¶ … Managing All Stakeholders in the Context of a Merger Process
Review of the Relevant Literature
Types of Mergers
Identifying All Stakeholders in a Given Business
Strategic Market Factors Driving Merger Activity
Selection Process for Merger Candidates
Summary, Conclusion, and Recommendations
The Challenge of Managing All Stakeholders in the Context of a Merger Process
Mergers and acquisitions became central features of organizational life in the last part of the 20th century, particularly as organizations seek to establish and maintain competitiveness in an increasingly globalized economy (Nevaer & Deck, 1996). Mergers are generally described as being the formal joining or combining of two corporations or business (Prichett, 1987), although both the framework and the method of merger vary greatly. The reasons for mergers are different based on what a company is trying to accomplish. The acquiring firm may seek to eliminate a competitor; to increase its efficiency; to diversify its products, services, and markets; or to reduce its taxes. Methods used to accomplish mergers may range from friendly to hostile takeovers and may involve varying degrees of company integration (Fitzgibbon & Seeger, 2002).
Statement of the Problem
According to Letza, Kirkbridge and Sun (2004), the current debate and conceptualization concerning corporate governance has been focused on two perspectives: a shareholder perspective and a stakeholder perspective. Although advocates and supporters of each view seek to justify its superiority, rationality and universality, such analysts rarely pay attention to the fundamental conceptions, assumptions and presuppositions that underlie their perspectives which are less credible and valid in matching the continually changing practice of corporate governance.
Justification of mergers are primarily based in three interrelated business themes; synergy, shareholder value, and enhanced competitiveness (Robinson & Peterson, 1995). Synergy would suggest that the two entities in combination may create new opportunities and efficiencies in that could not be realized in singular operation. Furthermore, synergy implies that the merging entities may be substantially different from one another in complementary ways. Competitiveness is grounded in the argument that larger organizations are necessary to compete effectively in an increasingly global market. This concept is closely connected to globalization pressures, suggesting that size is a requisite feature of a success in a globalized economy. Finally, synergy and competitiveness, it is argued, will lead to increased shareholder value in terms of higher stock prices.
Almost inevitably, however, mergers create some level of duplication and the need to eliminate some functions and associated jobs. For internal audiences, such as employees, merger is a source of high uncertainty and reduced job security. This level of uncertainty may result in employee stress and, in some cases, active resistance to the change (Fairhurst, Green & Courtright, 1994). When people are threatened, or perceive the potential for a threat, they may resort to a wide range of behaviors that overtly or covertly serve to undermine or sabotage organizational change (Robbins, 2001). This point is reiterated by House (1996), who points out that most people, just being people, are reluctant to any change in their routine. Many people will passionately challenge each and every effort on the part of management to alter any aspect of their duties; however, when this active resistance originates among key managers, there are more fundamental issues involved.
Furthermore, such conditions are frequently more pronounced in global mergers through arguments about loss of American jobs. In virtually every case, though, the uncertainty and stress of a merger will result in at least a short-term loss of productivity. This uncertainty is most frequently resolved by providing stakeholders with clear statements of justification, articulation of motivation for the merger, and clear and compelling visions of the future (Ford & Ford, 1995). Clear, frequent, consistent and unambiguous messages, therefore, would be most desirable when facing a potential merger (Fitzgibbon & Seeger, 2002).
Moreover, corporate leaders frequently engage in a process of framing, offering world views, perspectives or visions, in order to manage the larger meaning of a merger (Putnam & Fairhurst, 2000). In mergers, these models frequently represent the larger strategic visions of the future that link old structures, cultures and identities with new in persuasive ways. This strategic framing may draw on a number of linguistic and rhetorical devices including catchphrases, jargon, spin and metaphor (Putnam & Fairhurst, 2000, p. 89).
Purpose and Importance of Study
The purpose of this study is to identify the key aspects related to managing all of the stakeholders in the context of a merger process. The importance of this study relates to the fundamental issue in any merger, which ultimately concerns effectiveness. An effective merger permits the combined organization to achieve synergy and enhanced productivity relatively quickly, with minimum stress and uncertainty for the organizational participants. By sharp contrast, ineffective mergers may result in long-term loss of productivity through alienation of employees and other key stakeholders, turnover of valuable employees, layoffs and lost jobs, and high levels of stress and uncertainty for those who remain. Although a number of pre-merger variables such as the relative health of the individual companies, and the degree of fit influence effectiveness, the strategies of merger, including the surrounding discourse, must also be considered (Fitzgibbon & Seeger, 2002 p. 40).
Companies are a collective means by which people assert their self-interests. To achieve their personal and organizational goals, owners and managers need employees and customers. Employees become involved with companies to assert their self-interest and to satisfy personal, economic, and social goals. Customers assert their self-interests as they select among products and services. In this sense, companies can be discussed "in terms of a set of organizational problems of different meaning and consequences for different organizational stakeholders. Problems are solved by sets of strategies and activities proceeding from different rationalities proposed by different stakeholder groups" (Fitzgibbon & Seeger, 2002 p. 6). This approach is also compatible with Putnam and Fairhursts' concept of "organizing as negotiation" (p. 251).
Because persons and companies all tend to act in ways that affect each other's interests, organizations can be defined as negotiated enactments of stakeholder interests. Emphasizing this point, Mumby (1988) concluded, "Organizations are not stable, fully integrated structures. Rather, they are the product of various groups with competing goals and interests. An organization services a group's interests to the extent that it is able to produce, maintain, and reproduce those organizational practices that sustain that group's needs" (p. 166).
Essential to this process are the individual decisions to seek, give, and hold stakes in the form of potential rewards or costs. The stakes, though, are negotiable and tend to affect the creation, maintenance, and dissolution of relationships. Timely stakeholder analyses provides researchers, managers and, in fact, affected stakeholders themselves, to see how organizational and individual behaviors enact self-interests and affect relationships (Heath, 1998).
Each company communicates with many stakeholders. How well it communicates is crucial. In this era of increasing regulatory constraint, managers need to understand how to position their company to take advantage of or remediate the constraints imposed by various stakeholders, whether internal or external. Some companies have become increasingly sensitive to the stakes their workers hold. Workers are able to assert their interests through legal and regulatory actions. They can sue if they believe they have been discriminated against or treated badly. They can "blow the whistle" if the company is violating laws, regulations, or contracts. They can leave and join another company (Heath, 1994).
Persons outside of organizations assert their self-interests by seeking and granting stakes. Neighbors in the locale of a company's plant may assert their self-interest by complaining about the health hazards it creates. How this self-interest is defined and asserted can impinge on the company's goals and operations. If the plant puts out pollutants that neighbors believe are harmful, they can exercise regulatory and legislative control of those emissions. In this regard, self-interests of neighbors are not simple -- not merely a matter of health, for instance. A plant in a community is a source of jobs -- a way its neighbors assert their self-interest. It can affect the tax base of the community and can be a matter of civic pride (Heath, 1994).
Overview of Study
This study employs an action research approach to examine the question of how to best management all stakeholders' interests prior to, during and following a merger or acquisition. A review of the relevant and scholarly literature in Chapter 2 is followed by a description of the methodology and study approach in Chapter 3. An analysis of the data is provided by Chapter 4, followed by a summary, conclusion and recommendations in Chapter 5.
Chapter Two
Review of the Relevant Literature.
Background and Overview. According to Black's Law Dictionary, a merger is "the fusion or absorption of one thing or right into another; generally spoken of a case where one of the subjects is of less dignity or importance than the other. Here the less important ceases to have an independent existence" (1991 p. 988). When the merger occurs between two corporations, there is statutory guidance as to which one of the corporations survives and the other disappears. "The absorption of one company by another," Black's adds, "[with] the former losing its legal identity, and latter retaining its own name and identity and acquiring assets, liabilities, franchises, and powers of former, and absorbed company ceasing to exist as separate business entity" (p. 988).
In other cases, mergers and takeovers have appeared to be the result of opportunists looking for the quick profit; however, the consolidation of the highly complementary assets and resources of both of these giants will create some clear advantages for everyone concerned. Nevertheless, just as bigger may not mean better, merger may not mean advantage. In his chapter, "Technology Strategy: Collaborative Mode, V.K. Narayanan says that from a strategic viewpoint, collaborative mode is undertaken by firms when the economics of collaborative mode enhance the firm's value more than the alternative mode of a firm undertaking implementation all by itself" (p. 289).
Types of Mergers. Mergers are of several different types: There is the horizontal merger (if both firms produce the same commodity or service for the same market); market-extensional, if the merged firms produce the same commodity or service for different markets; or vertical, if a firm acquires either a supplier or a customer. If the merged business is not related to that of the acquiring firm, the new corporation is called a conglomerate. The reasons for mergers are also varied. The acquiring firm may seek to eliminate a competitor; to increase its efficiency; to diversify its products, services, and markets; or to reduce its taxes. Merger activity tends to vary with the business cycle, with the rate of mergers being higher when business is good; based on the current status of the U.S. And global economies, the business cycle is relatively depressed (Mergers, 2004).
Identifying All Stakeholders in a Given Business. Table 1 below illustrates a model of strategic management that incorporates the dual role of public relations in strategic management, in both the overall strategic management of the organization and in the strategic management of public relations itself. According to Grunig (1992), the first three components of the model are described as stages instead of steps because they describe the evolution of publics and issues. Public relations practitioners cannot control these stages, but they can make a contribution to overall strategic management by diagnosing the environment to make the overall organization aware of stakeholders, publics, and issues as they evolve. However, organizations will need different kinds of public relations programs for each stakeholder:
Table 1. The Strategic Management of Public Relations [Source: Grunig, 1992].
1. Stakeholder Stage. An organization has a relationship with stakeholders when the be- havior of the organization or of a stakeholder has consequences on the other. Public Relations should do formative research to scan the environment and the behavior of the organization to identify these consequences. Ongoing communication with these stake- holders helps to build a stable, long-term relationship that manages conflict that may occur in the relationship. 2. Public Stage. Public form when stakeholders recognize one or more of the consequences as a problem and organize to do something about it or them. Public relations should do research to identify and segment these publics. At this stage focus groups are particu- larly helpful. Communication to involve publics in the decision process of the organiza- tion helps to manage conflict before communication campaigns become necessary. 3. Issue Stage. Publics organize and create issues" out of the problems they perceive.
Public relations should anticipate these issues and manage the organization's response to them. This is known as "issues management." The media play a major role in the cre- ation and expansion of issues. In particular, media coverage of issues may produce publics other than activist ones -- especially "hot-issue" publics. At this stage, research should segment publics. Communication programs should use the mass media as well as interpersonal communication with activists to try to resolve the issue through negotia- tion. Public relations should plan communication programs with different stakeholders or publics at each of the above three stages. In doing so, it should follow Steps 4-7. 4. Public relations programs designed to address stakeholder concerns should develop formal objectives such as communication, accuracy, understanding, agreement, and complementary behavior for its communication programs. 5. Public relations should plan formal programs and campaigns to accomplish the program's objectives. 6. Public relations, especially the technicians, should implement the programs and campaigns. 7. Public relations should evaluate the effectiveness of programs in meeting their objectives and in reducing the conflict produced by the problems and issues that brought about the programs.
