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CHAPTER 8 Obtaining Technology: Evaluation and Control
OVERVIEW
This chapter details the evaluation and control processes used in conjunction with external means to obtain technology. In addition, the chapter discusses the interconnection between evaluation and control processes and the planning and implementation processes. The topics examined include the five areas in which evaluation and control should occur. These areas and the other topics examined in the chapter are:
· • Examining alliance/acquisition capabilities
· • Performing due diligence prior to obtaining the technology
· • Negotiating the deal
· • Integrating the new technology into the existing systems and structures
· • Ongoing evaluation and control of the process of obtaining and blending external technology
· • Developing metrics
INTRODUCTION
An organization first establishes where it hopes to go (planning), it then takes actions to get there (implementation), and finally it must evaluate if it is making progress toward its goals (evaluation and control). This text has stressed that most mergers/acquisitions and alliances fail to meet their desired results. However, it has also stressed that the effort to obtain technology through these external methods will only increase in the future as the importance of technology continues to grow in society. A critical part of not falling prey to the failure that permeates most efforts to obtain technology externally is an appropriate evaluation and control system. The evaluation and control system is not an isolated activity, but instead is an activity that should occur throughout the organization on an ongoing basis. Thus, you should view the obtaining of technology as a process in planning and implementation connected to evaluation and control.
Evaluation and control are the most pervasive of the functions in an organization because they are ongoing activities that are typically constant in technology-focused firms. To illustrate, large technology-focused firms such as Microsoft actually conduct their evaluation and control almost daily as they analyze their performance and the actions needed to ensure the meeting of strategic goals. A firm like Microsoft fears that its environmental changes are so rapid that without such constant evaluation and control the firm can quickly find itself off course and missing its strategic goals or missing new, emerging opportunities. Figure 8.1 summarizes how evaluation and control fit with the other strategy processes of planning and implementation.
Evaluation and control are pervasive in organizations today, and their importance will increase in the future. This is because of the growing significance of technology for information processing, new product development, and systems management and the increasing use of external means to obtain capabilities in these areas. Already, an estimated 70 percent of mergers and acquisitions are driven by the desire to acquire some specific technology or technological capability. 1 The need to obtain technology has led twothirds of the companies surveyed by The Economist to expect their dependence on external relationships (alliances, joint ventures, consortia, and strategic partnerships) to significantly increase in the future. 2
figure 8.1 Questions to Address for Evaluation and Control
Thus, we have a situation where external methods to obtain technology will continue to increase. Nevertheless as noted in Chapter 6, these external methods including both alliances and acquisitions often do not produce the desired results. In fact, more than 60 percent of alliances/acquisitions fail to meet expected goals. As a result, the need for evaluation and control appears high and can be expected to go higher, as efforts to obtain technology externally continue, but face a high potential of failure. Perhaps, improving the evaluation and control processes will ultimately improve the success of external acquisition of technology.
WHERE EVALUATION AND CONTROL OCCUR
A key part of the better methods needed in the external acquisition of technology is to recognize that technology and innovation are not isolated activities in a firm but instead impact and are impacted by multiple functions within the organization. As a result, when firms seek technology externally they need to recognize that the evaluation and control process is complex and requires the coordination and integration of multiple functions within the organization. If these multiple functions are not coordinated and integrated, then barriers between operational areas will continue or grow, the use of politics rather than logical decision-making will expand within the firm, and key human resources may be lost.
The evaluation and control effort occurs at five different places in the external focused processes to obtain technology by an organization. The evaluation and control efforts in each of these five places should include the analysis of multiple dimensions through multiple methods. The five places that evaluation and control happen in an externally focused process are:
· 1. Examining alliance/acquisition capabilities of the firm
· 2. Performing due diligence prior to obtaining the technology
· 3. Negotiating the deal
· 4. Integrating the new technology into the existing systems and structures
· 5. Ongoing evaluation and control of the processes to obtain and blend external technology
Clearly, evaluation and control should be ongoing. The ongoing evaluation and control efforts of the firm should focus on the examination of the following questions, that we have seen previously ( Chapter 5 ):
· a. Where are we compared with where we wanted to be?
· b. What lies ahead that can affect us either positively or negatively?
· c. Where are we going in the future if we continue on the current path? Is it where we thought we were going when we decided to obtain the technology externally?
Each of the five places that evaluation and control occur and the three questions will be examined in detail in this chapter to ensure that the multidimensional aspects of evaluation and control are understood.
Alliance/Acquisition Capabilities
Before undertaking efforts to build an alliance or to begin an acquisition, a firm needs to evaluate its capabilities for success in such activities. The manager should do this evaluation in light of whether the firm will employ alliances or acquisitions in its effort to obtain the technology. Most firms will focus principally on either alliances or acquisitions to achieve expansion goals. 3 The capabilities needed in each method are slightly different. Therefore, before beginning the due diligence process, the firm must determine whether it will pursue an alliance or an acquisition and then see if it has the capabilities necessary to be successful. Figure 8.2 delineates the characteristics of the environment and the firm's goals for determining which of the two alternatives is more appropriate.
If an alliance is the more appropriate method for obtaining technology, then the type of alliance must also be determined. Chapter 6 discussed the different types of alliances and their relevant characteristics.
figure 8.2 Differences to Look for to Obtain Technology Externally
The process of evaluating the type of collaboration method most appropriate for meeting the goals determined during the planning phase should lay the groundwork for the due diligence effort. For example, DuPont has developed a Business Initiative Process that it uses when it is thinking of obtaining technology from external sources. In this process, the firm fully explores a domain before trying to expand into it. There are five separate but intersecting steps with clear yes no decisions in each of these steps. These steps are: 4
· 1. The business case is explored. This is an examination of the strategic ways of pursuing the technology/innovation under review. If there is not a strong business case the project is abandoned.
· 2. Evaluating the environment and all relevant parties and planning the potential change takes place. Due diligence is an integral part of this process. If there are not matches for the firm's strategic goals and if assurances of success cannot be established, then the project is terminated or redirected.
· 3. There is detailed development of the introduction plan and preliminary negotiations.
· 4. If the project makes it to this step, there is a scale-up of activities and definitive agreements are negotiated. This can be a time-consuming process, but it is vital for successful implementation.
· 5. Implementation and commercialization are the activities in the last step. The new business is brought into DuPont and implementation begins.
Due Diligence
Chapters 6 and 7 discussed that the technology-focused firm needs to conduct a thorough evaluation of many elements in the initial stages of the effort to obtain and integrate technology from external sources. This investigation is referred to as due diligence. Because evaluation and control are not isolated events but happen throughout the organization on a continual basis, evaluation and control are part of the very early stages of the effort to obtain technology externally.
The due diligence process should gather data in an orderly manner about potential candidates for an alliance or acquisition. The information gathered will form the basis for implementation if the alliance or acquisition is pursued. Ensuring that the right information is with the right people is part of the evaluation and control process in due diligence.
