and architecture for change involves defining strategy as an integrated set of hypotheses that describes an organization’s evolution from the present to the future. The hypotheses are captured in a balanced scorecard, with defines the causal relationships between the things of value to the business, thus enabling value-based and activity based management. It also defines how these things of value should be measured, thus providing key performance indicators. Effective Purchasing Most textbooks state that purchasing is about buying the right goods, at the right time, at the right price, in the right quantity and of the right quality. While these are indeed fundamental requirements, effective purchasing has to deliver more than this. Adopting an effective purchasing strategy turns a reactive buyer into a proactive buyer who adds value to the process (Cavinato, 1999). Advantages – Effective Purchasing Is proactive and adds value for your organization; Improves communications with suppliers; Gives you a deeper understanding of the marketplace. Disadvantages There are not real disadvantages to effective purchasing, but it requires time to Gather and sort internal data; Evaluate supplies Take time to learn how your own company functions and what is important to each department in terms of the supply of goods and services. What are the most crucial factors for each line manager in terms of quality, price, and deliver? Which items do they purchase most often, and what are they used for? How does each department determine its reorder levels? Gathering data can provide a sound basis for formulating your strategy. Your internal customers will appreciate your professionalism and increase their sense of involvement in the process (Steele, 1996). Procurement driven by function By connecting the power of collaborative commerce tools with tools that build deliver, and manage the procurement or sales process, significant benefits can be leveraged from buyer and supplier relationships. Many e-business relationships begin by automating the procurement process, so optimizing these relationships using additional tools may seem like a natural extension. However, because the entry points and reasons for collaborative commerce are often separate, many organizations miss out on the benefits of a more integrated strategy. Never the less, using collaborative commerce to support the procurement process often creates opportunities to improve the efficiency of business relationships, and can radically cut costs and unnecessary steps out of existing processes (Cunningham, 2000). Over time, the effectiveness of any business relationship can be easy to measure. Using collaborative commerce as a means of communication can help in identifying and resolving these issues rapidly. In addition, the development of the relevant content bases, training materials and support procedures can often accelerate the speed at which the buying, supply, and sales processes become integrate, reducing the potential for misunderstandings and problems along the way (Koulopoulos, 2001). Over the past years the use of the Internet as the basis for transaction tools has expanded. The transaction tools developed include dynamic marketplaces, portals, auctions, Web-based EDI, and electronic catalogs. Compared to traditional EDI, transaction systems affect a greater number of phases in procurement or selling life cycles. The good news, however, is that the RFQ proposal responses, and communication between purchaser and supplier can all be conducted electronically. This cuts the time required to complete the evaluation phases and the supporting tools allow the specialist to manage relationships with more suppliers or customers. Collaboration Tools The tools discussed thus far, support important phases in the transaction life cycle. They fit within an organization’s processes and support certain task; in general, they do not require the company to make large process or organizational changes to utilize them. Collaborative tools extend beyond the task level to all the phases in the transaction life cycle. It is important to view them as modules that fit together to form solutions. These modules are often extensions of existing systems or other collaboration tools. For example, a workflow system will utilize e-mail to notify individuals that they need to take action. These are not a replacement for transaction systems. Rather, they are a way of extending the information and value of a transaction system throughout the enterprise and beyond to its trading partners. By implementing these tools to complement transactions systems, an organization will create a collaborative transaction network. The collaborative transaction network gives all members of the trading network access to data. Even more importantly, it extends the knowledge of the specialist throughout the life cycle and in other major organization processes (Cunningham, 2000). Until recently, most of the technology being implemented by corporations to aid transaction life cycles has been complementary to existing processes. Organizations have successfully implemented EDI and e-business systems without making significant organizational or process changes. This is no longer enough. In order to stay ahead, firms must also review and change their work processes and the supporting collaborative technology (Cunningham, 2000). At this stage of development, transaction stems effectively increase a corporation’s ability to procure high quality items at the right time and place and at a fair price. Supply chain activities have evolved as a series of tasks integrated by processes and systems designed to take advantage of advances in connectivity and enterprise-wide databases. More significant improvements often stem from enhanced capabilities in sourcing, procurement and materials management. Representative strategies include: Workflow facilitated and self service processes that provide increase transparency and accessibility between purchasing, suppliers, and materials management. Sole sourcing, suppliers’ pre-qualification, and dynamic bidding processes that tend to lower the acquisition cost of procured items. Coordinated forecasting, planning and component replenishment processes that tend to lower the retained cost of procured items. These benefits dramatically improve the efficiency and effectiveness of work processes required to attain business goals. As such, they can be characterized as “collaborative-based” processes that utilized the increased connectivity accessibility, self-service, and parallel-processing capabilities of new transaction-based solutions. These types of collaborative strategies tend to de-emphasize the impact and inefficiencies found in serial supply chain operations through the promotion and use of enhanced data accessibility. Reflecting a more holistic supply chain approach, these systems and strategies increase productivity through the use of new processes that enable tasks to be accomplished simultaneously (Koulopoulos, 2001). Effective