Grunig also points out that a crucial distinction for segmenting a population of people into publics is the extent to which they passively or actively communicate about an issue and the extent to which they behave in a way that supports or constrains the organization's pursuit of its mission. Publics are more likely to be active when the people who comprise them perceive:
That what an organization does will involve them (level of involvement);
That the consequences of what an organization does is a problem (problem recognition); and,
That they are not constrained from doing something about the problem (constraint recognition) (Grunig, 1992).
In the event that none of these conditions is applicable to a given group of people, these people then represent a nonpublic; and they are of no further concern to an organization. According to Grunig, whenever an organization does something that has consequences on people or people have consequences on the organization, there is a likelihood that the people will perceive an involvement and recognize a problem. Therefore, consequences produce, at the minimum, a latent public; in other words, a public that is passive but has the potential to be active. As the level of involvement and problem recognition increase and constraint recognition decreases, however, these publics can become more aware and may then become increasingly active. Grunig points out that publics generally move from the latent to the aware and active stages, therefore, as strategic management of public relations moves through the first three stages of the process.
Frequently, the terms stakeholder and public are used synonymously; however, there is a subtle but important difference that helps to understand strategic planning of stakeholder management. According to Grunig, "People are stakeholders because they are in a category affected by decisions of an organization or if their decisions affect the organization. Many people in a category of stakeholders -- such as employees or residents of a community -- are passive" (Grunig, 1992 p. 126). The stakeholders who are or become more aware and active can be described as being publics, with whom the company would then have a continuing interest.
Gruning adds that stakeholders are people who are linked to an organization because they and the organization have consequences on each other, they can cause problems for each other. In this regard, people who are linked to an organization have a stake in it, which Carroll (1989) defined as "an interest or a share in an undertaking" (p. 56). A stakeholder, then, is "any individual or group who can affect or is affected by the actions, decisions, policies, practices, or goals of the organization" (Freeman, 1984 p. 25). Along these same lines, Brody (1988) defined stakeholders somewhat more symmetrically as "groups of individuals whose interests coincide in one or more ways with the organization with which the public relations practitioner is dealing" (p. 81).
The first step in strategic management of stakeholders, then, is to identify the people who are linked to or have a stake in the organization. Freeman (1984) termed this list a "stakeholder map" of the organization. A typical stakeholder map for a corporation, Freeman notes, contains owners, consumer advocates, customers, competitors, the media, employees, special interest groups, environmentalists, suppliers, governments, and local community organizations.
Strategic Market Factors Driving Merger Activity. Once the key stakeholders in the potential merger process have been identified, it is important for any company to incorporate their management into their overall business strategy. In this regard, successful cosmopolitan firms, such as the Japanese and German car makers Honda, Toyota, Mercedes, and BMW, and the Swedish-Swiss conglomerate ABB (Asea Brown Boveri) have all managed to anticipate changes in the global environment as opportunities (Georgantzas, 1995). In this regard, within every business venture, there is an underpinning that serves as the framework for the operations of the business. This foundation is frequently referred to as the company's "business strategy." The business strategy tends to be evidence of the core competencies of an organization; it also expands on the core competencies through the organization's mission statement (Georgantzas, 1995).
Business strategy in general has experienced a profound transformation over the past few decades. Early on, the construct of strategy was generally well received and considered to be an effective business approach. The supporting rationale was that there were abundant resources and little or no competition particularly from foreign investors; in this regard, companies in the United States have experienced virtually no growth constraints. Strategy was primarily focused on the internal elements of the firm but not the outside. In the 1970s, strategy began to take a different definition, as this was a transition period in the Corporate America. New strategies began to extend to outside the firm. Gluck (1985) maintained that these early strategies had transcended the minimum four stages, which are budgets, long-range planning, strategic planning, and strategic management. Further, they recommended that firms assess their industry in formulating corporate strategy. This evolution and transformation of strategy has had notable concurrence. The community development direction developed by Gluck provided a framework for orienting people to the production and consumption activities that exist in their communities, institutions and organizations. For instance, stakeholders in the health field were engaged in reflecting on their role in the planning, resourcing and delivery of health and health education services. Additional conflicts occurred when values related to these activities were challenged but the community development process provided a strategy for translating these conflicts into goals related to the establishment of the pipeline (Gluck, 1985).
Another industry analyst of the era, Michael Porter (1985), argued that firms in an industry are actors that must cope with each other in terms of suppliers, competitors, potential entrants, and customers. Strategy continued to evolve well into the 1980s when globalization was born and more diverse perspective and issues on strategy emerged. Hence, strategic management focuses on such elements as people, skills, technology, information, and finance. The underpinning construct of this focus is to ensure that these elements are coherent with corporate strategy. Fredrickson (1990) reported that the transformation of strategy over the years now considers actors, that were once identified as adversaries, as potentially having a nonadversarial relationship. This relationship reconsideration has been fueled in large part by the fact that "it is clearly the case in the sequence of suppliers, competitors, and customers; each and every one may be our partner" (Frederickson, 1990 p. 13). The partner in this sense today is now reflective of the enormous mergers, acquisitions, alliances, and outsourcing as practiced by many businesses.
Today, the strategy of an organization becomes a driving force that charts the course of such an organization. As a result, it becomes increasingly a focal point in any business environment for the strategic planning to be well established and flexible to have the potential to deliver on the organization goals and mission statement. It is pertinent to mention here that every business starts with some level of strategy. Such a strategy might have been developed without explicit effort of the business owners.
It also is important to point out that a business strategy is different from a business model. Business models have their own considerable impact on the organization's performance, just as does a business strategy. Business model selection is important and is different from business strategy, as Magretta (2002) reports, "A business model isn't the same thing as a strategy, even though many people use the terms interchangeably today" (p. 6). Business models show the interrelationships of the various diverse business components. It often does not factor in the competition, which always results with time. It is the lack of the competitive factors in the business case that sets a business model aside from a business strategy (Magrette, 2002). Therefore, in taking into consideration the existence of competition or its obvious potentials moves a business model a notch up to become a business strategy. The potential of a business to do better than its competitors in the same industry or not is a fundamental function of competitive strategy.
Strategy can therefore be defined as a framework that business managers formulate in order to ensure not only the survival of their business ventures but also to stifle competition. Such a framework must take into the considerable amount of factors that are pertinent explicitly or otherwise relevant to their environment. Environment here can be defined as domestic or foreign. In generality, an organization's environment must then be considered as the locales of its operations. Therefore, an organization's environment can be as diverse as the locations of the business branch offices.
In today's increasingly globalized marketplace, an organization that is either global or multi-national needs to formulate business strategy that can be adapted to its local operations. In formulating strategies, it is imperative that business's key executives understand the big picture. The importance of big picture provides significant value to company executives concerning how to best craft their business strategies to align with both corporate goals and competitors' competence. Such a big picture strategy also tends to offer better directions to the business. The importance of big picture strategy is pointed out by Kim & Mauborgne (2002), who note, "Most strategic planning involves preparing dense documents filled with numbers and jargons. But building process AROUND A PICTURE yields much better results" (p. 5). A big picture strategic plan must be terse and can be portrayed on a few slides (unlike the stack of documents that graphs and spreadsheets result in). Because the substantial advantage of big picture in strategic planning is obvious, it therefore becomes necessary to suggest that to ensure more aggressive strategic planning or formulation that organizations use drawing in place of piles of written documentation to present and harness their organization's driving vision.
Strategic planning is frequently associated with the ability of the business to initiate or create an imperfect market. The intention for the creation of imperfect market is for the business to leverage on such market conditions. A business that creates such market conditions incurs some costs that are associated with such market conditions to the business that creates it. Such costs include implementation of such strategies. The costs associated with strategic implementation, the issues of strategic market factors come into play.
Barney (1986) defined strategic market factors as being.".. A market where the resources necessary to implement a strategy are required" (p. 1231). In the event that the strategic market factors are perfect it only means that the cost of acquiring the resources that are strategic have greater probability of being equal to the economic value of those resources that will be needed to implement the market strategies. The problem with this scenario is that the revenue generated here has substantially less propensity to generate less than above normal revenue for the business that implements it. In order for economic value to be generated in a process that results in greater than normal economic value, the strategic market factors must be capable of creating an imperfect market conditions.
In order for corporations to create and foster market imperfections, they frequently engage in acquisitions and mergers. The quest for these practices is one of the strategies such acquiring firms tend to use to create imperfect market and ensure growth. Such strategic practices of mergers and acquisitions are indicative of the existence of such markets for firms (Porter, 1980).
There are also instances that the acquiring firm amasses above than normal returns on its investment. If this type of a condition exists, most often, the returns are passed over to the shareholders of the acquired company. It is pertinent to mention that acquisition is just one form of strategic market factor. Strategic market factor exists any time a business has a need to make a purchase or a sale that will enable it implement on its strategy. Therefore, a business that acquires another in order to implement a strategy uses the acquired firm as a required strategic resource for strategic implementation. Consequently, considering companies or firms as a resource makes them a strategic factor market.
In some cases, such as a business' need for diversification, businesses have no option but to acquire other businesses and use the acquired businesses as strategic implementation resources. There are occasions when resource acquisition becomes a low cost producer. Such situations exist when the acquiring firm's market share is large. All the same, such conditions still are considered strategic factor markets. At the same time, they still are applicable as the pertinent strategic factor market may be the market share. There are numerous attributes that constitute strategic factor markets. Some of these could be for quality status since most corporations are reputation conscious, low volume high sales margin are associated with strategic factor markets (Porter, 1980). While other factors as presented by Thompson and Strickland, (1980) also include managerial and labor markets; in addition, included in these strategic factor markets are production innovations. Examples of such labor markets are researchers and skilled development employees.
Selection Process for Merger Candidates. The selection process for potential mergers or acquisitions therefore requires three fundamental factors to fall into place for an alliance to be concluded:
1. Self-analysis. Relationships benefit when the partners know themselves. It is also important that they are sufficiently experienced to be able to assess each other's qualities fairly accurately.
2. Chemistry. Mergers frequently succeed or fail based on the rapport between chief executives, and it is equally important that the executives from the two companies further down the hierarchy get on well.
3. Compatibility. The courtship process tests companies' cultures, their philosophies, and fundamental ways of doing business. It is vital that these be broadly compatible between the companies, if they are to work closely together (Child & Faulkner, 1998 p. 90).
Geringer (1991), while emphasizing the importance of the complementarity of assets, provides a more complex view of the appropriate determinants of partner-selection criteria, particularly in relation to international joint ventures. In this regard, Geringer differentiates between task and partner-related dimensions of selection criteria, and maintains that "the relative importance of task-related selection criteria is determined by the strategic content of the proposed International Joint Venture and the parent firms, specifically the critical success factors of the venture's competitive environment and the parents' static and dynamic position in relation to these factors" (Geringer, 1991 p. 45). Geringer assessed previous research on the selection of international-joint-venture partners, which he concluded was vague regarding selection criteria. As a clarification, he distinguished between two categories of selection criteria. 'Task-related' criteria are those which 'refer to those variables which are intimately related to the viability of a proposed venture's operations' (Geringer, 1991 p. 45), and include features such as:
Access to finance;
Managerial and employee competences;
Site facilities;
Technology;
Marketing and distribution systems, and, favorable institutional environment or a partner's ability to negotiate acceptable regulatory and public policy provisions (Geringer, 1991).