To ensure that the due diligence of a potential candidate for an alliance or acquisition is thorough, a checklist is often used. For example, a technology-focused firm such as Cisco, which conducts a large number of acquisitions, typically relies on such checklists. The value of the checklists is that they not only form the means to evaluate potential partners but also form the basis of implementation plans and progress checkpoints during integration. Because of the importance of effective due diligence, we need to examine it more closely. Therefore, this section of the chapter will look at the characteristics that organizations should examine in their due diligence of a potential alliance partner or takeover candidate. The chapter will then examine the characteristics that the organization should use in developing its own checklists. Finally, we discuss how an organization uses such checklists in its evaluation and control effort.
Evaluating Future Partners or Takeover Candidates
Firms should base their evaluation of the potential alliance or acquisition candidates on a detailed assessment of a wide range of issues, including the alliance/acquisition prospect's history, financial position, human resources, technology, systems and structures, processes, markets, and competitive positioning. The firm should consider more than financial and technological performance of specific products in this process. To create value from obtaining technology externally an alliance or merger/acquisition requires a meshing of the systems of the different firms. Thus, due diligence needs to focus on a wide range of items rather than just the financial aspects of the firm.
There are five nonfinancial concerns that need special attention in the due diligence evaluation of the potential partner or merger/acquisition target. They are: 5
· • The value creation potential: Examines the value of technologies in the potential partners. This value is relative to positioning, profitability, and growth activities as well as the creation of shareholder value.
· • Assessment of the portfolio of technologies: Looks at a multitude of dimensions relative to the new entity's ability to continue an effective technology program (including innovation through R&D). The issues to examine include timing, level of risk, core competency development, and exploitation as well as the portfolio of technologies across the organization. Thus, the evaluation should look not at a single product but rather at the range of products that the future partner or takeover candidate possesses.
· • Business integration: Indicates the commitment of the firms to use teamwork for technology exploitation within the new entity (no matter who developed it), and the processes and programs for developing new technology.
· • Value of the technology assets: Examines the strength and viability of each firm's technology and the potential partnership's technology. It includes proprietary assets, knowledge systems, and experience of employees, and it indicates the ability of the organization to create future value.
· • Support of innovation practices: Demonstrates the ability of the potential partnership/alliance to produce newness. It includes management practices such as project management, idea generation, knowledge sharing, cross-functional linkages, and other practices that enhance the ability of the firm to reach new ways of doing things and new product development.
A firm known for conducting such forward-looking due diligence is Alcoa. One outcome of Alcoa's approach to due diligence is that the firm has consistently outperformed its competitors. The strength of the firm has in turn allowed Alcoa to be recognized as one of the leading environmentally sustainable corporations in the world by the World Economic Forum in Davos, Switzerland because of its environmental performance. Central to the efforts of Alcoa to obtain technology externally is that the firm includes strong elements of nonfinancial concerns in its due diligence efforts. 6
To be successful, due diligence must also be well planned and executed. To help do that, several rules have emerged to conduct due diligence successfully on potential alliance or merger/acquisition targets: 7
· 1. Objectivity should be maintained. Too often, especially where new technology is involved, the acquirers fall in love with the deal. As a result, the evaluation is flawed since the evaluator has on rose-colored glasses. Many failed mergers occurred because emotion and ego overruled sound judgment.
· 2. Suspicion about the analyses provided by others as well as your own is healthy. Economic forecasts and environmental risk analyses are based on numbers supplied by the prospect and on judgment calls. A healthy cynicism accompanied by a critical eye will help alleviate many potential problems in the future.
· 3. Both the upside and the downside of an alliance or a merger/acquisition should be reviewed. If the firm desires process efficiencies from the blending of the two systems, then due diligence requires that you know the systems are compatible or linkable. Too often, firms lose all potential benefits and even increase costs because the technologies for systems such as IT are not compatible. Thus, a manager needs to develop a best case and worst case set of scenarios.
· 4. Keep the process quiet as long as possible, but do not rush because you are worried about potential leaks. Starting a process of alliance/ acquisition has implications for both parties involved. These implications include a wide range of issues such as the effect on each firm's stock price. However, rushing through the process of due diligence to protect against leaks does not enhance the process. The manager needs to balance between protecting against leaks and rushing the process. This balance is different for each deal, but it is one that managers must actively seek to maintain.
Due Diligence Checklist To obtain the information discussed above in a systematic manner, the manager should use a checklist. Such a checklist helps systematically consider the widest possible set of issues in the firm's due diligence process. There are five key characteristics for such checklists.
· 1. Clarity of objectives
· 2. Comparison
· 3. Competitive understanding
· 4. Customization
· 5. Continuity
These characteristics of due diligence checklists are discussed next.
Clarity of Objectives The objectives for developing a due diligence checklist are not merely listed so that a box can be checked if the item is acceptable. Rather, the manager should use them to discover important, often hidden, potential expenses, costs, and liabilities (as well as benefits) that might affect the alliance/acquisition if it is completed. The checklist cannot cover every aspect, but it should be thorough and aimed at the reasons for considering the alliance/acquisition in the first place. In fact, the answer to the question of “why” should be the first consideration. If the individuals working on forming an alliance cannot articulate a clear answer with identifiable objectives, the alliance/merger will probably fail.
One area that has received attention because it is not considered by many organizations in their due diligence checklist is information technology. A sample due diligence checklist for information technology is in Figure 8.3 . Notice the checklist deals with the physical assets of IT, the systems for protection and continuation, maintenance policies, management procedures, people issues, other contractual obligations, and potential problem areas.
The manager should develop a similar checklist for each of the key areas of the takeover prospect. By having a clear checklist, the management of the takeover candidate understands something about the culture of the acquiring firm, and the manager can communicate the objectives for the takeover. The danger with poor checklists is a merger like the one between Quaker Oats and Snapple. In this merger the food products company acquired the drink company in 1994, but then divested it by 1997. A principal reason for the failed effort to obtain technology externally was that Quaker Oats never considered the culture clash that emerged from trying to combine a mass marketer like Quaker with a quirky, distributor-oriented firm like Snapple. Similarly, Houston-based Lyondell Chemical and its United States affiliates filed for bankruptcy in January 2009, a little more than a year after the December 2007 merger with Basell to form LyondellBasell Industries. The merger, which came at the height of the buyout boom, was funded entirely with debt financing, and saddled Lyondell Chemical and its affiliates with a huge debt. Lyondell obviously expected the continued growth patterns that had led to the boom in acquisitions in the chemical industry during the early part of the decade. 8 However, as the market returned to a more conservative position, the firm's effort to obtain technology and economies of scale proved to be its undoing.
figure 8.3 IT Areas to Examine
Comparison The leading partner in an alliance or acquisition cannot assume that its own systems or methods are the best. In developing the checklist, the leading firm should benchmark , or compare, its systems and the systems of the partnering firm with the best in the industry. The integration of two firms or technologies is very difficult. One danger is that firms do not deal with tough issues such as choosing which systems to use. In fact, rather than simply relying on one system or the other, the best choice may be to change both systems.
