Another failed M&A: misaligned business models as culprit

Journal of Business Strategy Anot her f ailed M&A: misaligned business models as culprit Gaël Le Floc’h, Laurent Scaringella, Article information: To cite this document: Gaël Le Floc’h, Laurent Scaringella, (2017) "Another failed M&A: misaligned business models as culprit", Journal of Business Strategy, Vol. 38 Issue: 5, pp.18-26, https://doi.org/10.1108/JBS-05-2016-0049 Permanent link t o t his document : https://doi.org/10.1108/JBS-05-2016-0049 Downloaded by Rennes School of Business At 04:33 01 September 2017 (PT) Downloaded on: 01 Sept ember 2017, At : 04: 33 (PT) Ref erences: t his document cont ains ref erences t o 20 ot her document s. 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The organization is a partner of the Committee on Publication Ethics (COPE) and also works with Portico and the LOCKSS initiative for digital archive preservation. *Relat ed cont ent and download inf ormat ion correct at t ime of download. Another failed M&A: misaligned business models as culprit Downloaded by Rennes School of Business At 04:33 01 September 2017 (PT) Gaël Le Floc’h and Laurent Scaringella Gaël Le Floc’h and Laurent Scaringella are both based at the ESC Rennes School of Business, Rennes, France. 1. Introduction Under the pressure of a changing environment, managers are compelled to design and renew their business models (BMs), and although conceptual and empirical works on this subject have greatly increased, there are still a limited number of works for practitioners to use. Consequently, scholars’ research has not had the positive impact on business that it should. One early contribution to the field of BM has been definitional. Scholars generally set the frontier of the domain and the purpose of studying it, which is a needed but often challenging exercise, and this is so in defining BM. However, this debate has been ignored by managers who have used the term BM to describe their businesses or activities. Consequently, a gap exists between the meaning that BM holds in the academic community and the practitioner community, which has led to an overall misunderstanding of the concept. Moreover, this inconsistency is not only terminological but also concerns the availability of tools at the disposal of practitioners. Except for reusing the BM canvas, managers have few tools they can use in their day-to-day operations and also little guidance for applying them correctly. Moreover, they are ill-equipped to use them for strategic decision-making. Therefore, managers must carefully design and renew their BMs based on the major BM aspects emerging from their fields. We intend to offer practitioners a better understanding of a BM by focusing on the main components: sensing customer needs, creating customer value, sustaining value creation and monetizing value. Our second objective is to identify the necessary firm capabilities to design and renew a business model. Our third goal is to go beyond the myth of “successful BM stories”. Most existing studies concentrate on successful BMs, especially for multinational corporations such as Xerox, Ryanair, Nokia and Nestlé; however, we focus on small and medium-sized enterprises (SMEs) that are facing difficulties. A firm can reinvent its BM through acquisitions, but it needs to ensure a good alignment between the BM of the acquirer and the targeted company because misalignment can be fatal for the new entity. BM failures in SMEs involved in an acquisition by a multinational have been largely ignored in recent studies, which leads to our research question: RQ1. How can companies avoid the misalignment of two business models when a multinational acquires an SME? Our paper specifically targets practitioners who are either part of a multinational currently operating an SME acquisition or who are part of an SME that will be part of a larger organization in the near future. PAGE 18 JOURNAL OF BUSINESS STRATEGY VOL. 38 NO. 5 2017, pp. 18-26, © Emerald Publishing Limited, ISSN 0275-6668 DOI 10.1108/JBS-05-2016-0049 ‘‘The board of directors wished to diversify the company’s activities by expanding into the heating market to take advantage of opportunities for growth.’’ Our paper is structured as follows: first, a review of the existing theoretical, empirical and practical literature on BMs is presented. Based on those studies, a set of four constants – sensing customer needs, creating customer value, sustaining value creation and monetizing value – is then selected. Finally, those constants are studied in the specific case of the failed acquisition of an SME by a multinational, which will provide some take-away tips for managers involved in acquisition processes. Downloaded by Rennes School of Business At 04:33 01 September 2017 (PT) 2. Conceptual, empirical, practical and management-oriented literature Conceptual studies have focused on searching for a typology of constants (fitting any type of industry with any size firm); empirical works have reviewed unique cases (BMs in the context of specific firms); and practical works have endeavored to assist firms in successfully implementing their BM and measuring results. Conceptual works identify