By contrast, 'partner-related' criteria refer to those variables which characterize the partners' national or corporate cultures, their size and structure, the degree of favourable past association between them, and compatibility and trust between their top management teams. Geringer's second contribution lies in the development of a contingencybased conceptual scheme for explaining the weighting of task-related selection criteria. In this regard, he provides three criteria that are closely associated with a parent firm's strategic intent:
1. The extent to which the dimension is perceived to be critical to the venture's performance;
2. The parent's existing strength in the critical success factor dimension in question; and, 3. The anticipated future level of difficulty likely to be encountered in internal efforts to achieve a viable competitive position in relation to the critical success factor.
Geringer's empirical research indicated that parent companies' evaluations of selection criteria usually involved analysis of both their firm's current and future competitive position in relation to achievement of a full set of critical success factors relevant to their target area of competition. Geringer therefore clearly emphasizes the importance of the critical success factors in the area to be attacked and a partner's specific weakness in relation to some of them as key determinants of the type of partner sought in a joint venture.
Strategic factor markets also have crucial implications for the product strategies that the acquiring firms implement. The crucial impact revolves around the cost the acquiring organization invests in acquiring the essential strategic resources. The cost of such implementation strategies is a function of the cost of the distinctiveness of the competitive resources that are of significance to strategic factor markets. Thus, in a perfectly strategic factor markets, the full value of the product market strategies will be expected when the relevant resources are acquired. The costs of acquiring product market strategies is better put in the words of Barney (1986), as:
If strategic markets are perfectly competitive, then the full value of product market strategies will be anticipated when the resources necessary to implement these strategies are acquired, and firms will only be able to obtain normal returns from acquiring strategies resources and implementing strategies. Firms can only obtain greater than normal returns from implementing their product strategies when the cost of resources to implement those strategies is significantly less than their economic value, i.e., when firms create or exploit competitive imperfections in strategic factor markets (p. 1232).
Therefore, in order for strategies to be of value to businesses, there exists a need for businesses to have sustained capabilities to create strategic market imperfections that such businesses can use to leverage on the competition. The beginning point of creating such market imperfections is by constructing a strategic factor markets framework. The purpose of such a framework is for businesses to be able use it as an aid in choosing which product market strategies can generate more than normal returns to the business.
Today, many companies are using the strategic planning process to help achieve their goals in ways beyond increasing sales and revenues. In the current dynamic globalized market, companies are constantly responding to changing project scope and customer requirements. Budgets are cut, resources are reallocated, and projects within the same company must compete for an ever-tighter resource pool. Add to these challenges the difficulties of managing without direct line authority, predictable cross-functional miscommunications and organizational politics and it quickly becomes clear that a new approach to organizational planning should be a top priority for businesses today. In the final analysis, it just makes good business sense to try to achieve a good balance between a rigid business planning approach on the one hand and a freewheeling "seat-of-the-pants" style on the other. Strategy has continually evolved over the years and its adoption in business has been of constant shift. There are essentially some four paradigms strategy can be grouped. These models can be grouped as organic; reactive; ad hoc management; and systematic management models.
The fundamental organic strategic model deals primarily on the premise that management or firm seeks some form of survival solution when threatened. Such a model is often unmanaged and unguided. Ansoff (1987) suggests that unless an organization is threatened by a survival crisis, its strategic behavior is unmanaged, organic, and serendipitous determined by socio-political forces. This model focuses fundamentally on finding a savior that can lead the firm out of its predicaments. The organization remains unfocused as its search for better leadership is active. The reactive model of strategic management centers on the principle of reactive, and torporific adaptation of the dysfunctions of the business. The ad hoc management model of strategic approach deals with more aggressive reactive measure in response to threats. In this model, management builds on the aspects of its prior strategies that were successful in a step-wise methodology.
Ansoff maintains that this type of model is not reactive but a deliberate shaper of its own development. In this implementation, the firm deploys a systematic approach to augmenting its strategies by leveraging on its prior successful effort. This analyst argued that the underpinning of this model of strategic management is incremental development. It is pertinent to mention that this model affords managers in the firm to individually make decisions that affect only their units. These unit-based decisions are not firm wide impacting but synergies exist among various unit decisions. The individual managers are able to provide synergy since they leverage off mutual experience from earlier experience. Ansoff (1987) also argued that leveraging on prior strategic experience is invalidated when the environmental change is large. He posits that there is need for management to redefine its strategic logic. The analysis of this construct establishes the fact that most strategies fail to initially produce the desired result due to misfit between the firm's internal configuration and the new strategic logic. In addition, there exists substantial probability that a firm undergoes a period of trial and error until the new strategy is developed and implemented. In order to address this misfit or ensure coherence, the firm experiences some downtime in re-crafting its strategic logic through adaptation after which the firm begins to reap the benefit from its new strategy. In addition to these strategies, there is a strategic model, systematic management model.
The systematic management model focuses on the premise of strong and comprehensive management ability of the firm. The firm anticipates the future environmental changes and initiates firm-wide strategic planning. Ringback (1971 in Ansoff) maintains that organizations systematically deploy explicit strategies that are considered as prescriptive to forestall invasion of its market position.
Table 2, below, shows an adapted version of these strategic models adapted from Ansoff (1987).
Model
Incremental
Discontinuous
Organic
Serendipitous Evolution
Crisis Mutation
Reactive
Reaction to Dysfunctions
Crisis Mutation
Ad Hoc Management
Episodic, Local Extrapolation
Trial and Error Search
Systematic Management
Periodic Comprehensive Extrapolation
Comprehensive Periodic Anticipation
Table 2. Change Process: Strategic Models adapted from Ansoff (1987).
Variations in strategic management approaches offer significant enhancements to the accomplishment of organizational goals. Therefore, it is critical that strategic management becomes and remains the foundation of any business' strategic vision. To this end, strategic management can be more effective if applied under two constructs; these constructs are business strategy and business execution. The two constructs, while parallel, have direct relationships that make good business sense.
According to Frigo and Litman (2002 in Ansoff), "Two pillars of strategic management -- business strategy and business execution -- as parallel and interrelated processes, are both necessary for an organization to achieve superior financial performance" (p. 6). Carefully crafted and well-managed strategic management processes can provide tremendous leverage to an organization that is geared towards taking advantage of its environment. Such management efforts also provide value-added framework that is both flexible and extensible. The dynamism that is associated with value-added strategic management system gives an organization a competitive advantage to retain its and gain market share. In their book, Scenario-Driven Planning (1995), Acar and Georgantzas point out that such "sticking to the knitting is logical incrementalism or the art of muddling through as practiced in the 1950s. This way of thinking is quite popular in Britain and, to some extent, in the United States" (p. 5). Peters and Waterman (1982) suggested that too much analysis results in managerial paralysis; consequently, their advice contained in the popular In Search of Excellence resulted in many managers responding with a "knee-jerk" reaction whenever profits dropped or their firms faced novel challenges. Eisenhardt (1989) found that in a turbulent environment it was important to move quickly in making and implementing strategic decisions.
The ability to move swiftly in a rapidly changing environment may be the defining characteristic of many successful firms today (Felan, Teal & Upton 2001). These authors suggested that the speed to the marketplace is considered an important competitive weapon for many firms. Chen and Hambrick (1995) showed that entrepreneurial firms were better positioned to compete based on speed because they were smaller and more flexible than their larger competitors. However, even though most companies invest significant time and effort in a formal, annual strategic-planning process, the extraordinary reality is that few executives believe that this time-consuming process pays off, and many managers complain that their strategic-planning process provides few new ideas and is often rife with politics (Beinhocker & Kaplan 2002).
According to Mercer (1991), the question of whether strategic planning pays off is a difficult one. "A lot depends on the time frame by which plans are judged and how the 'payoff' is measured (Mercer 1991, p. 23). Generally speaking, though, most studies to date have shown that formal planning (in other words, making a conscious effort to cover most of the planning basics) has resulted in a positive payoff. Allocating resources into a planning effort should result in more knowledge for decisions and, therefore, better organizational performance (Mercer 1991).
Jauch and Glueck (1998) suggest that a better approach to planning today is one that maintains enough flexibility to be responsive to ever-changing conditions. "Strategic planning is a steam of decisions and actions which leads to the development of an effective strategy or strategies to help achieve corporate objectives. The strategic planning process is the way in which strategists determine objectives and make strategic decisions" (p. 5). One authority says that a strategic planning should include:
1) defining the corporate mission and setting objectives;
2) forming strategic business units; and 3) establishing strategy guidelines for long-term strategic planning of the corporation and its business units (Cravens, 1998).
In this regard, a company's executive leadership is responsible for the formulation of the vision that will drive this strategic planning process: "Top management decides what corporate strategies will move the firm toward its objectives" (Cravens, 1998 p. 61). After implementing a strategic plan, it is important for management to measure the progress of the plan and make adjustments as necessary. Successfully executing these steps requires penetrating and insightful analyses. Strategic planning is clearly essential to corporate survival and continued improved performance (Cravens, 1998). Clearly, then, business growth through the strategic planning process requires both an assessment of the internal and external factors that could potentially impact the industry, as well as to identify opportunities for growth, goals that can be accomplished using the action research process.
Chapter Three
Methodology
Description of the Study Approach
Action research is not a new concept, and actually dates to 1946; action research can readily be traced back to the end of World War II in the U.S. when social psychologist Kurt Lewin (1946) developed the methodology (Kemmis & McTaggert, 1990). Some of the most widely accepted definitions of Action Research include following: [Action Research]...aims to contribute both to the practical concerns of people in an immediate problematic situation and to the goals of social science by joint collaboration within a mutually acceptable ethical framework. - Rappaport (cited in Hopkins, 1985).
Action Research is also described as."...a form of self-reflective enquiry undertaken by participants in social situations in order to improve the rationality and justice of (a) their own social practices, (b) their understanding of these practices, and - the situations in which the practices are carried out. It is most rationally empowering when undertaken by participants collaboratively...sometimes in cooperation with outsiders" (Kemmis, 1985). Finally, [Action Research].".. is the systematic study of attempts to improve educational practice by groups of participants by means of their own practical actions and by means of their own reflection upon the effects of those actions" (Ebbutt in Hopkins, 1985).
The essentials of action research design were considered by Elliott (in Hopkins, 1993) as per the following characteristic cycle: Initially an exploratory stance is adopted, where an understanding of a problem is developed and plans are made for some form of interventionary strategy (this is known as the "The Reconnaissance and General Plan" phase)
The next step is to implement the intervention (in other words, this is the "Action" in "Action Research"). During this period of time,.".. pertinent observations are collected in various forms. The new interventional strategies are carried out, and the cyclic process repeats, continuing until a sufficient understanding of (or implement able solution for) the problem is achieved" (Hopkins, 1993). Finally, the research shows that this protocol, like the survey design approach, is iterative or cyclical in nature and is intended to provide a group with a more complete understanding of a given situation, starting with conceptualizing and particularizing the problem and moving through several interventions and evaluations.
Another distinguishing aspect of action research involves the degree of empowerment which it provides to all participants. Empowering employees to achieve higher levels of performance is a popular catch phrase, and as of 1997, empowerment programs had been adopted by more than 40% of manufacturers in the U.S. More effective management styles have been advanced to help managers oversee the additional numbers of employees created through the process; however, Stephen Robbins points out that these programs are only likely to improve productivity when employees are willing to accept increased responsibilities, are group oriented, and have good interpersonal skills. In addition, successful empowerment programs are even more successful when the organization's culture is characterized by trust, risk taking, and employee participation, when employees have been trained in empowerment skills and are provided with the necessary resources; and when management has put into place a comprehensive control system that monitors employees actions and alerts management quickly of major problems (Robbins, 2001 p. 375).