The benchmarking effort allows the acquiring firm to ensure that in making changes they eventually employ the best system possible. Such benchmarking can be useful in making personnel decisions and taking advantage of superior technology throughout the combined organization if the alliance/ acquisition is completed. In addition, such comparison leads to the how of integration planning. In fact, if this part of due diligence is done correctly, the plan for integration should emerge with the best processes and systems being integrated into the new entity. Thus, the benchmarking effort provides a set of key measures in the evaluation and control process to ensure that the accomplishment of the firm's goals.
Competitive Understanding The due diligence checklist also needs to include an understanding of how the partnering prospect or acquisition fits into the competitive environment. If the firm desires the partner or acquisition to enhance the product line with new products and/or new distribution technology then there should be an understanding of the competitive environment of each firm. Often, organizations may view a potential partner or acquisition target as attractive, but the ultimate impact on each firm's strategic posture may not be as great as desired from the activity. The technology may be outdated or may not enhance the competitive posture of the acquiring firm. In fact, research shows that about two-thirds of mergers and acquisitions do not deliver the expected synergies. The odds are that about half of the firms will divest the acquired assets or dissolve the partnership in five to seven years. 9 Thus, there is a critical need to understand the potential partner or acquisition target thoroughly, including what the true strategic impact of joining the two firms will be.
Legal and environmental issues are critical in this area. Legal issues such as patent protection and concentration of economic power are important but often overlooked. The legal issues of concentration of economic power are important not only in the United States but also in other parts of the global marketplace. For example, for the HP Compaq merger in 2002, it was not concerns in the United States but those in Europe that delayed the merger.
Environmental issues are also a critical part of the competitive understanding of a firm. The law in the United States is that if a factory is closed, the factory site needs to return to a natural state. This is because many manufacturing processes involve highly toxic materials. For example, the silicon chip manufacturing process involves harmful chemicals. If a firm acquires a silicon chip manufacturer and the acquired firm has not handled these materials correctly, then the acquiring firm takes on the liability of returning that factory site to an environmentally desired state. The costs of doing that may be far greater than any benefits obtained by having a constant silicon source or any emerging technology the silicon chipmaker may have been developing.
Customization Some active firms in the alliance building or acquisition arena do not have formal checklists but rather have an informal due diligence checklist that emerges in a patterned way. Whether the checklist is formal or informal, it is important to remember that each deal is different. This means the due diligence checklist cannot be rigid and inflexible but rather must be customized to the potential deal. Identifying potential deal breakers or major hurdles early will help focus the process on the most effective approach to due diligence. If the acquiring firm is looking for certain outcomes, then the manager should examine the potential target first to see if the target has the organizational characteristics to provide those outcomes. If a firm wants to enhance its manufacturing systems and the potential target does not have a competitive advantage in that area, then other targets may be better suited.
Customization of the due diligence process is aimed at answering three basic questions.
· 1. Are the goals for this potential alliance or acquisition clear and strategically significant?
· 2. What assets and processes does the target firm have that will help reach those goals? What might hinder reaching those goals?
· 3. What assets and processes does the acquiring firm have that will help reach those goals? What might hinder reaching those goals?
Continuity If the due diligence checklist is well developed and applied, then it can become the foundation of the post-acquisition/post-merger operating plan. The work done during due diligence should tell the management of the blended organization where the strengths and weaknesses are as well as where the potential synergies for improvement exist. If the acquired organization personnel understand the nature of the analysis performed for both companies and if there is an effort to truly incorporate the best practices, they should feel less like they are being taken over and more like they are joining a bigger, better organization. This can help the implementation of the acquisition a great deal.
Figure 8.4 shows the principal reviews needed for obtaining technology from external sources. The six phases of reviews can all be predicated on a well-done due diligence process. If due diligence is done correctly and the questions asked are pertinent and thoughtfully answered, the integration process will be greatly enhanced.
Employing the Checklist in Evaluation and Control The preceding checklist for the potential alliance or acquisition of a technology-related firm generates information that is useful in evaluating those activities before they occur. However, the information generated can also be used by the firm to determine whether the alliance or acquisition is performing as intended and, if not, why not. This is why the due diligence process forms the foundation for the firm's evaluation and control process. The information generated while considering the deal is also useful if an alliance or acquisition does not produce the desired results as it can help generate learning on how to avoid such situations in the future. A follow-up to examine the due diligence process should ask questions such as:
figure 8.4 Needed Process Reviews
· • In the analysis of the alliance or acquisition, were there key questions and data that were not gathered?
· • If the information was generated but somehow overlooked, why was it not given the importance that it should have been given?
The data generated will help in the actual alliance or acquisition activity. The data also provide a critical paper trail that the organization can evaluate as it goes forward to ensure those things that worked well are repeated and those that did not are avoided in the future.
Negotiation of the Deal
If after due diligence the decision is to pursue a deal, the evaluation and control continue through the negotiation process. During negotiations, the specific goals of the parties should lead toward a mutual understanding. It is important in multiparty negotiations to understand where the various parties stand as they approach the negotiations. Tera Allas and Nikos Georgiades, writing in the McKinsey Quarterly, argue that three key dimensions need to be understood in such multiparty negotiations. 10 These are: 1) their position or preferred outcome, 2) their salience or how much importance they place on any given issue, 3) and each party's clout or ability to influence a given decision about some issue. By examining each of the key items in the negotiations along these three dimensions, it is possible to determine which items can be compromised, which cannot, and the best approach to negotiation.
Once the potential partners have defined what is essential, what is negotiable, and what is nonnegotiable, then the process of analyzing where to build the bridges among the firms begins. This evaluation process will determine the organizations blending and integration efforts and can help improve the potential for success. There are certain questions that need answering during the negotiation phase. These include:
· • Where is the value creation for each organization and for the combined organization or alliance activity?
· • What are the short-term and long-term objectives for each partner, and will the joining of forces help each reach those objectives?
· • Who knows what in each organization?
· • How will the joint venture, alliance, or merger be governed?
· • How will the alliance or joint venture be terminated if either party becomes dissatisfied? This is not an issue with acquisitions; divestment is the choice of the acquiring firm.