collaboration tends to reduce overall process cycles and costs by improving the level of accountability, and monitoring and controlling duplicate activities. All parties have to realize process efficiencies rather than bottom-line pricing as a primary source for operational savings. Once freed of historic concerns and boundaries, collaborative transaction systems establish the beachhead for a wide range of strategies leading towards the benefits of comprehensive supply chain integration. Among the most important, will be those that link with back office ERP systems and real-time, automated transaction settlement. Ultimately, the benefits should result in lower inventories, faster processes, and higher-quality products and services. The stakes are particularly high for systems like e-procurement and collaborative commerce that involve increased cooperation with clients and business partners. While traditional EDI has been at the leading edge for some businesses in the past, Internet-based systems open the door for almost any organization to revolutionize the way it does business. For many, changing the way they do things is more than just an opportunity; it will be a necessity for staying in business. Making Strategy Operational Business process reengineering, activity-based costing and workflow The organization’s leaders decide on the corporate processes and initiatives required to deliver the outcomes. They use these to assess the relevance of current corporate processes, to prioritize existing initiatives, and to define new initiatives needed for achieving the strategy. Some initiatives and processes are found to be irrelevant to the future of the organization and can be removed. Activity-based costing is used to determine which resources are released by the removal of the activity, and workflow software is applied to the new and remaining processes after their definition or improvement. Processes are associated with the outcomes they deliver, and in so doing, they suggest an organization that allocates resources to the delivery of strategic outcomes. This is usually radically different from, and more productive than, the functional organization (Hammer, 2001). IT Alignment Matrix The IT Alignment Matrix (ITAM) defines the knowledge communities of the future and the structure and content of the data warehouse required to inform them. The ITAM reveals the gap between the current databases and systems and those required to deliver the future outcomes defined in the balance scorecard. The type of resources, people and things, needed to deliver the future outcomes are then identified and valued in monetary terms to define a budget. Note that this turns the business planning process on its head, since the traditional process starts with money and involves too much guesswork. Starting with outcomes enables a rational debate about what should be produced and in what quantity. Information from enterprise to resource planning systems is used to calculate the budget. Business alignment integrates individual with business performance management by empowering individuals to say what they can contribute to corporate outcomes. Instead of being told what to do people are invited to say what they can produce (Kaplan, 1996). Cultural Compatibility The process of merger is often likened to marriage. In the same way that clashes of personality and misunderstanding lead to difficulties in personal relationships, difference in organizational cultures, communication problems, and mistaken assumptions lead to conflicts in organization partnerships. Mergers are rarely a marriage of equals and it’s still the cascade that most acquirers or dominant merger partners pursue a strategy of culture absorption; the acquired company or smaller merger partner is expected to assimilate and adapt the culture of the other. Whether the outcome is successful depends upon the willingness of organizational members to surrender their own culture, and at the same time, perceive that the other culture is attractive and therefore worth adopting. Cultural similarity may make absorption easier than when the two cultures are very different, yet the process of due diligence rarely extends to evaluating the degree of cultural fit. Furthermore, few organizations bother to try to understand the cultural values and strengths of the acquiring workforce or their merger partners in order to inform and guide the way in which they should go about introducing change (Cooper, 2000). Conclusion Despite thorough pre-merger procedures, mergers continue to fall far short of financial expectations. The single biggest cause of this failure rate is poor integration following the acquisition. The identification of the target company, the subsequent and often drawn out negotiations, and attending to the myriad of financial, technical, and legal details are all exhausting activities. Once the target company has been acquired, little energy or motivation is left to plan and implement the integration of the people and cultures following the merger. It seems nonsensical to waste all the resources and energy that has gone into the merger through inadequate planning of the integration stage of the process, yet all too often organizations do just that. Without a properly planned integration process or its effective implementation, mergers will not be able to achieve the full potential of the acquisition. It is essential for executives around the globe to understand the opportunity presented by the combination of collaborative commerce technologies and revised business processes. Just “waiting for it to happen around them” may produce very undesirable results. The competitive edge will go to those who understand and exploit these technologies and who change their business processes and practices to leverage them in the marketplace. References Bebb, Peter. (2002). Organic “Growth versus Acquisition” Business the Ultimate Resource. Cambridge, MA: Perseus Publishing. Cartwright, Susan, and Cooper, Cary L. (1996). Managing Mergers, Acquisitions, and Strategic Alliances. Woburn, MA: Butterworth-Heinemann. Cavinato, Joseph L. and Kauffmann, Ralph J. (1999). The Purchasing Handbook: A Guide for the Purchasing and Supply Professional. New York: McGraw-Hill. Cooper, Cary L., and Gregory, Alan, eds. (2000) Advances in Mergers and Acquisitions. Vol.1. New York: Elsevier Science. Cunningham, Mike. (2000). B2B: How to Build a Profitable e-Commerce Strategy. Cambridge, MA: Perseus Publishing. Hammer, Michael, and Champy, James. (2001). Reengineering the Corporation: A Manifesto for Business Revolution. Rev. ed. New York: Harper Business, 2001. Kaplan, Robert S., and Norton, David P. (1996). The Balanced Scorecard. Translating Strategy into Action. Boston, MA: Harvard Business School Press. Koulopoulos, Thomas, and Palmer, Nathaniel. (2001). The X-economy. New York: Texere. Steele, Paul T. (1996). Profitable Purchasing: A Manager’s Guide for Improving Organizational Competitiveness Through the Skills of Purchasing. New York: McGraw-Hill. Read More