The action research approach framework is most appropriate for participants who recognize the existence of shortcomings in their business activities and who would like to adopt some initial stance in regard to the problem, formulate a plan, carry out an intervention, evaluate the outcomes and develop further strategies in an iterative fashion (Hopkins, 1993). The initial stance in regard to the problem adopted for the purposes of this research follows the findings reported by Steve Letsza and Christian Hunt (2004) that maintains that all stakeholder needs must be managed effectively in order for any merger to succeed.
Chapter Four
Data Analysis
Professional managers and management scholars have increasingly recognized the fundamental and vital interdependencies that exist among the firm, its employees, customers, investors, communities, and constituencies. Furthermore, they also recognize that these dependencies cannot be described in terms of simple contractual exchanges, but rather involve interactions and network effects. According to Post et al. (2002), "Indeed, early in the last century -- and just as the mechanistic idea of 'scientific management' was gaining acceptance -- Mary Parker Follett discussed the central contribution of 'interconnectedness' among diverse actors to business success (Post et al., 2002). Likewise, Chester Barnard described the business firm as a "cooperative" organization that was founded on rational principles; and this characterization continued to attract scholarly endorsement over the following decades. More recently, Freeman argued that the central challenge of strategic management was to create a satisfactory balance of interests among the diverse constituencies that contribute to, or place something at risk in, the running of a business (Post et al., 2002).
Freeman's work helped to popularize the term "stakeholders" to describe the entities and interests that are involved, either voluntarily or involuntarily, in the operations of the firm. Although the strategic implications of Freeman's work have not been fully recognized, the "stakeholder model" has subsequently become a familiar and widely accepted characterization of the contemporary business organization (Post et al., 2002). Until very recently the theory of strategic management was dominated by a controversy over whether the primary determinant of a firm's successful performance was its access to resources or its position within its industry structure. The editors of a Special Issue of the Strategic Management Journal devoted to this issue concluded that the attempt to select one of these explanations over the other is pointless because there are continuous "reciprocal interactions" between the firm and its environment, with competition shaping capabilities and capabilities in turn shaping competitive positions; however, even this relatively harmless conclusion does not take into account the third dimension of strategic activity: the social-political environment (Post et al., 2002).
As noted above, developing appropriate business strategies is certainly not a new process. "The role of overarching values and institutional purposes -- not restricted to market transactions alone -- has been emphasized for decades by such scholars and practitioners as Chester Barnard, Tom Peters and Robert Waterman (In Search of Excellence), and Jim Collins and Jerry Porras (Built to Last)" (Post et al., 2002 p. 6). The interaction of market and non-market forces, combined with the impact of such forces on competitive success, has also been examined by researchers such as Baron, Mahon and McGowan, and Edwards and Watkins (in Post et al., 2002).
Today, though, a variety of analytical tools such as the balanced scorecard and double/triple-bottom line reports have been applied to the management of stakeholder interests, a trend that also reflect attempts to reconcile short-term / long-term, customer/non-customer, and shareholder/non-shareholder complexities in the corporation today. Post et al. add that the common characteristic of all of these contributions is recognition of the multiplicity and diversity of stakeholder relationships and of the fact than any stakeholder relationship may be the most critical one at a particular time or on a particular issue. "The key to solving the core strategic problem is to understand the firm's entire set of stakeholder relationships. These relationships are the essential assets that managers must manage, and they are the ultimate sources of organizational wealth" (Post et al., 2002 p. 6).
The New Stakeholder View. Modern analysis of the stakeholder model has been built around, but has expanded beyond mere descriptive accuracy to exploring its instrumental and normative implications for the firm. Following the argument that managers have a responsibility to meet the legitimate claims of all stakeholders, Jones and Hill developed a "stakeholder agency" model and argued that managers should act as "agents" for stakeholders (the relevant "principals") (in Post et al., 2002).
While the specific instrumental impact of a stakeholder orientation on financial performance has been difficult to quantify, Michael Jensen, a well-known finance scholar, reflects a widespread consensus in the remark that "a firm cannot maximize value if it ignores the interests of its stakeholders" (Post et al., 2002 p. 15). The new Stakeholder View examined by these researchers developed these themes in detail and also stressed the importance of inter-stakeholder relationships. "The stakeholder model implies a complex web of relationships, not a series of dyadic corporation-stakeholder links" (Post et al., 2002 p. 15).
In spite of its widespread use, the term "stakeholder" is rarely given a precise definition. To correct this deficiency, Post et al. proposed the following as a working definition: "The stakeholders in a firm are individuals and constituencies that contribute, either voluntarily or involuntarily, to its wealth-creating capacity and activities, and who are therefore its potential beneficiaries and/or risk bearers" (p. 8). This definition is in consonance with the criteria for stakeholder identification suggested by Kochan and Rubenstein in their study of Saturn, Inc. In which they note that stakeholders: supply critical resources, place something of value "at risk," and have sufficient power to affect the performance of the enterprise.
These criteria clearly exclude a firm's competitors from the list of its stakeholders. In their role as market rivals, competitors do not provide resources to the firm, nor do they stand to gain from its success in the same way that other stakeholders do. However, competitive firms may have a common interest in the welfare of their relevant industries and markets, and may gain or lose status and wealth as a result of the actions of some of their colleagues. (Witness the damage done to the entire professional accounting industry by the accusations against Arthur Andersen.) As a result, competitive firms with common interests may be recognized stakeholders in the pursuit of those interests, although not in their competition for scarce resources or market share.
The new Stakeholder View maintains that the capacity of a firm to generate sustainable wealth over time, and hence its long-term value, is determined by its relationships with critical stakeholders. The stakeholders of any firm are usually quite diverse, but relationships between the firm and each of its stakeholders have many common features; and the stakeholders have common interests (as well as potential conflicts) among themselves. According to the Stakeholder View, the critical challenge for contemporary management is recognition of the mutual interests among the firm and its stakeholders, leading to the development of consistent and supportive policies for dealing with them.
Post et al. constructed a visual representation of the Stakeholder View by converting the familiar stakeholder model of the firm into a diagram showing the position of the various stakeholders in relation to the three dimensions of the strategic setting -- resource base, industry-market, and social-political arena; however, these stakeholders were merely illustrative and each business setting is obviously unique.
The term "stakeholder management" refers to the development and implementation of organizational policies and practices that take into account the goals and concerns of all relevant stakeholders. (It emphatically does not imply the mobilization or manipulation of stakeholders in an exploitative sense.) A recent example of applying stakeholder management in the extended enterprise is the response of Monsanto to the changing concerns of investors, customers, and worldwide public opinion, all of which challenged its "license to operate" (Post et al., 2002).
Methodology and Data. The research conducted by Post et al. was based on the empirical maxim that "corporations are what they do." Our goal has been to find out how and why large, complex enterprises adopt comprehensive stakeholder-oriented management policies and practices, what these policies and practices actually involve, and what their overall effects may be. The need for depth and comprehensiveness in this kind of research -- together with the anticipated importance of evolutionary developments and path-dependencies -- necessarily implies that only a small number of firms can be studied. We began by identifying a set of firms that appear to have adopted comprehensive stakeholder management practices, and eventually focused on three -- Cummins Engine, Motorola, and the Royal Dutch/Shell Group (hereafter referred to as "Shell").
It was clear that these three companies differed from each other in many respects, and the authors did not intend to suggest that they are perfect examples of stakeholder management. "Each has experienced significant problems and changes in critical stakeholder relationships over the past quarter century; each has been forced to realign its strategy, structure, and culture to adapt to new circumstances; and each has made mistakes" (Post et al., 2002 p. 8). Despite these constraints, though, the combined experience of these three firms in dealing with diverse constituencies and issues enables us to examine a wide range of critical firm-stakeholder relationships and provides considerable insight into the implications of the Stakeholder View in both theory and practice. By closely following the "path dependencies" and "complex contingencies" in a few well-observed cases, Post and his colleagues demonstrate that the Stakeholder View provides a comprehensive perspective on the strategic situations confronting real firms and therefore offers a useful framework for strategic management analysis and practice in the extended enterprise.
Cummins, Motorola, and Shell are firms well-known to scholars of business management. According to Post et al., the stakeholder relationships that have been most critical for each company during the past 20 years indicate hat these companies have confronted challenging stakeholder issues in all three dimensions of the Stakeholder View, and that issues arising from the social-political arena have had particularly important and pervasive impact. The Stakeholder View acknowledges linkages between the extended enterprise and its multiple constituents as being the principal means of sustaining and enhancing its wealth-creating capacity; furthermore, based on these linkages with the firm, these constituents have a "stake" in its operations; that is, they have something "at risk," which is the possibility of gaining greater or lesser benefits, or experiencing greater or lesser harms, as a result of the firm's operations (Post et al., 2002).
The Stakeholder View raises three fundamental questions for the analysis of strategic management at Cummins, Motorola, and Shell over the 25 years or so:
How did the Stakeholder View affect the firms' analysis and management of universally recognized "business" stakeholders -- investors, employees, and customers?
How does a comprehensive Stakeholder View framework of analysis improve our understanding of the strategic options and actions of these firms over the past quarter-century?
How did these firms develop and institutionalize a comprehensive Stakeholder View and with what results? (Post et al., 2002).
Relations with "Business" Stakeholders. Both systematic research studies and common experience suggest that most firms recognize investors, employees, and customers as representing critical "business" stakeholders (Agle, Sonnenfeld & Mitchell, 1999). All three of these groups are conspicuously critical to the existence and success of virtually every enterprise, and most companies have more numerous and frequent routine interactions with them than with other classes of stakeholders. Under ordinary circumstances, the "business" stakeholders stay in contact with the firm voluntarily because they believe they will be better off by doing so than they would be otherwise. Post and his colleagues say these "business" stakeholders stand to gain from the success of the firm in creating new wealth through such things as innovation, productivity gains, and increasing (or increasingly recognized) customer benefits.
Historically, firms have spent more time and attention in analyzing these "core" stakeholders, and to managing relations with them on a routine basis, than they have other interested groups. These functions are highly specialized, using different information sources and modes of analysis. As a consequence, managerial responsibility for them is dispersed. Hence, the prevailing view in both theory and practice seems to be that relations between the firm and these stakeholders involve dyadic linkages -- firm-investors, firm-employees, and firm-customers -- rather than a network of mutually interactive stakeholder relationships. As a consequence, there is no necessary consistency -- and little consideration of inconsistency -- among the policies and practices surrounding each of these linkages, and there is no attempt to develop synergies among them. "Indeed, the prevailing (and alarmingly static) view seems to be that managing these linkages is a zero-sum game (e.g., anything gained by employees comes out of the pockets of investors or customers)" (Post et al., 2002 p. 10).
The Stakeholder View directly challenges this viewpoint, and emphasizes that these stakeholder linkages are part of a single network, that consistency and balance in stakeholder relations are critical manifestations of corporate culture, and, most importantly, that organization-wide stakeholder management should result in the dynamic evolution of positive-sum strategies that give rise to benefits for all or most critical stakeholders over the long-term. Competence in stakeholder relations can be applied throughout the extended enterprise network; in fact, it is a source of competitive advantage and a guarantor of the firm's "license to operate" within its environment (Post et al., 2002).