The answers to these questions can then become the basis for evaluating the alliance or acquisition outcomes if they become a reality. Furthermore, the answers will give the partners a target for controlling the actions and continuation of the alliance. Figure 8.5 gives examples of some information to consider as negotiations begin and continue.
figure 8.5 Evaluation Factors during Deal Negotiations
Integration
Once due diligence is completed and if the deal is consummated, then the technology-focused firm will either form an alliance or make the acquisition. The integration process (the fourth area of evaluation and control) is critical to the ultimate success of the external effort to obtain the technology. As mentioned in Chapter 7 , this is the place where most alliances/acquisitions fail. There are a number of issues for evaluating the integration process. These include: 11
· • Clear, common objectives and definition of success
· • Appropriate governance model with clear decision-making criteria determined
· • Clear plan for integration and evolution of the plan if needed
· • Clear metrics to track and measure success and areas that need attention
Each of these integration issues typically involves written documentation. Organizations should not only judge choices they make but also create measures for evaluating outcomes in these domains over time and take actions to change things if necessary. The evaluation for integration should focus on several items. These items are domains that pose the greatest risk to the success of the integration effort. Studies indicate that these factors include: 12
· • Financial systems
· • Core business applications
· • Networked operating environments
· • Systems compatibility
8.1 REAL WORLD LENS: Satyam Group
In 1987, The Satyam Group was a motley group of companies. There was Sree Satyam Spinning & Weaving Mills Satyam Constructions (renamed Maytas in 1998); Satyam Impex (exporter of shoe uppers); Satyam Homes (building residential apartments); and Oceanic Farms (aquaculture). The Satyam Group was controlled by the Ranu family (three brothers). However, Ramalinga Raju chose to leave the family firm and start a different business. Charmed more by cyberspace than spindles, he once told a reporter that he had set up Satyam Computer Services as a hobby. This hobby saw a 122-fold rise in net profit in a business that grew over 20-fold since incorporation within 10 years of its founding in 1987. By 14 years after its founding the Satyam Computer Services was listed on the New York Stock Exchange and subsequently joined the billion-dollar club by 2006.
For most of these years in Satyam, Raju was a thorough planner who thought long term and looked at the big picture. He was willing to take risks but most of them were calculated risks. However, in the 2008, Raju changed his actions and his business directions. First, he became more and more enamored with the “star” lifestyle and was seen with politically powerful individuals and leading business people. Second, he became obsessed with land acquisition and neglected his vision for IT services. His business decisions became less transparent and less analytical. He then destroyed shareholder value through two unrelated acquisitions. Ultimately Raju was arrested for fraud by Indian authorities and his business empire came to an end.
· 1. List at least five lessons Satyam Group shareholders and board members should have learned from this experience.
· 2. If you were a consultant to Satyam Group, what would you suggest they do in the future to rejuvenate the firm?
References
Sharma, E. 2009. The tiger rider; B. Ramalinga Raju was a meticulous strategist who was fuelled by a burning desire to make it big. He didn t know where and when to stop. Business Today. February 8.
These items require an in-depth analysis of the processes in both firms. Benchmarking helps the firm to identify best practices in these various domains. To understand how the systems operate, the firms need to recognize the underlying technology and factors to align. Recall from Chapter 7 that the key alignment issues include the need to develop reward systems to match goals, establish common policies, and build fit. During the integration process, the blending for an alliance requires the development of (1) reward systems to support the goals of the alliance, (2) policies that each organization can support, and (3) fit in the structures and culture. Previously we noted that DuPont employs a Business Initiative Process Guideline Manual when it acquires technology externally. In this process for each new business development project, there is an assigned team whose job is to represent DuPont's interest throughout the five steps to ensure such an in-depth analysis. These steps include: 13
· 1. A seminar to educate top managers and the project team on the issues and demands of alliance development
· 2. Partner evaluation and selection checklists and assessment worksheets
· 3. Guidelines for organizing and managing the agreement-negotiation process
· 4. Due diligence checklists with details covering all aspects of the effort
· 5. Detailed guidance on how to structure and integrate the new alliance into ongoing operations
Thus, a considerable part of DuPont's success in using external methods for obtaining technology is its thorough and systematic methods. These methods help DuPont understand how to fit and support a new partner, whether through alliance or acquisition. These systematic methods include both an established process and manuals that help managers generate success in their external acquisition efforts.
Ongoing Evaluation and Control
Until now, this chapter has focused on evaluation and control of the efforts that take place before the alliance/acquisition. Once the firms have begun the integration activities, evaluation and control become ongoing processes, which is the fifth item on the list of where and when evaluation and control take place discussed at the beginning of the chapter. The information from the due diligence process and the negotiations about what, who, why, when, and where provide considerable information on which to base the implementation effort. After due diligence and integration have been accomplished, the firms should evaluate whether they have been done well or whether there is a need to make changes in what the firm is doing. As stated earlier, during the efforts to obtain technology externally, there is also a need to conduct evaluation and control efforts as part of an ongoing strategic process of the organization.
The questions examined in Chapter 5 concerning the ongoing evaluation and control of innovation internal to the organization are also relevant for the ongoing evaluation and control process in the acquisition of technology as well. These questions are:
· a. Where are we compared with where we wanted to be?
· b. What lies ahead that can affect us either positively or negatively?
· c. Where are we going in the future if we continue on the current path? Is it where we thought we were going when we decided to obtain the technology externally?
These questions will be examined next.
Evaluation of Current Status
The first question to determine if the acquisition strategy is working is: Where are we compared to where we wanted to be? This is an evaluation of how we are doing right now. In planning for the acquisition of new technologies, there should be specifically defined goals. These goals should be both short term and long term. The firm can judge its current status against the short-term goals and objectives and the progress toward future goals and objectives. It is important that the evaluation timing match the timing of the goals.
Understanding the timing and goals for an alliance can be particularly difficult because of the differences between the firms involved. Obtaining technology through external processes involves arrangements between firms that may have their own reporting processes and systems as well as their own motives and goals. Agreeing on how to measure performance can be difficult in alliances. One complication that often occurs in the evaluation process is tracking the costs and benefits. For example, to be consistent in cost/benefit analysis both firms need to agree on how to implement transfer pricing. In addition, depending on the type of alliance the controlling firm may not have in place the evaluation system needed to get the information required for the evaluation and control processes. This may result in the alliance not receiving the necessary management scrutiny from all the parties. 14
For a merger or acquisition, the timing and goals can include the desire to merge with a customer or supplier. If the firm merges with a customer, the purpose of the merger is to extend value to upstream operations. The analysis for evaluation then becomes cost/benefit oriented. Does the benefit for the firm outweigh the costs of blending operations with that customer? If the firm merges with a supplier, the firm should be evaluating the quality of inputs and the improvements that the increased control of inputs provides the organization. For example, in 2009 Boeing wanted to acquire Vought, the supplier of Boeing's 787 fuselages. In large measure, Boeing pursued this acquisition in an effort to tighten quality control standards over a key input to its planes and to save money. By owning the fuselage manufacturing process, Boeing hopes to have stricter oversight and control. 15 Boeing believes the resulting benefits of the merger will outweigh the costs.
One goal that is part of the evaluation of the firm's current status that is similar for either an alliance or a merger/acquisition is the desire to improve a firm's processes through the combination. The evaluation and control then focuses on whether a firm's efficiency and/or quality is improved. Thus, there is a need to examine the immediate situation in the resulting alliance or merger and see whether the outcome is consistent with the goals established and the time desired.
