Acquisition Integration Strategies Part 1

Acquisition Integration Strategies Part 1

Acquisition-Integration-Strategies

This blog is a chapter from my doctoral dissertation which was published in 2002. My research studied the integration of two firms involved in a joint-venture buyout, specifically Sprint Corporation’s buyout of the PCS business from its cable partners. It is important to note that PCS had operated as an independent company with no active involvement by Sprint in its day-to-day operations. I was particularly interested in the effects of integration on knowledge transfer and creation between the two firms. This chapter is part of my literature review on integration strategies explored from a knowledge-centric perspective. I am sharing it in this blog as, while the references are old, the content remains relevant to this day.

As an interesting side note, my research provided significant insights into organizational culture and specifically its importance as part of acquisition due diligence and integration. This was unexpected and became the foundation for my work over the last 30 years.

To make this blog more readable, I have removed specific references within the text. I’ve also split the chapter into two parts. The first provides a knowledge-centric perspective on the value of integration and an introduction to key concepts related to strategic and tactical integration. Part 2 focuses on the factors influencing tactical integration and design considerations.

Introduction

This chapter begins with a knowledge-based argument in support of acquisitions. This segues into a discussion of the role of organizational integration strategies in terms of their significance to the achievement of acquisition goals. The second part tackles the definitional task and explores ‘organizational integration strategies’ from three different perspectives. The first is the rationale behind the acquisition decision, which sets the integration agenda by establishing objectives and goals that are aligned to the underlying strategic purpose. The second examines the strategic level of integration, which defines the umbrella strategy for integration efforts. The third moves to the tactical level and specifically explores the four areas of tactical integration and the factors that influence tactical integration design decisions. Note: The latter is covered in Part 2.

A Knowledge-Centric Perspective on the Value of Integration
“…global competitiveness is largely a function of the firm’s pace, efficiency and extent of knowledge accumulation” (Hamel. 1991: 83).

A firm’s unique knowledge is a fundamental source of above normal returns and profitability and thus competitive advantage. The reason for this is simple, changes in the economies of advanced cultures, specifically in terms of the liberalization of markets (dropping of trade barriers) and the expansion of markets into intermediate products where markets previously did not exist (such as in index futures, portfolio insurance etc.) has resulted in new competitive dynamics. These new dynamics place a premium on the value of non-tradable assets as explained by Teece (1998: 60) in the following quote…
“…competitive advantage at the level of the firm can flow only from the ownership and successful deployment of non-tradable assets. If the assets or its services are traded or tradable in a market or markets, the assets in question can be accessed by all; so, the domains in which competitive advantage can be built narrows as markets expand.”

One such difficult to trade asset is knowledge, and more specifically ‘know-how’. As Teece (2000: 36) explains there is an “absence of commodity-like markets for knowledge assets, a condition that arises in part from the nature of knowledge itself and, in particular, the difficult to articulate and codify tacit dimension”. Although there is a strong argument for the exploitation of existing knowledge bases (replication of the new approaches in diverse contexts and their absorption into the existing set of routines for the execution of that particular task) combined with internal innovation and knowledge renewal by means of the transfer or sharing of best practices within the firm, this is by no means an easy task. As a result, organizations, particularly in the West, are looking to augment their internal knowledge base through other means such as cooperative ventures and acquisitions which, given the increasing pace and scale of change in the external environment, can provide attractive alternatives to the onerous and time-consuming challenge of ensuring the continual renewal of in-house capabilities. They can, as noted by Vermeulen and Barkema (2001: 458), provide an opportunity to “broaden the firm’s knowledge base, break inertia and foster the development of new knowledge through combinations of existing forms of knowledge”. 

The main premise is that over time organizations tend to become rigid and narrow in focus owing to the repeated use of their knowledge bases. Thus, an organization’s unique competencies, once a source of competitive advantage, are now ‘competency traps’ that are blocking signals from the external environment that indicate change is necessary. Under these conditions, when the organization’s internal stock of knowledge is deteriorating, acquisitions can “revitalize a firm and enhance its ability to react adequately to changing circumstances” (Vermeulen & Barkema, 2001: 458) because they allow the firm to acquire new technological resources  and to adopt practices and skills in new domains. In addition, acquisitions can promote constructive conflict, which acts as a shock to the system, breaking rigidities and inertia, stimulating renewal and change and enhancing the ability to adapt to new circumstances. 

However, it is also widely accepted that most mergers, acquisitions and the like, at least by financial measures, fail to achieve their goals as illustrated by the following statements…

  • “Fewer than one quarter of mergers and acquisitions achieve their financial objectives, as measured in ways including share value, return on investment, and post-combination profitability” (Marks & Mirvis, 2001). 
  • “Just 23 percent of all acquisitions earn their cost of capital” (Galpin & Herndon, 2000: 2).
  • “In the first four to eight months that follow a deal, productivity may be reduced by up to 50 percent” (Galpin & Herndon, 2000: 2).
  • “Operating results analyzed nine years after a takeover provided no evidence that the takeover resulted in an increase in the acquired firm’s operating profitability” (Ravenscraft & Scherer, 1987).