Cummins' relationship with "business" stakeholders has been epitomized by its successful attempt to place Ford Motor Co., Tenneco, and Kubota (a Japanese firm) in the dual roles of customer and investor, thereby emphasizing their simultaneous interest in both the availability and quality of Cummins' products and its long-term financial performance (since each interest is essential to the other.) In addition, Cummins brought the government of Brazil into partnership in its operations in that country, again in an attempt to seek shared objectives. The majority of Cummins' overseas activities are structured as joint ventures or license agreements, the most important exception being CUMMSA, a Mexican facility that Cummins took over after management became convinced that its JV partner was sabotaging the project through mismanagement of key stakeholder relationships. CUMMSA recently became the first multinational corporation to be awarded the National Prize for Exports by the President of Mexico. In the domestic U.S. context, Cummins experienced a devastating strike during the 1970s, a strike that was sufficiently harmful to both the company and its employee stakeholders that it brought about a transformation in Cummins' labor relations. As a result, the company's most recent union contract, signed in 1993, was scheduled to run for an unprecedented eleven years (Post et al., 2002).
Motorola's historic commitment to "uncompromising integrity" and "respect for the individual" provides an explicit basis for developing consistency and positive-sum results in its stakeholder relationships. In a dramatic emphasis on the common interests of employees and investors, CRT screens throughout the company's Schaumburg, Illinois, headquarters continuously display current stock market activity and, in particular, the Motorola stock price. Motorola's emphasis on product-service quality, reflected in the "six sigma" quality standard that it pioneered in the 1980s, is a manifestation of its value commitments for customers and carries the further implication that adherence to quality objectives will benefit employees and investors as well.
Shell's traditional orientation has been toward technological leadership and the combination of resource-enhancement and risk-spreading made possible through a network of alliances with other companies in its industry. The oil industry is highly capital-intensive, and individual projects are subject to considerable risk, political as well as environmental and technological. As a result, joint venturing with major competitors (termed "co-opetition") is becoming increasingly commonplace, and it creates stakeholder linkages with entities that would otherwise be more interested in Shell's decline than in its success. (Post et al. add that these collaborative activities also make it more difficult for any new competitor to enter the industry, a fact that benefits all of the established firms.) In addition, Shell has gained competitive advantage by making major breakthroughs in drilling, refining, and transport technologies, which will ultimately benefit other industry participants as well.
Relations with Social and Political Stakeholders. An explicit purpose of the Stakeholder View is to emphasize the critical importance of relationships with stakeholders in the social and political arena, and all three of the focal companies have actively developed relationships with such stakeholders as part of their long-term value-seeking strategies. For instance, Cummins recognized early on (as early as 1969) the potential impact of changing public concerns about environmental protection when it announced an intention to increase emission standards for its engines in advance of explicit government regulation. The company subsequently actively collaborated with the EPA in a successful effort to strengthen that agency's exclusive authority to set air pollution standards. Cummins ultimately initiated the formation of a unique government-business research center, the Health Effects Institute, to monitor and analyze the effects of diesel emissions. Motorola's two-pronged strategic response to competitive pressures from Japanese companies during the so-called "chip wars" of the 1980s concerned an internal "quality crusade" that was linked with an external political campaign they called "Meeting Japan's Challenge." More recently, the company has been noticeably active in promoting the establishment of normal trade relations between the U.S. And China, a development that will undoubtedly have profound implications for its global competitive position and the value of its resource base (Post et al., 2002).
Perhaps the most dramatic evidence of the impact of non-business stakeholders on the company's corporate strategies was provided by Shell's experience during the last few years of the 20th century. Based on a number of incidents that were widely reported and discussed, Shell was simultaneously challenged about both its plans to dispose of the Brent Spar oil storage terminal by sinking it in the North Sea and its relationships with the national government and regional native peoples in Nigeria. According to Post et al., the Brent Spar challenge was headed by the environmental activist organization Greenpeace and ultimately involved a number of European politicians and the German government as well. The criticism Shell's involvement in Nigeria received came from a variety of sources, including human rights organizations and even conservative, The Economist.
This entire experience resulted in Shell's management recognizing the seriousness of such external challenges, regardless of their specific quality. The result was an initiative designed to bring about pervasive change throughout the complex and highly decentralized Shell Group, replacing a closed "Planet Shell" culture with a new dedication to "listening and responding" to external perspectives. Post et al. point out that it is important to note that Shell's next major foreign venture, the Camisea Project in Peru, was organized from the beginning around a comprehensive program of environmental and social impact assessment, including a formal plan for stakeholder participation involving local communities and interests as well as international organizations concerned with the environment and human rights. "While the Camisea venture was ultimately abandoned by Shell, it served as a model for other current and future projects, such as the Malampaya (offshore oil drilling in the Philippines) and Athabasca (oil sands mining in Western Canada) projects" (Post et al., 2002 p. 17).
Institutionalization. All three of the firms offer evidence of attempts to institutionalize the stakeholder perspective throughout their policies and practices. In the 1970s, Cummins established a "Corporate Action Division" (CAD) with a mandate to serve as an in-house resource for understanding the social and political context of the company's operations, to coordinate related programs, and to work with management at all levels to see that social responsibility considerations are included in their decisions and actions. The codes and guidelines developed by the CAD eventually penetrated every layer and function of the corporation. CAD quickly became a model for similar initiatives in other companies (Post et al., 2002).
Motorola's values commitment is formally stated in For Which We Stand: A Statement of Purpose, Objectives & Ethics (first published in 1973, periodically updated, and eventually incorporated into the company's Code of Business Conduct in 1999). A list of key stakeholders and an elaboration of the company's policies toward each of them has been included in this document from the beginning. More recently, Motorola has attempted to update the specific content of its policies -- particularly with respect to their application in non-U.S. settings -- and to increase employee awareness of its value commitments through the Motorola Ethics Renewal Process (MERP). This effort, initiated by the CEO and Board of Directors, aimed to open up an unrestricted and proactive dialogue within the company about ethical issues as they are encountered in everyday settings. A new office was established within the company to lead this initiative, and new study materials were prepared to stimulate reflection and discussion. MERP has evolved into a sustained learning process and has been followed by the establishment of a Global Corporate Responsibility Task Force, chaired by the CEO, with the goal of maintaining what the company considers its "ethics advantage" under changing operating and competitive conditions around the world.
As noted above, development of the "New Shell" organizational structure (with greater central coordination from the dual headquarters in London and The Hague) was already underway when the Brent Spar and Nigeria issues heightened top management's awareness of the potential impact of external, non-business stakeholders on Shell's global operations. This impact was brought into sharp focus by a 1997 shareholder initiative sponsored by two British activist groups. Ultimately identified as "Resolution 10," this initiative demanded that Shell establish new internal management and external reporting procedures concerning its environmental and social impacts. Although Shell management opposed this resolution and it was defeated, Shell subsequently evolved its own version of the "triple bottom line" (financial, environmental, social) reporting system originally advocated by John Elkington. The Planning and External Affairs staff initiated an extensive program of communication and data-gathering, including a series of roundtables involving Shell executives and external participants held in various parts of the world. The results of these efforts were refined through additional studies and consultations. One outcome of this work was Shell's 1997 announcement of a new core purpose: "Helping people build a better world." The company also updated its Statement of General Business Principles to include greater emphasis on broad environmental and social issues, including human rights. To implement these broad policy declarations, Shell initiated a global reporting and consultation system and established a new internal publication, Interchange, specifically intended to provide a forum for information and experience about public affairs management. An annual "Shell Report" on the company's environmental and social impact and a separate report on health and safety issues were also begun at this time. In initiating these extensive communication efforts, Shell apparently reflected acceptance of the advice of one its consultants that it was not only important for companies to be "doing the right thing," but also to be "seen to be doing the right thing" (Post et al., 2002 p. 11).
A key aspect of all of these implementation efforts is that they involve company-wide recognition of the integrity of the individual, both inside and outside the firms, and a commitment to the values and goals of the larger society within which the firm operates. The activities of Cummins' CAD and the sequence of ethics-related programs at Motorola were fundamentally based on normative, rather than purely instrumental, considerations.
Implementation: From Concepts to Goals to Actions. Effective management of the extended enterprise requires both a new conception of the firm (i.e., a network, rather than a hierarchy) and a new approaches to the practical issues and problems that arise in such a setting. Changing work practices (e.g., outsourcing), technological developments, globalization, increased involvement in alliances and partnerships, and the emergence of new public policy issues all cause firms to become more "extended" and to realize that their success -- and therefore their value -- increasingly depends more on relationships than on the accumulation of conventional assets. (Indeed, in a rapidly changing environment, excessive accumulation of inflexible assets may prove to be a strategy for failure.)
With respect to the voluntary stakeholders in the firm -- e.g., investors, employees, customers, market partners -- the basic principle of stakeholder management is mutual benefit. These stakeholders contribute directly to the operations of the firm and expect to be made better off as a result. With respect to involuntary stakeholders, particularly those who may be negatively affected by externalities such as pollution or congestion, the guiding principle has to be reduction or avoidance of harm and/or the creation of offsetting benefits. "These stakeholders expect that they will be at least as well off as they would be if the firm did not exist" (Post et al., 2002 p. 19).
The challenge confronting the contemporary extended enterprise is the development, maintenance, and integration of favorable working relationships with stakeholders in each of the three dimensions of its strategic setting. In dealing with resource base stakeholders, the firm is challenged to maintain and enhance its ability to draw critical physical, financial, human, intellectual, and social assets into its extended domain. Within its industry structure, the company is challenged to establish and maintain relationships that enable it to improve its position in the marketplace and within the value chain while conforming to relevant regulatory guidelines and industry standards. In the social-political arena, the firm is challenged to identify key actors and issues throughout its extended purview, as well as to anticipate and respond to new developments, so as to bring long-term benefits (or at least no harm) to the entire organization and its critical stakeholders (Post et al., 2002).
The key to effective implementation is recognition of stakeholder management as a core competence. In spite of the need to manage routine aspects of each corporation-stakeholder linkage within a specialized framework (e.g., investor relations, human resource management, public affairs), the over-arching commitment to establishing and maintaining favorable relationships with all stakeholders has to become an integral part of the culture of the organization. The strategies that the firm adopts to deal with various stakeholder groups and the structures that are developed to implement the strategies both rest on a broad cultural base.
Integrating a stakeholder perspective into corporate culture gives rise to two practical implications:
Management must become alert and responsive to the appearance of new stakeholder groups, concerns, and priorities.
Management must become more aware of inter-stakeholder relationships (employees-customers-communities, for example) and of the importance of mutually beneficial policies rather than policies that favor one stakeholder group at the expense of another.
In order to implement these insights, top management must make the effort to assign responsibility and accountability for particular stakeholder relationships to specific individuals or units, with the goal of making each relationship stronger over time and increasing its value to the entire enterprise (Post et al., 2002).