Evaluation of the Future
The second question that must be addressed in the ongoing use of evaluation is: What lies ahead that can affect the firm either positively or negatively? This involves scanning the environment for opportunities and threats. All of the environmental issues (see Chapter 2 ) are relevant when addressing this question. However, more than that, the blended firm must use its new technologies and competitive advantages to look for and find future opportunities. Because of the costs of mergers and acquisitions, the firm may also need to be particularly aware of potential threats that were not present earlier. When British Petroleum (BP) acquired AMOCO, the world's premier drilling research facility closed. This drilling research facility was known throughout the industry for developing creative solutions to drilling problems. The facility had developed many of the cutting-edge drilling bits for the industry. BP decided to move the personnel to its research facilities in other states and nations. Many of the research engineers decided they did not want to move. The culture and facilities were lost. As a result, BP did not acquire the full research prowess it had hoped for when it purchased AMOCO.
Another potential threat to a firm derives from the fact that once a major player in an industry makes an acquisition, many other firms will look for ways to make a similar acquisition to level the playing field. This can cause a great deal of uncertainty in an industry as products, processes, research facilities, and other technology-based assets change ownership. For example, today the cable television industry and the telephone industry are beginning to merge into a single industry. Firms such as AT&T, Cox Communications, and Direct TV offer a package of services that include some or all of the following internet connection, cable television, cell telephone services, landline telephones. As little as 5 years ago, this was not the case. However, legal changes in regulation by the United States government have resulted in a series of acquisitions that have led to a largely integrated industry today. In the future, the level of integration for all telecommunications services should become stronger.
Evaluating the future involves monitoring how well the blending process is going for the organization after the initial integration effort. If employees are still identifying with their original companies two years after the acquisition/ merger, then the building of future synergies may be hampered. The evaluation of the future should also consider unexpected internal opportunities. It may be that an unexpected blending has led to positive outcomes. If this works in one part of the combined firm, it may work in other parts. This is clearly a potential benefit for the future.
Evaluation of Where You Are Heading
The last question in the ongoing evaluation and control process is a fundamental evaluation of whether a radically different direction for the newly formed firm is needed. The firm should ask: Where are we likely to end up if we continue on this path, and is it where we thought when we developed the plan? Such radical evaluation does not occur as often as the comparisons between the goals and outcomes of the acquisition. If the firm is not heading in the direction that the managers believe will lead to long-term success, this more radical type of evaluation may lead a firm to look for acquisition opportunities. The evaluation process needs to periodically examine potential opportunities or paths that are different from those being sought by the organization. Breakthroughs in thinking and action can lead to new initiatives for the firm.
This questioning of direction is particularly relevant for industry leaders or those who have had long-term success. The industry leaders are targets for imitation and for strategic attack—frontal or guerrilla. The firms that have had long-term success may get complacent. This is commonly known as the inertia of success since firms assume because of past successes future success will occur.
The key areas to address when looking for future direction are:
· 1. Creation of value
· 2. Integration of systems, processes, and technologies
· 3. Opportunities and threats
Figure 8.6 illustrates the importance of each of these and the key questions for the organization's managers and other stakeholders as they look to the future.
Creation of value when evaluating the acquisition of technology depends on the emergence of processes and/or products that improve the competitive positioning of the organization. This can include the emergence of improved processes, the development of new products and other innovations, and the alignment of best practices. For the acquisition of technology to reflect positive outcomes, it is important that some type of technology improvement has emerged. The expertise of the two organizations should merge into a system that has improved returns and provides synergies that support the company's goals and desired positioning in the industry.
One other question should be examined if the firm is not on the planned path—if we continue on this path, even though unintended, what do we think will happen? The unintended activities in turn can be formalized into an emergent strategy that seeks to continue the activity. Emergent strategies can lead the firm to outcomes the management did not envision initially. The integration of systems, processes, and technologies requires consideration of the how, why, where, and when of process. When a firm creates any type of alliance, the integration will determine the eventual success. This process is difficult, at best, because of the newness factors and the identifications that exist.
figure 8.6 Key Areas and Their Measurement
For example, the culture of one firm may be very family oriented. However, if one of the firms in the alliance or an acquiring firm is not as family oriented, then integration can be more difficult. These issues may or may not be directly related to work outcomes, but they still affect the work environment and need to be taken into consideration. The team that evaluates this area should include members from both organizations and from multiple levels and areas of the organizations. If the firm does not integrate after an alliance formation, then inefficiencies appear, and other potential opportunities may be missed.
METRICS
A key aspect of evaluation and control that is part of the implementation process of evaluation and control is the ability to measure many of the issues raised in the preceding discussion. The generation of information during due diligence analysis, negotiation, and implementation impacts and facilitates some of this evaluation. But there still remains a need to develop metrics , or measures, that the organization can use in its evaluation and control.
Generally speaking, the development of metrics for use in the external acquisition of technology is more difficult than evaluation of internal innovation. This is because the acquiring firm does not control all aspects of the process and as a result may not have all of the information needed to do “hard” evaluation. The most common metrics and the ones that managers tend to feel most comfortable with are “hard” metrics or numbers on some aspect of the technology that can be compared to some standard. Financial information from the income statement and balance sheet are such measures. However, as indicated in Chapter 2 , even these types of numbers are subject to interpretation, and it is important to take notice of what accounting practices the different firms may have. For example, different methods for valuing inventory may result in very different outcomes. There are areas beyond financial and similar domains that managers should also examine and develop metrics. Callahan and MacKenzie argue that domains that need to be measured include: 16
· • Partner motives—Clarity of partner's motives for the alliance
· • Partner capabilities—Partner's skills to deliver desired result
· • Partner resources—Partner has deep managerial resources
· • Development processes—Development processes of two firms fit well together
· • Organizational cultures—Key players in each organization accept the alliance
These types of metrics can be very detailed; just as in the due diligence process. When the firm is evaluating the partnership, whether it is an alliance or an acquisition/merger, it is important to be thorough. However, the firm needs a balance since evaluation can be costly to the firm. The balance is to gather the information needed to help the organization realize its goals in a timely fashion while being cost effective.
GAP ANALYSIS
A key evaluation and control tool that the organization can use in its implementation of evaluation and control is a gap analysis . Chapter 5 noted that the difference between goals and outcomes is a gap. Gap analysis seeks to identify the gaps before major problems arise. If a gap is recognized, then managers can take corrective action. These actions take two forms: change the desired outcomes or change activities that produce the outcomes. In strategic alliances, the gap analysis identifies the fitness of the alliance. The focus in this part of the chapter is on alliances and not mergers/acquisitions because the alliance can be changed or abandoned more easily than the merger/acquisition, which involves a permanent movement of assets.
In the gap analysis, there are four critical types of fitness examined: financial, strategic, operational, and relationship. 17 With the analysis of these four types of fitness the firm should be able to identify gaps in performance.
Financial Fitness
Financial fitness refers to the difference between the desired financial outcomes and those actually produced. In a merger, acquisition, or alliance, financial measures show the outcome of strategic actions. These measures are often readily available. The standard types of financial measures used in this area are sales revenues, cash flow, ROI, ROA, and net present value. (Refer to Chapter 2 for financial items and their calculation.)