One of the main reasons for these sub-optimal results is believed to be the lack of planning and effective implementation of organizational integration strategies. This is supported, these and other theorists suggest, by a solid body of evidence that when a structured integration process is well managed, significant results can be achieved such as faster integration that capitalizes on targeted synergies, lower costs, protection of productivity and customer focus, and higher levels of employee morale. In other words, all value creation takes place after the acquisition. The challenge, however, is to accomplish this in the face of pressure for rapid realization of the synergies expected from the combined firm as explained in the following excerpt from Galpin and Herndon (2000: 5-6)…

“Given the all-out race for globalization, not to mention the constant short-term pressure for earnings growth, desirable targets are fewer in number, demand for them is much greater, and price premiums are far more common. There is less margin for error in actually achieving the economic projections of the deal. Costs must still be driven out of the business, but now without any sacrifice of the ability to capture revenue-generating synergies. Moreover, in contrast to the 1980s (an era when an acquisition normally could be integrated over a longer period, perhaps two or three years), today the businesses must be merged as quickly as possible – often within six to twelve months after the close…It is no longer sufficient just to buy the right company at the right price. Today’s deals start there, but they also demand effective execution of the right integration plan.”

To summarize, not only is it important to select the right integration strategies; these must be executed quickly and effectively so that the combined organization achieves rapid positive gains from its acquisition effort. The speed of integration is also important in minimizing the effects of diverting management attention and effort away from the achievement of other strategically important goals. This raises a number of concerns relevant to the transfer of knowledge between firms such as…

  • As knowledge transfer occurs through individuals, and this knowledge is context-dependent and distributed, time pressures and logistical issues are likely to constrain the amount of knowledgeable people participating in the integration efforts thereby limiting opportunities for knowledge transfer (Grant, 1996).
  • The need for rapid decisions suggests that senior managers, who often lack the specialized knowledge of their staff, will make decisions that may not be in the best interest of the combined organization (Grant, 1996).
  • Senior management will focus on integrating tasks, which are easier and thus faster to accomplish, than integrating the human element in organizations thereby ignoring a major source of potential resistance and knowledge loss (Birkinshaw et al., 2000).
  • The dominant organization, in this case the acquirer, may force its routines on the acquired firm without properly assessing the impact that this will have on business performance (Child & Rodrigues, 1996; Lyles & Salk, 1996). This can also lead to conflicts owing to differences in culture, structures, and systems (Chatterjee et al. 1992; Datta, 1991; Jones & Hill, 1988).

This is just a short list, but I presume that you’re getting the picture. The risks of any acquisition are extremely high which makes the selection and implementation of the right integration strategies absolutely crucial not only in terms of achieving short-term performance goals but also in terms of the transfer of knowledge which is as previously noted one of the main reasons for an acquisition in the first place. But exactly what are integration strategies and what are the ‘right’ ones?

Integration Strategies

It is perhaps interesting to note that the term ‘integration strategies’ is used to describe the outcome of decisions at a number of points in the acquisition process. For example, integration strategies can refer to the type of acquisition (integrating product lines in a product extension acquisition), the degree of autonomy provided to the acquired firm or the specific tactics used to integrate the two organizations. This article focuses on the tactical level and on three specific types of integration activities. The strategic level of integration is covered briefly in order to position the ensuing discussion of tactical integration.

Strategic Integration

At a macro or strategic level, acquiring organizations are faced with making decisions regarding the degree of autonomy retained by the acquired company and the degree of strategic interdependence between the acquired and acquiring firms whereby strategic interdependence reflects the “degree of capability transfer, mutual learning and adaptation necessary to accomplish the aims of the acquisition” (Hakanson, 1995). These dimensions provide the axes of Haspeslagh and Jemison’s (1991) four-quadrant model, which several later frameworks have adapted or built upon. 

According to this model, acquiring organizations select an integration approach that aligns with the strategic goals of the acquisition. This is important as different approaches influence how the firms will be combined, as well as the selection of tactical integration activities and related organizational and human resource policies and procedures. For example, in product extensions the retention of the related knowledge and capabilities of the acquired firm is crucial to achieving acquisition goals. This is consistent with a high degree of strategic interdependence. However, one of the challenges presented by high strategic interdependence is that it is often associated with an emphasis on rapid integration in the pursuit of capability and knowledge transfer. This in turn may have unwanted and unanticipated negative consequences such as the loss of valued capabilities in the acquired firm either through the loss of individuals with specialized knowledge, or as a result of changes to the acquired company’s culture that here to for had preserved certain valued capabilities. Hence, in this type of context-dependent situation, a high degree of autonomy may be necessary in order to ensure that there is minimal deterioration of the acquired firm’s stock of knowledge. 