what in a firm’s structure and activities makes a successful BM (Zott and Amit, 2010; Zhang et al., 2007). More recently, Baden-Fuller and Mangematin (2013) have called for further research on constants to conceptualize BM success. Empirical studies complement the conceptual approach by exploring relevant examples. Success stories of Nespresso, Ryanair, Xerox, Nokia in the 2000s (Aspara et al., 2013; Casadesus-Masanell and Ricart, 2010; Chesbrough, 2007; Matzler et al., 2013) dominated the field as argued by McGrath (2010) or Chesbrough (2007). However, few studies have focused on the reasons for the failures (Aspara et al., 2013; Sosna et al., 2010) or the problems encountered in implementing certain business models. Practical and management-oriented works have studied how business models experiment with strategic business units or the firm as a whole (McGrath, 2010). These experiments can be disruptive during mergers and acquisitions, obliging the acquirer to reinvent or re-examine its previous model and implement new tools to monitor the changes (Burns, 2014; Chesbrough, 2007; Christensen et al., 2011). Baden-Fuller and Mangematin (2013) undertook converting academic concepts into easy-to-use, clear components linking customers, organizations and money. They identified a basic set of four constants for structuring any BM for any industry, at any time and even in a changing environment: sensing customer needs, creating customer value, sustaining value creation and monetizing the model. Table I uses these constants to synthesize conceptual, empirical and practical and management-oriented works. The four constants can be found in varying degrees in the literature, depending on the authors, and lead to our attempt to further expand the study of BM constants by considering the capabilities required (Table II). This synthesis of the literature confirms the need to convert academic research into management-oriented works turned toward business actions. Practical works are needed to complement the systematic studies of large firms’ successful BMs. Our intent is to warn managers of potential maladjustments between the BMs of an acquiring multinational and a targeted SME. Looking through the lens of the four model constants and the required capabilities, we address how to avoid misaligning two business models in the course of an acquisition. VOL. 38 NO. 5 2017 JOURNAL OF BUSINESS STRATEGY PAGE 19 Table I Four constants from conceptual, empirical and practical and management-oriented works Type of work Authors Topic Downloaded by Rennes School of Business At 04:33 01 September 2017 (PT) Conceptual works Findings Ahokangas and Myllykoski The practice of creating No consensual definition: (2014) and transforming BMs business context is key; incremental changes through learning Baden-Fuller and From a taxonomic to a Four constant components of Mangematin (2013) typological description BM; easy to use for managers Teece (2010) BM strategy and A good BM is more than “a innovation: organization good logical way to do and finance business”; no definition yet; focus on clients Zott and Amit (2010) Design elements and Integrated system of activities design theme (structure ⫹ processes) transcending an SBU’s boundaries. Novelty/ lock-in/complementarities/ efficiency Aspara et al. (2013) Transformation of BM Nokia case: cognitive process Empirical works by selling an SBU at corporate strategy level. BM of SBU motivate strategic choices and influence evolutions; focus on SBU capabilities Bozeman et al. (2007) Key ingredients in the Nanotech cases: old habits emergence of based on old frameworks (BM) technologies are unable to foster innovative BM or new vision/mission Chesbrough (2007) BM beat idea or Xerox, IBM cases: BM technology framework types, depending on adaptability to partners Christensen et al. (2011) Reasons for acquiring a Radical change in BM through company; causes of acquisition (which generates failures new processes and new resources); disruptive BM for growth Collan and Kinnunen Considering the options Kone case: options to consider (2009) available after an after an acquisition (synergize/ acquisition split in different SBUs/sell parts) Sosna et al. (2010) Learning from trial and NaturHouse case: constant error in BM innovation adaptation and learning, process and structure evolution, role of the top management; focus on customers Bruni-Bossio and Sheehan Communication on BM Strategic tool to communicate Practical and at top level managerial-oriented (2013) Burns (2014) Measure flexibility of Top-down tools (formal BCG or works new business McKinsey) are less efficient than proposed matrix (prospective-oriented) McGrath (2010) Conventional When uncertainty is high, the approaches (structure/ best solution is experimentation capability) not through a trial-and-error actionable process Johnson et al. (2008) Effective BM Four components: customers components value proposition, profit formula, key resources and key processes; “learn & adjust” requirement PAGE 20 JOURNAL OF BUSINESS STRATEGY VOL. 38 NO. 5 2017 Sensing Creating Sustaining customer customer value Monetizing needs value creation value x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x