Technology-focused firms should also consider other issues as part of their financial fitness gap analysis. Particularly, there needs to be an analysis of the organization's progress toward increasing efficiency. Examples include the measurement of the reduction of overlapping costs, transfer-pricing revenues, other increases in revenue attributed to the alliance, and cash outlays against expected returns. When entering an alliance, a firm should include specific financial objectives and then measure the outcomes against those objectives.
Strategic Fitness
If the purpose of the alliance is the acquisition of technology then there should be an evaluation of strategic fitness , or the ability of the organizations to align their strategic goals. Therefore, although strategic fitness is more fluid in its measurement, it is still important that the organization consider it and make adjustments as required. Just as with financial fitness, strategic fitness measures can indicate success and failure but are unlikely to help in specific diagnosis of potential solutions.
When acquiring technology or forming some type of alliance for technology development, the goals should reflect issues such as development of new technology, increased knowledge base, improved processes, and better service to customers through bundling of related products. The goals of the external technology obtaining activity should define the types of measurements used. For example, if the goal is to develop new products then the measure could be the number of new products brought to market, an increase in market share, or even the number of new patents obtained. This type of assessment often requires creative thinking to develop a set of measurements that truly reflect the outcomes the firm is seeking.
Operational Fitness
Operational fitness refers to the difference between the desired and actual operational performance. Managers examine a firm's standing in this domain by measuring the efficiencies that emerge from the combined activities in areas such as sales and manufacturing costs. These metrics can help reveal the underlying cause of poor financial performance as well as uncover potential future problems. When seeking technology externally for improving technology, there should be key operating goals such as economies of scale, increased input reliability, and increased quality of outputs. These areas need ongoing evaluation. For example, operational fitness goals could be to reduce the cost of goods sold by 5 percent. One way managers can accomplish this goal is by acquiring a competitor that has this advantage because of just-in-time inventory management. Operational fitness can also be indicated by measures such as cost of goods sold and lower inventory costs as well as the cost of the justin- time inventory system.
Another area of operational fitness that is often overlooked is optimization of coordination efforts. Often, with an alliance or acquisition, the systems (especially operating systems like IT) do not get integrated. This can lead to human resources within the organization spending many hours reconciling the differences between systems. The decision for a firm then becomes whether to continue, rectify, or divest. In this case, the failure to obtain operational fitness may dictate strategic decision making rather than the preferred strategy dictating operational decisions.
Relationship Fitness
Relationship fitness is the difference between the desired and actual relationships within the firm. This fitness concerns a number of issues in the firm including: Are decisions made in a timely fashion? Is the proper information getting to the proper place within the organization? Are managers roles clearly defined? Is senior management involved? Are the cultures at least compatible? Are projects properly monitored? Are evaluation and control based on unbiased measures and processes and not on the source of the object being measured? Has the new organization truly adopted best practices?
For relationship fitness one problem is how to measure such items. Despite the difficulty in measuring such relationships the firm needs to establish clear expectations in this domain. The building blocks for relationship fitness are:
· 1. There must be integration and trust among the human resources at all levels of the organization.
· 2. There must be concern for other things besides “the numbers.” While financials are important, they do not tell the whole story.
· 3. Oversight of technology must be flexible to promote idea generation. If there is integration and trust, this is easier.
· 4. Oversight of technology must be tight to prevent runaway projects and divergence along pre-alliance organizational lines.
· 5. Opportunity knocks. It is the responsibility of management to be ready.
8.2 REAL WORLD LENS: DuPont
Although DuPont has been very active in internal development of technology, it has also relied extensively on external means to obtain innovation and technology. The firm made its first acquisition in 1859. The coal industry at this time used a great deal of gunpowder to break up coal seams in the mine. The miners would then haul out the dislodged pieces of coal after such a blast. The movement of the powder from the Delaware factory to the coalfields of Pennsylvania was expensive. Therefore, in 1859, DuPont bought an explosives mill that was close to the coalmines of the time from Parrish, Silver & Company for $35,000. After purchasing the mill, DuPont upgraded the facilities to make it a state of the art mill.
Later DuPont did not want to be limited to business in the United States. Therefore, in 1910, it purchased a Chilean mine and formed the DuPont Nitrate Company. The firm produced nitric acid for the manufacture of smokeless gunpowder. The firm continued its expansion in South America in the early 1920s by joining with other firms to form the Compania Sud-Americana de Explosivos at Rio Loa, Chile. Alliances were also a critical means for expansion into Europe. In 1929, DuPont and ICI from Great Britain formed an alliance to share information about patents and research. The firms also agreed not to compete in certain geographical territories and established successful joint ventures in Canada, Argentina, and Brazil.
DuPont also continued its external efforts to obtain technology in the early part of the last century by purchasing specific products. Cellophane was invented in Switzerland and it was first produced commercially there in 1912. DuPont acquired the U.S. patent rights in 1923. The company continued to improve this product, and by 1938, various cellophane products accounted for more than 25 percent of the firm's revenues. In 1928, the firm bought Grasselli Chemical Company, one of the largest U.S. chemical companies of the time to help support it various operations. The firm then diversified further when it bought Remington Arms Company in 1933. In 1969, DuPont bought Endo Laboratories to enter the consumer pharmaceuticals market. Eight years later, DuPont Pharmaceuticals and Merck formed a joint venture known as the DuPont Merck Pharmaceuticals Company. In 1972, the firm bought Berg Electronics to enter consumer electronics, and in 1981, it bought Conoco Oil Company. Thus, throughout its history DuPont has used a wide variety of external means to obtain firms and products.
In recent years, the pattern of active external methods of increasing innovative capability through acquisition of technology has continued. In 1996, the firm formed a joint venture with Dow Chemical Company called DuPont Dow Elastomers. This joint venture offers a wide variety of products ranging from thermoset rubber polymers used by the general rubber industry to high-performance fluoroelastomers used by the chemical processing and automotive industries. At the end of the twentieth century, DuPont bought Pioneer Hi-Bred International to integrate agricultural biology into the company's science and technology base. The firms last major purchase was in 2004 when it bought VERDIA, which specializes in genetically modified plants.
These external efforts to obtain technology, whether through alliances such as joint ventures or through mergers and acquisitions, are only a partial list of the wide range of activities conducted by DuPont. However, this partial list demonstrates a strong pattern by the firm to employ external methods to obtain innovation capability or technology. Today, Du Pont is focusing on building on the technology and skills it acquired in its external efforts as it seeks to address specific global trends it has predicted for business; the move from petroleum to bio-fuels and the need for home and commercial security products.
· 1. What benefits has DuPont gained from its pattern of acquisitions? Administratively? Technically? Product? Process?
· 2. Besides the potential benefits discussed, what else did DuPont probably gain? Are there potential losses it should guard against?