The skills required for effective relationship management include: listening and responding, negotiating, environmental scanning, issue forecasting, and measuring and reporting on both issues and impacts -- all within an atmosphere of openness and transparency. Knowledge about stakeholders (explicit and tacit) is a critical source of competitive advantage. The knowledge networks that connect the firm with its human resources (both employees and contractual workers) and suppliers can enable it to increase the efficiency of its operations, develop unique product-service offerings, and create (or overcome) barriers to entry. Knowledge about customers -- including their receptivity to various communication modes and other forms of influence -- not only guides marketing efforts, but also creates opportunities for collaboration in the search for mutually beneficial product-service improvements. Knowledge about nonmarket stakeholders helps the firm to build constructive social and political relationships, anticipate and minimize the impact of unfavorable developments, and preserve its "license to operate" in the face of changing circumstances. As Child and McGrath have recently suggested, the evolution of information-based enterprises is producing systemic changes in organizational design and process management. "Knowledge and understanding of the firm's stakeholder relationships is at the heart of this new reality" (Post et al., 2002, p. 12).
Assessing Stakeholder Management. In turbulent business climates, mere survival alone may indicate something about the appropriateness of corporate policies and practices. The three companies studied by Post et al. survived in industries where many other firms have failed or been forced into mergers during last couple of decades. In fact, these firms have not only survived -- sometimes in the face of traumatic challenges -- but have grown within their spheres of activity, made acquisitions, and entered into new alliances. With respect to Cummins and Motorola, the record of relative "success" within turbulent environments can certainly be taken as favorable results of long-term commitments and policies. Shell's adoption of open and proactive stakeholder relations policies is probably too recent to justify a conclusive judgment. One of Shell's senior executives remarked that "it has taken five years to put this new system into place, and it will take at least another five to see if it works" (Watts, 2000 in Post et al., 2002 p. 15). Clearly, there is no sign in any of the three companies that stakeholder management policies had experienced any significant negative impacts.
A second manifestation of the impact of stakeholder management policies is avoided costs. Cummins' costly strike of the 1970s, Motorola's disastrous experience with Iridium (which involved many factors, one of which was disregard of customer interests in price and physical convenience), and Shell's problems with the protests about Brent Spar and Nigeria all constitute ample evidence of the costs that may arise from disregard of key stakeholder interests. Indeed, the firm's overall "license to operate" may be threatened when key stakeholders become alienated. Cummins' avoidance of costs through the creation of the Health Effects Institute, Motorola's reduced labor turnover costs associated with its status as an "employer of choice" in its industry and area, and the apparent success of Shell's stakeholder-oriented policies in Peru (and the general decline in public criticism of its activities) all point to cost avoidance.
A third indicator of the favorable impact of stakeholder-oriented policies in these companies is their continued acceptance and use. Successive generations of managers at both Cummins and Motorola have embraced stakeholder management concepts and implemented them within their own spheres of responsibility. Cummins' concern with community stakeholders has been demonstrated in all of its operating locations. Motorola has carried its fundamental human resource policies around the world and has also used its prior experience in the political arena effectively to address the issue of trade relations with China. Shell is applying lessons learned during the 1990s to new areas. The selection of Phil Watts as successor to Mark Moody-Stuart as chair of the Committee of Managing Directors (and therefore, in essence, the CEO of the global company) suggests that Shell's top management believes the stakeholder-oriented structures and strategies adopted since 1995 are proving effective (Post et al., 2002.
A final piece of evidence is the expanded recognition and adoption of stakeholder-oriented policies by other companies and by the consulting community. Two important recent industry publications undertaken at PricewaterhouseCoopers and KPMG have built on research at Shell and other companies to produce analytical schemes and policy guidelines appropriate to a wide range of firms and industries. These efforts transcend previous work on the "triple bottom line" and "balanced scorecard" and provide further evidence of the success of these policies and practices (Post et al., 2002).
Stakeholder management involves more than knee-jerk reactions to specific and unrelated situations and crises, and more than case-by-case attention to the dyadic ties between the firm and individual stakeholder groups. Instead, an emphasis on stakeholder relations must pervade the firm, which results in common and mutually consistent policies and practices involving multiple stakeholders and recognizes the mutual and overlapping interests of various stakeholder groups. Within the firm's stakeholder network, all relationships matter, although all are not of equal relevance or priority for every specific situation or issue.
The foundation of stakeholder management in the extended enterprise of the 21st century is a humanistic commitment to the integrity of the individual, which necessarily implies a respect for individuals, groups, other organizations, and the general public. Successful stakeholder management also involves learning, because stakeholder characteristics and interests change over time. Again, recognition of and interaction with stakeholders is an integral and on-going part of the management process. Stable and supportive stakeholder relationships are built up over time on the basis of experience. Trust grows from trustworthy behavior, not from rhetoric. The Stakeholder View emphasizes that the survival and success of the enterprise ultimately depends upon its mutual interactions with its network of stakeholders. Positive stakeholder relationships tend to generate long-term competitive advantages for the firm and for society as well (Post et al., 2002).
Monsanto: Stakeholder Management in an Extended Enterprise. The extended enterprise is ascendant in knowledge-based industries with complex supply chains and marketing channels. Such firms operate amidst rapid technological change and the need to coordinate decentralized operations through sophisticated information systems. The complexity of such environments, and the importance of comprehensive strategies for dealing with them, is well illustrated by the experience of Monsanto.
Monsanto has become a leading competitor in the "life sciences" industry through a decades-long transformation from the chemical industry to biotechnology. The company has business relationships involving a vast number of stakeholders around the world who affect its products, services, intellectual property, and business knowledge. In 2000, Pharmacia, the world's third largest pharmaceutical company, acquired Monsanto, which had valuable patents and popular drug products (e.g., Celebrex). Monsanto has continued to operate as a relatively independent business unit. In 2001, Pharmacia issued an initial public offering for Monsanto, selling of 15% of its shares at the time and subsequently announcing an intention to eventually turn over control of the company to other investors (Post et al., 2002).
Monsanto's genetic seed business -- a lower-margin product line, intended to sell in large volume to major grain exporting countries such as the U.S., Brazil, Canada, Argentina, and Australia -- has become the target of controversy, protest, and terrorism. Intense pressure has built up in Europe, where sophisticated activist groups have waged a high profile campaign against GMOs (genetically modified organisms), accusing Monsanto of producing "Frankenstein foods." Japan has refused to accept grain shipments from Canada because it included genetically modified seed. As a result of these public reactions, it has been difficult for Monsanto to secure regulatory and public approval for its GMOs, including seeds for wheat, corn, soy, and other crops (Post et al., 2002).
In the context of these issues, Monsanto CEO Hendrik Verfaillie called for "breakthrough thinking" to reposition the company. In response to conflicts between the company and regulators in several countries and to criticism from an international network of research scientists, activists, and non-governmental organizations, the "New Monsanto Pledge" was announced on November 27, 2000. Verfaillie said that Monsanto was, "knowingly and deliberately taking a different path" than in the past and acknowledged that the firm had been blinded at times by its enthusiasm for new biotechnologies and failed to recognize public skepticism about them. "When we tried to explain the benefits, the science and the safety, we did not understand that our tone our very approach -- was seen as arrogant," Verfaillie said. "We were still in the 'trust me' mode when the expectation was 'show me.'"
The five-part pledge calls for steps that included:
Creating an external biotechnology advisory council to discuss biotech issues;
Sharing Monsanto research with universities;
Supporting a requirement for firms to notify u.s. regulators about plans to market a biotech product;
Seeking global standards on biotech seed, grain, and food products; and Selling only grain products approved as human food and livestock feed.
Each of these corporate commitments required Monsanto to engage in on-going consultation with its affected stakeholders that ultimately led to the company redefining the way it does business. Should Monsanto fail to manage effectively the critical stakeholder relationships indicated by these commitments, it is likely to fail as a business. According to Post et al., every aspect of Monsanto's business is connected to stakeholders in the resource, competitive, and social-political arenas.
Cummins. From the time of its founding in 1919, Cummins Engine Company has consistently sought to develop, build, and sell the best diesel engines in the world. Originally a traditional "family company," Cummins was transformed after World War II, developing professional management and extending its business outreach both at home and abroad, the latter mostly through joint ventures and alliances. Cummins' corporate culture is a blend of progressive humanitarianism and conventional bottom-line thinking that emphasizes clear objectives and accountability for results. References to "stakeholders," "doing the right thing," and "ethical standards" are commonplace at Cummins, and leaders at every level understand that such ideas are important sources of the company's strength and creativity (Post et al., 2002).
Despite its long history of stakeholder-oriented policies and practices, Cummins has been challenged in recent years to better realign its relationships with some major stakeholders. The company has faced ownership and governance challenges from hostile shareowners, conflicts with government agencies and advocacy organizations about the environmental impact of diesel technology, and disagreements with some of its global business partners. The development and maintenance of a highly trained, stable workforce and of stable and reliable financial support have been critical factors in Cummins' success in a specialized, intensely competitive niche within the highly cyclical motor vehicle industry. When the environmental effects of diesel technology were challenged during the 1970s, Cummins needed to address both the competitive viability of its technology and the management of its relationship with regulators and environmental activists. Cummins' culture of shared values assures that the firm's responsibility to operating communities and employees is considered on the same basis as responsibility to investors and customers. Feedback from business partners has been consistently used to improve both product and processes, thereby enabling Cummins to enhance value for all of its stakeholders (Post et al., 2002.
Motorola. Motorola has grown from its modest beginnings to become a global leader in electronics and telecommunications technology. Its brand name and reputation for high product quality are known throughout the world, and it has frequently been listed among America's "most admired" companies. It is also the largest U.S. investor in China. For the first half-century of its existence, Motorola executives dealt with public officials and political figures only in connection with government purchases. However, the development of aggressive Japanese competition during the 1970s brought a new awareness of the impact of public policy, both domestic and foreign, on the company's strategic environment and resulted in new strategic initiatives in the social-political arena (Post et al., 2002).
Motorola has long been a leader among multinational corporations in explicitly articulating its cultural norms and behavioral codes. Although the company operates in more than 120 countries and is highly decentralized, two staff areas -- technology and human resources -- report directly to the chief executive officer. These reporting arrangements reflect the company's core commitment to technological leadership and its stress on human values and skills.
The company has made large investments in employee and executive training, usually carried out under the auspices of Motorola University. It attempts to foster open internal communications and a participatory management environment. A commitment to "uncompromising integrity" became the basis for company-wide policies reflecting respect for the individual, whether inside or outside the firm, and for an unwavering emphasis on technological leadership. The result was a long-term willingness to invest in and adopt new ideas, both managerial and technological, and to strive for global excellence in product quality. Throughout the company's battles with Japanese competitors regarding market practices, and with both domestic and foreign competitors over technical standards for products, Motorola sought to create value by improving quality and challenging barriers to competition. More recently, the emergence of strong international competitors, and serious technological, financial, and marketing challenges, led to major corporate reorganizations in 1998 and again in 2001. Throughout this period, one of Motorola's primary concerns has been the adaptation of its fundamental values commitments to new operating environments, particularly the company's "second home" in China (Post et al., 2002.
Royal Dutch/Shell Group. Shell was one of the first truly international corporations and has been one of the ten largest companies in the world for nearly a century. Historically, its regional operating units were the dominant elements in a decentralized management structure. The company is now somewhat more centrally controlled through a Committee of Managing Directors (CMD) and is organized globally into five lines of business: Exploration and Production, Chemicals, Gas and Coal, Shell International Renewables, and Oil Products. With a dominant technical orientation in top management and relatively few senior executives recruited from outside, the company long functioned as an essentially closed system, sometimes referred to as "Planet Shell." Consensus building was facilitated by a strong emphasis on long-range planning, based on the construction of competing "scenarios" about major long-term global trends that would affect its status and operations.