Situations that require high autonomy and high strategic interdependence are often the focus of a ‘preservation strategy’, which places priority on preserving the acquired firms’ unique capabilities. This is because the best way to ensure that there is minimal or no loss of capability in the acquired firm is to leave it alone including allowing it to maintain its unique culture and other internal environmental conditions that support these capabilities. However, as reported in Hakanson’s (1995) study of the acquisition of R&D labs by Swedish multinational corporations, although highly prized functional areas were given a certain degree of autonomy, others less central may be subject to full assimilation or absorption by the acquiring firm. 

This introduces another reality of the strategic level of integration, which is that although the valued areas of the acquired business may follow one of the four primary integration strategies (absorption, holding, preservation, symbiosis), in actuality integration activities at the departmental or functional level can fall anywhere on a continuum from fully autonomous to fully integrated. As well, even though certain areas of the business may be protected from direct integration activities they are still likely to be affected by organization-wide changes in other areas of the business as well as wide-ranging initiatives such as culture change programs. For example, the rationalization of sales and marketing may cause problems in the protected areas such as cutting members of research and development off from established information channels. 

There are basically two factors that determine the degree of integration within different parts of the acquired firm: the strategic importance of the function in question (centrality) and the ease with which the integration can be achieved. 

“As a general rule, functions that are critical to the strategy of the firm and that are relatively easy to integrate should be consolidated; functions less important to the combined firm’s strategy and harder to integrate should be coordinated rather than consolidated: and finally, functions that are peripheral to the firm’s overall strategy and are hard to integrate should be left separate” (Buono & Bowditch, 1989): 73).

As such, support functions such as Legal, Finance and Human Resources are often subject to an absorption integration strategy, even when core areas of the business are being ‘preserved’ (ibid). This is because they are not central to the organization’s strategy, and they are relatively easy to integrate. They are also a potential source of operational synergies that can result in substantial cost savings to be achieved through economies of scale and the elimination of redundancies. 

One of the challenges posed by the absorption strategy is that its success is closely related to the extent that the ‘acquired’ and ‘acquiring’ organizations are culturally compatible. If the organizational cultures are significantly different then absorption is likely to be extremely difficult as it will be associated with the destruction of values and unique organizational characteristics often resulting in behaviors that include active hostility and even mass resignations. In contrast, if the organizational cultures are similar, the absorption can go quite quickly and smoothly. 

Summary

To summarize, the dominant decision criteria in the design of a strategic integration strategy is the underlying purpose or intent of the acquisition. The result is the selection of one of four primary integration strategies (absorption, holding, preservation, symbiosis) however, in most acquisition situations, pressures for rapid financial results often cause a combination strategy to be implemented whereby high value areas of the business are protected and provided a high degree of autonomy in order to minimize the risk of capability loss while others that are not seen to provide unique capabilities or value are targeted for assimilation in order to achieve cost savings.

In the case of my research, all three of the business units that participated in this study were targeted for absorption by the acquiring firm due primarily to the desire to quickly achieve cost savings through the elimination of duplicate functions, consolidation and streamlining of work processes and the leveraging of economies of scale. In other words, the acquiring firm did not believe that these three areas of the business provided any value-added unique capability or knowledge that needed to be preserved. Now that this research has been positioned within an absorption approach at the strategic integration level, we are ready to examine the literature pertaining to tactical integration strategies. 

Tactical Integration

So, the decision has been made to assimilate the three business units in the acquired company and leave the core areas of the business intact. But what’s the best way to accomplish this and how will this affect the transfer of knowledge between the two firms? 

Unlike strategic integration strategies, tactical integration strategies deal with the ‘nuts and bolts’ of the integration process in terms of precisely how the desired level of integration is to be achieved.  It involves changes to one or both organizations that are often radical such as the closing of a laboratory or plant facility, or the termination of employment relationships even in the most senior positions. As such, the design and implementation of a tactical integration plan can be viewed as a form of managed strategic change intended to “secure the efficient and effective direction of organizational activities and resources toward the accomplishment of some set of common organizational goals” (Pablo, 1994: 804). 

The problem is that the implemented strategies do not always work as planned primarily because the organizational realities within which managers operate are complex, dynamic and difficult to predict. The challenge therefore is for managers to assess the situation to the best of their abilities, based on a number of factors, and then select the tactical integration strategies that are most appropriate to achieving acquisition goals while at the same time recognizing that the realized strategy is emergent in that the final result is likely to deviate somewhat from original intentions. Ideally, this should involve participation by senior managers from both the acquired and acquiring organizations for, as Larsson and Finkelstein (1999: 16) note, “the greater the degree of interaction and coordination between combining firms, the greater the degree of synergy realization”.

 

To be continued in part 2…

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