References
http://www.marketwatch.com/story/dupont-ceo-company-not-interested-inmajor- merger
Karol, R., R. Loeser, and R. Tait. 2002. Better new business development at DuPont—I. Research Technology Management (Jan.–Feb.): 24–30.
Smith, John. DuPont: The enlightened organization. http://heritage.dupont.com
Stevens, T. 2001. R&D times two. Industry Week (May 7): 49–53.
SUMMARY
We established the dimensions of building an evaluation and control system for the acquisition of technology. Evaluation and control are more complex for blending two firms than for providing an innovative environment for the internal development of new technologies. Even though no two evaluation systems look alike, there are common elements that should be present.
· 1. Evaluation of readiness to create an alliance is critical for success. Numerous checklists can help to guide the process, and potential partners or acquiring firms should have one they are comfortable with. However, managers must remember that all involved with the acquisition or alliance should be evaluated. This will identify potential problems and synergies if the alliance is formed.
· 2. Top management should take the lead and be involved, of course. This is natural for this type of technology acquisition. The neglected areas for acquisition of technology are in operational areas of the organization. In other words, the alliance is made and then the problems emerge as the operations areas (i.e., human resources, manufacturing, IT) try to blend systems.
· 3. There should be a clear goal for the alliance, and the focus should be on reaching that goal. Too often, power struggles emerge as relationships are tested by the changes, and learning stops. Power and politics then emerge as the motivating energy rather than where the organization is trying to go.
· 4. Evaluation and control are ongoing processes, not just once a year phenomena. Monitoring systems that are appropriate for the level of detail and activity being demanded should be in place. The successful evaluation and control system gathers relevant information, verifies its reliability, is used for making good decisions, and spurs actions to improve the processes and products of the organization.
MANAGERIAL GUIDELINES
There are a number of points to remember when designing and implementing the evaluation and control system for obtaining technology from external sources. These include:
· 1. There will be a drop in productivity as energy and resources are used to accomplish the planning and blending of the alliance/ acquisition. The evaluation and control process should recognize this.
· 2. There will be feelings of loss among the employees. These feelings of loss relative to the old way and the old systems and processes should at least be acknowledged. In implementing control, such a loss should be acknowledged while still seeking to move the organization in new directions.
· 3. Try to avoid the conqueror outcomes. Especially in acquisitions and controlling contractual agreements, people from the acquired company may feel like losers and may not feel welcome in the new way of doing things. People from the firm with the least power after the blending need the ability to express concerns. These concerns can provide valuable information to the evaluation and control process.
· 4. Remember, it is unlikely that the new entity will actually display the best of both firms. The goal is to display the best possible outcomes as the process unfolds. Control processes will allow the firm to make adjustments as the need to change becomes more evident.
· 5. Be sure that subtle aspects are not overlooked when blending functions and operations. For example, a sales force accustomed to retail distribution may have trouble with sales to manufacturing customers.
· 6. Do not assume everyone will understand the strategic value of obtaining external technology. Remember, there is no guarantee that everyone in top management will, so why should that be true throughout the organization? Communication is critical to the successful evaluation and control effort.
· 7. Acquisitions and new ways of doing things do not just blend in naturally. Just because the acquisition makes sense, it does not mean that sense of the acquisition will be made. Many acquisitions of technology that look good on paper have failed. Evaluation and control are critical to help avoid such problems.
Guiding Questions
There are a number of checklists that have been developed through the years to determine or enhance the potential success of an alliance or acquisition. Asking the following questions and evaluating the information indicated shouldmove themanagement team toward success in mergers/acquisitions or alliances. 18
· 1. Does the potential benefit/reward warrant the risk of failure or excessive cost as well as management distraction?
· • Examine the expected shareholder returns and compare them to the industry position.
· • Delineate the value creation opportunities in the deal and determine how risky they are.
· • Realistically assess how much management time will be absorbed by the blending activities.
· • Determine what opportunities will be missed or delayed by pursuing this particular alliance/acquisition.
· 2. Is the strategic rationale for obtaining the external technology well grounded?
· • Evaluate the basic business model for its potential for success.
· • Determine what the alliance/acquisition improves. This needs to be specific.
· • Delineate what the obtaining of the new technology will do for the firm's competitive advantage.
· • Realistically evaluate how the change will affect the firm's projected competitive positioning relative to competitors.
· 3. Is the integration plan well designed and realistic?
· • Clarify where the most value is to be obtained.
· • Specify what needs to be done to obtain the most value from the alliance/ acquisition action.
· • Assign responsibility for the integration effort with appropriate authority given to the integration team.
· 4. Are top managers establishing a strategic plan and model for long-term success?
· • Determine the meaning of success for the firms involved.
· • Agree on how the success of the alliance/acquisition will be measured.
· • Set up a process for resolving conflicts and potential value destroying activities.
· • Agree on how the alliance will be monitored and determine how, when, where, and who will decide if the alliance will continue or expand.
CASE 8.1 THE REAL WORLD: Sport7
Sport7 was a consortium formed with the intention of creating a dedicated sports channel in the Netherlands. It was to be a European version of what people in the United States see when they view ESPN. At the time, this would have been a new innovation in the Netherlands. This consortium won the rights to broadcast the games of the Royal Dutch Football Association in 1996.
The investors in the consortium included Endermol (a TV production company), the Royal Dutch Football Association, ING (an insurance company), Nuon (a utility), and Philips (an electronics company). The consortium included some of the most powerful firms in the Netherlands. Additionally, at the time of the formation of this consortium (1996), one of the local Dutch clubs had won the European Championship League title. This had built an environment where there seemed to be a very high demand for football (or soccer to Americans). Thus, the environment and the participants in the consortium thought the venture would be successful. However, ultimately, it failed.
There was a wide variety of issues that the consortium had not considered in its due diligence and implementation effort. These included three principal issues: (1) the opposition of the existing public broadcaster, (2) the opposition of some cable companies, and (3) the opposition of some of the leading football teams. Each of these issues will be examined in turn.
In the Netherlands, only the public broadcasting system may broadcast over the air. Other broadcasters must broadcast using cable technology. Historically, the public broadcasting system had televised football games in the Netherlands. Not everyone had access to cable television because of its extra expense, and the public broadcasting station was the most widely available in the country. The public broadcaster saw the arrival of Sport7 as a major competitor. This is especially true because the firm was taking one of the public broadcaster's most popular programs, football. As a result, the public broadcaster responded much more aggressively than Sport7 had anticipated.
Sport7 planned to broadcast football 25 percent of the time but needed other sports programming to complete the other 75 percent of the schedule. However, these rights were often held by the public broadcasting system. Additionally, both the public broadcasting system and Sport7 aggressively sought out minor sport associations to contract with. The public broadcasting system also retaliated by increasing the time spent broadcasting sports. Sport7 had dramatically underestimated the response of this competitor. As a result, the nature of the material it could broadcast and its expense were much higher.
