Acquisition decisions and integration processes must evolve dramatically to be in tune with the markets and the competition of the twenty-first century, say David G. Hartman and George F. Brown, Jr.
Here is the question that we think belongs on the top of your firm’s strategic agenda. “Do we need to bring what they do very well in China into our company?” If your firm aspires to global leadership, we believe the answer is yes—and there is an urgency to take actions that are consistent with that answer. Jack Welch’s challenge to “change before you have to” is excellent advice. For some firms, it may already be too late, but for most, the opportunity is still available.
The change that will be required will impact on most elements of business strategy, with a very significant impact on acquisition strategy. The need goes beyond just acquiring firms in China. It will require that acquisition decisions and integration processes evolve rather dramatically to be in tune with the markets and the competition of the twenty-first century.
Most businesses are already fully aware of the relatively benign rationale for the need to respond to this challenge. China’s extraordinary growth has already propelled it onto the leaderboard in terms of country markets—and that growth will continue. In the future, success in China (and other emerging markets) will require serving the broad middle segments, not just the elite segments involving the operations of global firms in China and the extreme tail of the income distribution. Few western firms are even close to ready to challenge Chinese competitors in those broad middle market segments. And, while China is the most prominent current example, the other emerging markets starting with Brazil, Russia, and India will hold precisely the same opportunities.
But that’s only part of the rationale and the other part is defensive, with an alternative that is far more frightening. There is no reason to be content about your firm’s leadership position in traditional western markets. In the near future, it is likely that you will have to respond to a challenge that will be mounted by a new type of competitor now springing up in China and other emerging markets.
We recently wrote about the “fast learner” economy in China, using the saying: “The early bird gets the worm, but the second mouse gets the cheese.” When we first thought through that statement, it was jarring to us. As Americans, we celebrate from childhood on the early bird—the creative, the brilliant, the far-sighted. Many of us started our education in high schools named for early birds like Thomas Edison, Benjamin Franklin, or George Washington Carver. Few of us were raised reading biographies of the second mouse—the one who arrived a bit late but faster than all the others, the one who ended up avoiding making the mistakes of the first mouse, and (stretching the analogy) often skillfully learning from the pioneering work of the early birds.
The Chinese are our example of emerging market participants because they not only have finely-honed second mouse skills, they are downright proud to be fast followers. It is one of the factors that drive their success in the middle market of China, as they evolve western products and technologies to meet the needs of Chinese customers at acceptable price points. Those same competencies will enable these firms to become a force in western markets, as they achieve scale in China and then turn their attention (often with government support) to expanding into global markets. In fact, the ability to quickly learn and copy products and technologies developed elsewhere has already propelled numerous Chinese firms to global stature. Firms that compete with Chinese companies like Huawei, Haier, and ZTE have already seen this transition, as those firms evolved from dominance in China’s market to positions of global leadership.
To meet the inevitable competitive challenges in their home markets and to succeed in the middle markets of China, western companies will also need to hone second mouse skills, sometimes as an additional weapon in their arsenal, more often as their primary mode of competing.
The change we are recommending in acquisition strategy is about addressing the emerging realities about what will be required for growth and what will be required to remain competitive. The solution is all about combining the best of the traditional western early bird business model and the emerging market second mousebusiness model. It may turn out to be possible to do this without making an acquisition of a confirmed second mousefirm, but we are skeptical.
The types of acquisition which have been successfully implemented in the past have frequently delivered value to shareholders through various contributions:
- Introducing new technologies to an existing product portfolio
- Bringing differentiated products to the portfolio to serve existing customers
- Creating entry into new markets, providing presence and relationships
- Producing profits as part of a portfolio of assets.
The traditional goal of strategic acquisitions has been strengthening the company and promoting its core business model, as those examples suggest.
For most firms, the primary challenge in realizing value from acquisitions involves successfully integrating the acquired company, particularly if the acquired company comes with a different business culture. When doing an acquisition in China, for instance, the major post-acquisition implementation actions often involve upgrading technology, teaching mature economy business methods, and bringing control to the free-wheeling business cultures found in the acquired company, while taking advantage of Chinese economics and the opportunity to enter a new geographic market.
We have been involved in developing many implementation plans of exactly this type, and acquisitions of this character will continue to be consummated and will continue to provide advantages and profits, if targeted and implemented well. But their objectives and results are limited to “taking what we do very well in the west to China.”