In the 1990s Shell executives came to believe that its corporate identity and reputation were at stake in both the marketplace and the policy arena. Oil prices were at all-time lows, the rate of return on capital was unsatisfactory, and Shell's weak organizational structure was clearly inadequate for effective control of a global enterprise. At this point, Shell started develop a "New Shell" organizational structure by strengthening the functional, rather than geographic, dimension of its organizational matrix and by providing for greater global management oversight and control by the six-member executive committee and the CMD (Post et al., 2002).
By 1995, when the evolution of the "New Shell" model was well underway, external criticism about the disposal of the Brent Spar oil storage facility in the North Sea and about Shell's relationship with the repressive military regime in Nigeria identified an additional need for company-wide analysis and response to public concerns. The result of this identification was a major extension of the "New Shell" model to include the interests of other, more diverse stakeholders, particularly non-business stakeholders from the social and political arena. The ultimate result was a transformation in the company's self-image, a process that has broad implications for the company's future strategy, structure, and culture. Post et al. note that historic core competencies in the firm came to be regarded as "core rigidities," and the company recognized a need to modify its purpose in terms of these new societal needs and expectations. Such societal needs and expectations assume even more pronounced importance when mergers extend across certain international borders and cultures, as is the case in the next merger examined below.
INFT and Euronext. On the 8th of December 2000, a private company called INFT (a fictional name) entered into a merger agreement with a Euronext and NASDAQ listed communication conglomerate called Noltes (also fictional). According to Letzsa and Hunt (2004), INFT and Noltes had been communicating for several years when the merger was finally agreed upon. The initial contacts were made between Smith and White (founders of INFT), and Dupont (founder of Ceylan and later Chief Executive of Nexto). Letsza and Hunt report that INFT and Nexto had been impressed by their mutual performance and had expressed interest in combining forces on several occasions. It was agreed that Noltes would contribute three of its agencies (Bounty, Nexto and Tie) into a new entity to be created jointly with INFT. Noltes would become the majority owner of the new entity, while the INFT shareholders would own a 30% minority stake with strong protections rights. The new entity, called Hucap, was incorporated in the summer of 2001, with approximately 750 employees and a growth margin of more than 75 million euros. It was agreed that Hucap would operate as a stand-alone entity with the objective of becoming publicly listed within 24 months.
Hucap's first Board of Directors (BOD) was appointed immediately on December 8, 2000. The original board of directors was comprised of Eugene Dupont, Alfred Lebreton, Michael Loransky (Chief Executive of Divas Group, a Noltes division), Jan Vanmoer (a member of the Noltes Board), Leon White and Ubald Smith. Dupont, Smith and White were appointed managing directors, while the other three members remained non-executive directors. In addition, Noltes insisted on appointing Kevin Lebeau (an old friend of Dupont) as an advisor to the managing directors.
Unfortunately, the three managing directors were unable to agree on dividing areas of authority and responsibility between themselves. Lebeau generated mistrust and sowed dissension between managing directors and between shareholders, while pursuing his own agenda. Noltes caused confusion by intervening directly in the affairs of Hucap. INFT was soon overrun by internal politics. Bailey (Bounty's Chief Executive) refused to report to the new board and managing directors. All of this took place while the recruitment market was suddenly turning upside down.
Rather than resolving issues between themselves and quickly turning their attention to real issues (i.e., the management of the merger process), owners and directors invested weeks and months into a useless power struggle, attempting to satisfy their own personal interests. In the meantime, INFT staff and middle management were swamped by demoralization and rapidly declining productivity. As a result, customers started to divert. When governance issues were finally resolved and the directors started looking at the interests of all stakeholders (such as customers and staff), the situation had already deteriorated.
Prior to the merger, INFT had 21 subsidiaries and offices around the world, with more than 300 employees. INFT was supposed to become the backbone of the new group. Three years after the merger, virtually nothing was left from what once was one of Europe's 500 fastest growing owner managed companies. In addition, Hucap disappeared, and Tie collapsed while Bounty and Nexto were folded into the Palice network (one of Noltes' advertising networks). As a result of the mismanagement of stakeholder interests prior to, during and following this merger, considerable value had been lost from the original business entities.
According to Letzsa and Hunt (2004), there are a number of stakeholders involved in any merger process; these include shareholders, board members, middle management, staff, and customers.
Founders. The founders of Hucap were the most obvious stakeholders (Noltes at one end and Smith and White at the other); their goal was to create a world-class staffing and recruitment communication group. They sought to maximize the combined value of INFT, Nexto, Tie and Bounty. Noltes needed entrepreneurial and management drive and talent to achieve this objective, while Smith and White needed financial backing. The trade-off for Noltes was to maintain majority ownership, while granting Smith and White strong minority rights to as shareholders and the majority of executive positions on the board. Noltes was to maintain majority ownership, while granting Smith and White strong minority rights to as shareholders and the majority of executive positions on the board.
Other shareholders. Other shareholders were composed of key managers and directors of INFT, Nexto and Tie, with Muller as the biggest shareholder and Dupont and Reno following in second and third position. Their interest was roughly similar to that of the founders, but given the size of their share, most shareholders were primarily interested in the development of their professional career, as well as maximizing the value of their asset.
Managing Directors. The three managing directors, Dupont, Smith and White, were in charge of the day-to-day management of Hucap. They were all eager to tackle the challenge of building Hucap, but were unable to unite under one banner. Dupont had no international experience, while Smith and White had no experience managing internal politics.
Non-executive directors. Non-executive directors, Loransky, Lebreton and Vanmoer were appointed on the Board to represent Noltes as a majority shareholder. However, they had no knowledge of the staffing and recruitment industry. Though the spirit of the contract was to create a new, independently managed group and to prepare it for a public listing, they did not realize the implications of this for the board. Their behavior on the Board was not different from their behavior at any other subsidiary board within the Noltes Group. They never realized that the board of Hucap was to be run as a top board, instead of a subsidiary board that merely tackled some financial reporting matters.
INFT middle management and staff. INFT middle management was composed of second and third level managers who were exceptionally disorientated by the battle at the top. After losing their reference mark, these managers became involved in internal politics and started to bypass White and Smith in search of authority and reassurance. Motivation among these managers dropped dramatically, having a disastrous impact on staff morale and productivity. While the objectives of the merger were clear for everyone, its concrete implications for INFT middle management and staff were confusing. In other words, INFT middle management could not see what "was in it for them."
Customers. Customers are the stakeholders that do not come immediately to mind when looking at the genesis and apotheosis of the failed merger. However, customers were ultimately the most important stakeholders, together with staff and middle management. The dynamism, energy and entrepreneurial culture of INFT were essential to its success. The quick disappearance of these key attributes had a dramatic and immediate effect. Amplified by a sharp decline in the demand for staffing services, the indifference and disaffection of customers for the merged INFT ultimately had the biggest impact on the failure of the merger (Letzsa & Hunt, 2004).
Analysis and Findings.
In some cases, mergers and takeovers have appeared to be the result of opportunists looking for the quick profit; however, the consolidation of the highly complementary assets and resources of both of these giants will create some clear advantages for everyone concerned. Nevertheless, just as bigger may not mean better, merger may not mean advantage. In an article from the Economist (Hold my hand, May 15, 1999), the authors examine how alliances are altering the corporate landscape into the 21st century. "Takeovers are certainly changing the corporate landscape. But alliances may be altering it even more. BUY, buy, buy. All around companies seem to be snapping each other up. AT&T wants to buy MediaOne; Deutsche Telekom and Telecom Italia plan to coalesce; Hoechst and Rhone-Poulenc have agreed, after much dithering, to be spliced" (Hold my hand, 1999). Some of the current instances of merger proposals may stop short of fruition; others, such as the mooted deal between Texaco and Chevron, two oil firms, may result in enormously adverse outcomes.
While the current merger activity is frenzied, a more important change may be in the scale and complexity of alliances. For instance, in Silicon Valley and Hollywood, alliances are old hat: in a sense, almost every movie is an ad-hoc alliance, as is the development of every new computer chip; however, as in so much else, these two fashionable places are proving models for older industries. The most readily noticeable change has been in the sheer number of alliances. "Mergers, like marriages, can be legally defined and therefore readily counted. Alliances are more like love affairs: they take many forms, may be transient or lasting, and live beyond the easy reach of statisticians" (Hold my hand, 1999 p. 73). One recent book by John Harbison and Peter Pekar of Booz-Allen & Hamilton, a consultancy (in Hold my hand), estimated that more than 20,000 alliances were formed worldwide during the period 1996-1998; further, such alliances represent an increasing share of corporate revenue, doubling since the early 1990s to 21% of the revenues of America's 1,000 largest firms in 1997 (in Europe, he estimates the figure is in "the high 20s").
However, the numbers represent just one part of the "big picture." Depending on outsiders for more than 20% of a company sales represents a fairly large impact for many companies in what they perceive themselves to be; according to The Economist, such radical impacts tends to adversely affect a company's definition of what they are: "It erodes corporate boundaries and forces imperious types to co-operate with one another. Thus AT&T's takeover of MediaOne may in the long-term prove less remarkable and complicated than the alliance it has simultaneously formed with Microsoft to deliver broadband services over cable-television networks" (1993, p. 73). The extent to which alliances transform companies varies with the type of alliance. The most common reason remains a means of finding a way into a foreign market. In fact, the need, or at least the desire, to expand abroad serves to explain why alliances have long been more common in Europe and Asia, which between them accounted for half the world's total, than in the United States, which now accounts for around a third. In fact, outside the United States, nearly all alliances are cross-border ones (Hold My Hand, 1993).
Other forces are also at play when companies are attempting to identify better corporate models. According to The Economist, the need to find an ally is frequently driven by governments rather than by commercial logic. For example, the number of alliances in the airline industry skyrocketed from 38% to 500% in the year to spring 1998, according to Airline Business, a trade magazine, due in part because there are usually national barriers to foreign ownership. "The huge Star Alliance, which includes Lufthansa and United Airlines, began as a series of loose arrangements to share codes and direct passengers to partners' flights; now it is beginning to look more like a quasi-merger, with shared executive lounges and pooled maintenance facilities" (Hold My Hand, 1993 p. 74).
These types of arrangements appear to be less efficient than full-blown mergers; The Economist notes that if it remained as just one company, the Star Alliance could save a lot in managerial overheads. The same applies rationale also applies to many telecoms alliances. According to Pat Gallagher, managing director for Europe of Britain's BT, the telecoms giant formed lots of joint ventures in the early 1990s with foreign firms "because we couldn't do an acquisition" however, this was frequently a second-best alternative: "Is it easier to run a 100% owned company?" he asks rhetorically. "Of course it is." With the Internet, national pride has not yet become an obstacle in Europe -- enabling Mr. Gallagher to readily acquire smaller Internet firms such as Spain's Arrakis" (Hold My Hand, 1993).