The consortium also did not accurately evaluate how cable companies would respond to the development of the network. The consortium believed that the demand was so high that it could change the existing model for how networks interacted with cable stations. Historically, cable companies charged the network to broadcast their programs. The network would be expected to obtain their revenue by charging for advertising. However, Sport7 wanted each cable firm to pay 2 guilders ($1.12 U.S.) for each subscriber. As an inducement, the consortium reserved 15 percent ownership in Sport7 for cable companies. It also had the support of the leadership of the national association of cable companies. However, the existing cable companies refused to go along with the proposed changes in the model. The result was that, as the new network tried to get started, it faltered because it first offered the service free hoping to create demand for the product. But instead, offering the service for free created an expectation that it would be offered in the traditional manner of other networks.
Finally, the leading football clubs in the nation did not support the creation of the network. These clubs voted against the broadcasting contract for the new network. They wanted greater exposure to more fans and a greater part of the proceeds of the contract. These teams were critical to the perception of the value of the network. One of the teams then filed a lawsuit against the network that called the validity of the network into question.
Sport7 started with very strong backers in an environment that would have led one to initially believe that it would succeed. The absence of full due diligence prevented the participants from completely understanding the nature of the opposition they would face and why. This led ultimately to television channel Sport7 failure.
· 1. What were the key evaluation and control processes that Sport7 failed to use? Why did you pick the processes you chose?
· 2. Most consortia involve only two or three different types of organizations. Make a chart of the key members of this consortium. What were the goals of each key member? How did this hinder the consortium? What could have been done to overcome the potential problems?
Reference
Sminia, H. 2003. The Failure of the Sport7 TV-channel: Controversies in a business network. Journal of Management Studies, 40 (7): 1621–1649.
CRITICAL THINKING
Relating to Your World
· 1. We have discussed pre-acquisition evaluation and post-acquisition evaluation. We know that systems of evaluation and control should be connected to each other. Following is a chart of pre-acquisition goals. What should you know before and after the acquisition to determine if the goals can be met and if they have been met?
· 2. We talk a great deal about getting buy-in with the strategic direction of the organization. How should managers develop buy-in from the acquired company personnel? How would getting the support of those individuals aid the merging process? How would you evaluate if you have the support or not?
· 3. What advice would you give a manager who is charged with the responsibility of blending IT systems after the acquisition of a smaller competitor? What do you believe are the key integration issues that must be addressed? Would it be easier in a joint venture than in an acquisition? What would be more difficult? Why?
WWW EXERCISES
· 1. Identify a well-documented merger/acquisition that was motivated by technology acquisition. Find the goals for the merger/ acquisition and then find how well the organization met those goals. What evaluation issues are identified in articles or comments about the merger?
· 2. Find a website that illustrates an evaluation process for merger/acquisition activities. How does this process compare to the issues identified in this chapter? How important is technology blending in the evaluation process? What are the strengths and weaknesses of the process that you find?
· 3. Find an article or website that provides guidelines for the evaluation and control of technology-based acquisitions and mergers. What do you think of the advice? Compare the advice you find to the advice your classmates find.
AUDIT EXERCISE
Goal |
Metric |
Goal/Results |
− |
Met |
+ |
Financial Fitness |
|
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Strategic Fitness |
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Operational Fitness |
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Relationship Fitness |
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Readiness |
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List four metrics for each of the fitness areas. What types of goals/results should the company look for? It is likely that not all of the goals will be met in any merger/acquisition. What should determine the company's readiness to acquire technology again?
DISCUSSION QUESTIONS
· 1. How would the evaluation and control effort differ in an alliance effort like a licensing effort compared to an acquisition of a firm?
· 2. Evaluation and control appear critical to the success of any effort to obtain technology externally. Do you think evaluation and control efforts contribute to the high failure rate in such external efforts? How and why? Or why not?
· 3. This chapter has a number of different evaluation and control frameworks represented. This is intentional; however, there are many more. What do you think are the five most critical issues in designing an evaluation and control system for obtaining technology externally? Give a brief description of why you believe these issues are critical.
· 4. Compare and contrast the purpose and process of due diligence and ongoing evaluation efforts. How should they complement each other?
· 5. Describe three types of measurement that can be used to determine the ability of a firm to be successful in strategic alliances.
PART THREE OPENING CASE: ACER
· 1. What are the special evaluation needs for a company such as Acer? What characteristics of Acer have the most influence on how well it evaluates progress toward stated innovation goals?
· 2. What steps in evaluation and control would you suggest Acer be most diligent about performing? How would its choices affect cost/ benefit factors in alliances and acquisitions? Explain.
KEY TERMS
benchmark 269
gap analysis 280
metrics 279
NOTES
1. Gorman, M., and P. O'Grady. 2001. Integrating Mergers and Acquisitions—A Perspective from the Technology Industry. Dublin, Ireland: Prospectus.
2. Anslinger, P., and J. Jenk. 2004. Creating successful alliances. The Journal of Business Strategy, 25 (2): 18–22.
3. Dyer, J., P. Kale, and H. Singh. 2004. When to ally & when to acquire. Harvard Business Review (Jul.–Aug.): 109–115.
5. Tipping, J., and E. Zeffren. 1995. Assessing the value of your technology. Research Technology Management, 38 (5): 22–39.
6. May, M., P. Anslinger, and J. Jenk. 2002. Avoiding the perils of traditional due diligence. http://www.accenture.com/xd/xd.asp?it=enwebxd=ideas%5Coutlook%5C7.2002%5Cstrategy_avoiding.xml
7. Milligan, J. 1990. The Ten Commandments of merger due diligence. Institutional Investor, 24 (7): 87–90.
8. McLaughlin, D. 2009. Corporate News: Lyondell Creditors Seek Probe of Merger. Wall Street Journal, March 11, B.2.
9. Hollander, D. S. 1998. Smooth post-merger integration hinges on detection of technology hurdles. Bank Systems and Technology, 35 (12): 56.
10. Allas, T., and N. Georgiades. 2001. New tools for negotiators. McKinsey Quarterly, 2: 86–97.
11. Anslinger, P., and J. Jenk. 2004. Creating successful alliances. The Journal of Business Strategy, 25 (2): 18–22.
12. Eckhouse, J. 1998. To navigate an M&A payoff. Information Week (Nov.9): 103.
13. www.dupont.com
14. Korman, R. 2001. Why acquisitions can turn bitter. ENR:Engineering News-Record, 247 (7): 15.
15. Sanders, P. 2009. Boeing Tightens Its Grip on Dreamliner Production—Company Is in Talks to Buy Fuselage Factory From Supplier; Supply-Chain Woes Have Dogged 787 Program. Wall Street Journal, July 2, B.1.
16. Callahan, J., and S. MacKenzie. 1999. Metrics for strategic alliance control. R&D Management, 29 (4): 365–377.
17. Bamford, J., and D. Ernst. 2002. Tracking the real pay-offs from alliances. Mergers & Acquisitions, 37 (12): 34–37.
18. Armour, E. 2002. How boards can improve the odds of M&A success. Strategy and Leadership, 30 (2): 13–20.