That strategy will not prepare a firm for the challenges of the future. Faced with the extraordinary challenge of realizing growth in the middle markets of emerging countries while warding off the competitive challenges of second mouse competitors in western markets, companies will need a new emerging market acquisition model. That new model will create value, not by molding the acquired new company to fit with the acquirer, but by embracing the wider diversity inherent in the acquired company. It creates by acquisition and preserves in integration the acquired firm’s second mouse capabilities.
We began by saying that bringing what they do well in China squarely into western companies belongs at the top of today’s strategic agenda. Among the reasons for our advocacy of this primacy are the contributions that second mouse acquisitions can provide:
- Products and technologies that address the needs and price points of customers in the broadest segments of emerging markets—the locus of growth opportunities for the foreseeable future
- The competencies of speed, innovation relevant to emerging market economic conditions, and the ability to sustain leadership over the entire technology life cycle (rather than ceding leadership soon after innovation to second mouse companies)
- The opportunity to shape a company that can be a global leader in the radically different business environment of tomorrow.
These new acquisitions introduce new competencies and a new business model, giving the acquiring company the chance to become faster, more willing to experiment, and able to serve markets that are focused on cost as well as ones focused on breakthrough innovation. Rather than changing the business model of the acquired company to be more like the western company that made the acquisition, it is the business model of the acquiring company that needs to adapt to that of the acquired company, in order to make this transition.
This concept changes the traditional perspective about globalization. The traditional perspectives involve either arbitrage or aggregation. Western firms initially went to China to take advantage of their low labor costs as a source of advantage in their home markets. Many stayed in China as the country’s growth yielded enough customers to meaningfully contribute to scale. Implementing the acquisition and integration strategy we’ve defined will represent the dominant contribution of globalization in future years, namely combining competencies that are strong in different global markets and cultures in order to achieve competitive leadership across all markets.
We are aware that what we are suggesting will be challenging in the extreme. To make an acquisition of a company that most would perceive as “naïve” or “primitive” in both products and methods of operating and then taking on that company’s business model requires both courage and hard work. We will have to overcome the western preference for the early bird and learn to embrace the second mouse.
There are challenges galore in trying to change the face of a parent company to match the business model of an acquired company. This is particularly true because there are likely to be parts of that acquired company’s business model that do require changing. Companies that have done acquisitions in China are familiar with many of the elements of the status quo that must be changed:
- Existing products may have been developed in disregard of intellectual property rights
- Human resource policies may not be consistent with western standards
- Corporate governance may not match the requirements of a public company
- Relationships, especially with government, and transactions with customers and intermediaries may not pass muster with western laws.
But, while changing what is “wrong”, it is important to keep the acquiring firm from changing what is “right” in the companies they acquire:
- Business systems that are oriented towards responding to the need for speed that is inherent in the economies of China and other emerging markets, relying on large available labor pools and processes that often involve trial and error instead of slow, deliberate strategic plans
- Standards and processes that are consistent with local economics and customer expectations—for product performance, product life, and service delivery—not some historical western performance standard
- The lack of a product legacy (and the fact that most customers in markets like China are first-time customers for almost every product), which creates an environment in which thinking is often not just out of the box, but out of the stadium.
The goal of the type of acquisitions that we are recommending is to bring what they do very well in China into your company. The mantra of the integration process must therefore be to change what must be changed without destroying what must be assimilated into the acquiring company.
The strategic challenges are clear. Future growth will require an ability to compete in the broad middle segments of emerging markets. Future competitive success in even traditional western markets will require responses to new competitors from emerging markets that will quickly offer customers “almost as good” products at highly attractive price points.
To address these strategic challenges, western businesses will have to evolve, blending what they already do well with the competencies that characterize mainstream Chinese firms. To accomplish that will require a new focus of acquisition strategy and a new perspective about what is to be accomplished in the integration process. Acquisition priorities must be refocused on strong second mouse companies, and integration priorities must emphasize not just retaining, but fully assimilating, the core competencies that these acquired firms can bring to the firm that acquires them.
George F. Brown, Jr. is CEO of Blue Canyon Partners, Inc., a strategy consulting firm, and is co-author with Atlee Valentine Pope of CoDestiny: Overcome Your Growth Challenges by Helping Your Customers Overcome Theirs, published by Greenleaf Book Group Press. www.CoDestinyBook.com
David G. Hartman is Blue Canyon Partners’ China Practice Director and has been an active participant in China’s markets for over twenty years. He has previously served on the faculty of Harvard University and as executive director of the National Bureau of Economic Research.