However, even when such alliances cross borders, many of them are not just "frustrated mergers," but are rather concerted efforts to change direction. According to The Economist, "In industries where local knowledge is particularly important, such as retailing, cross-border partnerships still seem essential" (Hold My Hand, 1993 p. 75). Based on the experiences of several of its peers who made expensive mistakes trying to buy stores or going it alone, Britain's Tesco began its initiative in South Korea closely linked with Samsung. Likewise, Wal-Mart is a past master at learning from local partners; this company began working with Cifra in Mexico as long ago as 1991, before taking control of the local retailer two years ago. The company's success in this region is well-known, and Wal-Mart is now the largest retailer in the world.
This implies that alliances may be just "stepping-stones." In fact, an examination of these trends extends beyond cross-border alliances, but include managerial alliances, especially concerning where companies define themselves as beginning and ending. "Typically a firm will focus on one or two core competences, and outsource other things to its allies. Sometimes this merely means sharing resources on a big project" (Hold My Hand, 1993 p. 76). For example, ten leading drug companies (including Britain's Glaxo Wellcome and SmithKline Beecham) created a $45 million joint research consortium in order to study variations in human DNA; however, in many instances, such alliances require divesting a company of one function completely and turning it over to somebody else. For example, Searle (a Monsanto subsidiary), produces Celebrex, a new arthritis drug that is outselling even Viagra in America, but Pfizer markets it there (Hold My Hand, 1993).
Alliances seem even more useful when companies are not potential rivals at all, but firms that are at different points on the same value chain. If a company wants access to another firm's knowledge in a particular area, argues Marcus Alexander, a director of Britain's Ashridge Strategic Management Centre, an acquisition can be a disaster. "If they know how to do it, they should do it," he says.
If they don't know, why buy? Buying your customer also means running the risk of losing other customers" (Hold My Hand, 1993, p. 75).
Inevitably this relentless focus on learning can bring together some fairly unusual bedfellows. Turner Broadcasting Services, which is part of Time Warner, has recently completed a deal with Philips, a Dutch electronics company, under which, among other things, Philips will get the right to name a new sports arena that TBS is building in Atlanta. But TBS's main motive is to find out more both about European consumers and about the digital communications hardware that is Philips's stock-in-trade. Steve Heyer, president of TBS, thinks one of the big arguments for alliances is the freedom to be promiscuous. "Being exclusive only cuts you off from other market opportunities" (Hold My Hand, 1993 p. 75).
In spite of all of the focus on developing "long-term strategic partners," two key features seem to be driving large companies towards an ever more promiscuous lifestyle, with multiple partners. The first is that many of the people whose brainpower the big firms most need simply do not want to work for them. "Drug firms now set aside up to a fifth of their research budget for joint ventures with biotech firms -- and the number of biotech alliances by the top 20 pharmaceutical firms has risen from 152 in 1988-90 to 375 in 1997-98. Why? Partly because bright scientists are put off by what Mark Levin, who runs Millennium Pharmaceuticals, a biotech firm in Massachusetts, calls the 'extreme largeness' of pharmaceutical firms. These researchers clearly prefer the sense of excitement and control that they find in a small start-up.
The second reason is the speed of change. "Alliances give you the chance to move on if something better comes along. Even though Microsoft has invested $5 billion in Ma Bell, AT&T has been careful to stress that the software giant does not have an exclusive deal" (Hold My Hand, 1993 p. 75). On the Internet this approach has achieved new levels and is redefining how companies are looking at mergers and acquisitions in general. Virtual shopping malls and Internet portals like Yahoo! And AOL are signing deals with 'real world' companies at will. When Streamline, an Internet home shopping service, sends you a cup of coffee and a video, the first comes from Starbucks, the second from Blockbuster.
On paper, all this knowledge-sharing sounds wonderfully creative. In practice, however, a number of challenges crop up. "Buy another company, and rationalisation is simply a matter of aiming the hatchet in the right place. Running an alliance, says Firoz Rasul of Ballard Power Systems, a Canadian pioneer of fuel cells, is "like getting married. You have to understand each other's expectations. And even then, you have to work very hard to keep the initial excitement going."
When the partners are corporate titans, such as Bill Gates of Microsoft or Michael Armstrong of AT&T, there is obviously plenty of room for disagreement. However, the process is not all that much easier even when partners are small. For instance, Ballard has alliances with two giants of the car industry, Ford and DaimlerChrysler. "We're like a mouse sleeping with two elephants," says Mr. Rasul. In Silicon Valley, plenty of people argue that if you get into bed with a company like Microsoft or Intel, you will get squashed. Some industry analysts are also calling for caution in view of the creation of such huge "megacorporations" (Hold My Hand, 1993).
According to Jerry Harris (2001), a good illustration of how fierce the competition is among transnationals can be seen in the most expensive buy-out in history ($185 billion), which took place in Europe when Britain's Vodafone/Airtouch acquired Germany's Mannesmann. Harris reports that the acquisition created the largest wireless telephone corporation in the world. Not only will the new company control the biggest European markets in Britain, Germany and Italy, it will have holdings in more than thirty countries, including the U.S. And Japan. "Europe shares a common wireless transmission standard, so mobile phone use is much more widespread than in the U.S. The Vodafone/Mannesmann merger also has huge implications for internet users, because throughout Europe personal computer access to the internet is limited and expensive. In achieving a monopoly over wireless communication, Vodafone is now in position to become the largest internet portal in Europe" (Harris 2001, p. 35).
The acquisition of Mannesmann, though, was a protracted battle in which both corporations tried to gain advantage by moving directly into the other's market. In January 1999, Vodaphone acquired Airtouch in the U.S., an important minority partner of Mannesmann. Mannesmann fought back by entering the British market and buying out the large mobile phone network Orange for $33 billion in October 1999. When Vodafone made off with another Mannesmann partner, this time in an internet deal with Vivendi in France, it had finally manoeuvred into a dominant competitive position (Harris 2001, p. 35). To think of the British, Germans or any national group as winners in these mergers is to miss their essential character as transnational deals engineered by denationalised elites. Newly evolving global markets are transforming national capitalists into a transnational class with increasingly common goals and interests. Citing how Mannesmann's CEO Klaus Esser, a member of the new global class, declined to use nationalist political rhetoric as a strategy to defend his corporation, Harris points out that in response, tens of thousands of unionised workers protested the proposed merger, as did most German investors. Nevertheless, Esser ignored his domestic audience and appealed to his global shareholders to hold out for a higher share price. "When Vodafone upped its offer, the majority of shareholders bought the deal. Esser understood that the question over which partner would dominate the deal was secondary to the building of a new transnational giant, and so allowed the process to unfold" (emphasis added) (Harris 2001, p. 35).
According to Harris, Mannesmann may have had a German face, but in reality it was already a thoroughly transnationalised corporation that was comprised of numerous institutional investors in the U.S. And Britain; further, Mannesmann also had important global holdings such as Italy's second largest phone company, Infostrade, and major U.S. interests in phone, publishing and music. "If you swoon to Whitney Houston or groove to Santana, you've been listening to a Mannesmann CD. After Vodafone's acquisition of Mannesmann, Orange was unloaded on to France's Telecom for $37 billion. This adds six million customers to Telecom, which also has operations in Austria, Belgium, Denmark, Italy, the Netherlands and Switzerland" (Harris 2001, p. 35). The Vodafone/Mannesmann merger illustrates the additional importance being attributed to international stock prices over domestic concerns and underscores how national markets and politics are becoming secondary factors in a globalised economy; in fact, around 40 per cent of all stocks traded in Frankfurt on the DAX are held by foreigners. The newly merged Vodafone joins a rapidly growing group that includes BP and Amoco; Credit Suisse and First Boston; Bertelsmann and Random House and many others. "These are corporations whose national identities fade away as they shape the world economy and compete under the new rules of globalization" (Harris 2001, p. 35).
While both of these corporations had strong domestic identities, their respective governments avoided being drawn into a nationalist contest. "Even as Mannesmann was being threatened by a hostile foreign takeover, Chancellor Gerhard Schroder judged government interference might jeopardise future mergers in which German corporations would want to continue their global integration. The acquisition of Chrysler by Daimler Benz has marked the true road forward for German transnationals" (Harris 2001, p. 35).
According to Jane E. Fitzgibbon and Matthew W. Seeger (2002), the 1999 merger of Chrysler Corporation and Daimler Benz involved the creation of a truly international corporation by combining two organizations of comparable size within the same industry, but with two very diverse cultures. On the one hand, "Chrysler, grounded in market driven American entrepreneurship and forged in the near bankruptcy of the 1980s, emphasized innovation and flexibility, within a highly focused business strategy" (Fitzgibbon & Seeger, 2002 p. 40). On the other hand, Daimler Benz was characterized by structured, hierarchical management, and German engineering excellence, emphasized luxury markets within a highly diversified corporate structure. Fitzgibbon and Seeger report that this merger was accompanied by a strategic explanatory and justificatory discourse offered by senior managers, including Daimler Benz CEO Jurgen Schrempp and Chrysler CEO Bob Eaton. This discourse was directed to external audiences, primarily shareholders, and internal audiences, employees as well as dealers, primarily in executive speeches, press releases, and in publications and replicated throughout the business press. "It was designed principally to overcome resistance to the creation of this new global company" (Fitzgibbon & Seeger, 2002 p. 41).
The two organizations that came together to create DaimlerChrysler AG had very different national origins and identities, histories, corporate cultures, products and markets. Daimler Benz is considered the archetype of German engineering excellence and industry leadership. Its flagship product, Mercedes, has long been the leader in the luxury car market. The company, however, has not only been associated with innovations in product engineering, quality, and design, but with the production of military equipment for Nazi Germany during World War II. Daimler Benz, at the time of the merger, was largely bureaucratic and somewhat rigid in its structures, proud of its industry leadership, and highly diversified into heavy manufacturing and aerospace. The company was already highly globalized with operations throughout Europe, South America and parts of India; however, its presence in the United States was limited (Fitzgibbon & Seeger, 2002)
Like Daimler, the Chrysler Corporation also had a long and prominent history. The company was established by the entrepreneur Walter P. Chrysler in the 1920's, and had also enjoyed engineering success and market leadership. Nevertheless, the company had been the smallest of the "Big Three" and had severely suffered from market downturns and industry cycles. The most notable such event was the near bankruptcy of the company in the early 1980's where the company was kept alive through government loans and the charismatic leadership of its CEO, Lee Iacocca. According to Fitzgibbon and Seeger, Iacocca had strategically linked Chrysler to American values of patriotism and competitiveness in order to build support for the company. Chrysler emerged from these difficulties as a dynamic and rugged competitor with a culture that was based on American innovation, creativity and pragmatism (Fitzgibbon & Seeger, 2002). Based on the popularity of its Jeep and Mini Van car lines, the company rose to record levels of profitability in the late 1980 and 1990's. The company had little success, however, building a presence outside the United States domestic market (Fitzgibbon & Seeger, 2002).
According to Fitzgibbon and Seeger, the Detroit news media leaked the news of the potential Daimler Benz-Chrysler merger on May 5, 1998. At the time, Chrysler was in a strong position with robust North American sales and the beginnings of an international presence. On May 6, the Chrysler Corporation issued a press statement confirming they were "engaged in discussions about a possible business combination of the two companies involving a stock transaction in which both companies would become stockholders of a new company" (Chrysler Corporation, May 6, 1998 in (Fitzgibbon & Seeger, 2002).
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