x Table II BM constants and required capabilities BM constant Definition Capabilities required Selected authors Sensing customer needs Identifying customer groups and targets for the firm; this marketing activity should be reactive and/or proactive Learning processes Experimentation Communication Creating customer value Offer a product/service matching the customers’ needs in the form of a specific and personalized solution (e.g. consulting) or a one-size-fits-all product/service (e.g. mass production) Capturing a long-lasting “customer engagement” (client shows interest because of the added value of the product/service; this lasting interest is the result of the whole chain value performed and continuously improved by the firm) Designing suitable pricing, offering complementary products, accounting and financing, enabling the firm to drive revenue from the product/service sold Communication intra- and extra-firm Challenge old habits Bozeman et al. (2007), Bruni-Bossio and Sheehan (2013), Chesbrough (2007), Johnson et al. (2008), Sosna et al. (2010), Teece (2010) Bozeman et al. (2007), Bruni-Bossio and Sheehan (2013), Chesbrough (2007), McGrath (2010), Sosna et al. (2010) Ahokangas and Myllykoski (2014), Aspara et al. (2013), Burns (2014), Collan and Kinnunen (2009), Johnson et al. (2008) Downloaded by Rennes School of Business At 04:33 01 September 2017 (PT) Sustaining value creation Monetizing value Focus on capabilities New forecasting tools Constellation of partners Structured and reliable processes Aspara et al. (2013), Sosna et al. (2010) 3. Learning from the failure of an acquisition A company we called Ventilair (VA), was founded in 1930 and produces and distributes building ventilation products. VA employs about 1,500 people in 10 countries and generates €220m in income. A second company, established in 2006, that we call Domestic Heating (DH) (also to respect confidentiality) manufactures and sells heat pumps. DH employs 70 people and generates €20m in income. In 2008, the ventilation market was slowing down (a consequence of the sub-prime crisis), and the heat pump market was growing fast (⫹30 per cent a year, boosted by various political incentives). In our study of this acquisition, we take a closer look at the companies and their respective BMs. 3.1 Ventilair VA is a family-owned company that produces and distributes a range of about 14,000 ventilation-related products (ventilation, sheet metal industry). The company mainly relies on the French domestic market and wants to widen its market coverage through acquisitions. VA has an efficient value chain (supply and procurement) of about 20 local agencies, a dedicated sales force (200 people), a strong commitment to professional clients who are important stakeholders in the building industry, a high-efficiency sales force that uses a push-sales strategy and a very strong brand name. The firm suffers from low differentiation and can be seen as “stuck in the middle” and faced with a strategic dilemma between the pursuit of cost leadership and differentiation. In 2009, VA operated four SBUs. The board of directors wished to diversify the company’s activities by expanding into the heating market to take advantage of opportunities for growth. 3.2 Domestic heating DH is a fast-growing small company that manufactures heat pumps and controls 4 per cent of the French market for individual heat pumps, with its four ranges of products and approximately 50 reference products. DH has implemented a differentiation strategy based on a strong innovation capability. It charges premium prices for high-end products. It has VOL. 38 NO. 5 2017 JOURNAL OF BUSINESS STRATEGY PAGE 21 strong customer recognition, high-quality products, a sales force with good technical know-how and a strong organizational structure (after sales, technical department and R&D). However, DH has experienced difficulties sustaining its competitive advantage and increasing its market share. In 2009, the CEO looked to acquire a mature company with well-established distribution channels that would complement its BM. During the same period, faced with organizational difficulties, DH implemented a structural reorganization and created four departments: procurement and manufacturing, design and R&D, sales and after sales. Downloaded by Rennes School of Business At 04:33 01 September 2017 (PT) 3.3 The acquisition VA’s founder originally envisioned providing quality air conditioning. The company offered filtering, controlling and ventilating solutions, but its portfolio lacked cooling and heating technology. This shortcoming had a negative impact on VA’s position in the ventilation market. VA considered acquiring DH for its know-how and capabilities related to the heat pump market. DH perceived the acquisition positively because VA would provide it with more financial stability and would give it access to its distribution network. The process of acquisition was carried out in three stages: in 2008, VA started selling DH products through its distribution channel; in 2009, it acquired 51 per cent of DH equities; and in 2010, it launched a takeover for 100 per cent of DH’s shares and integrated DH as a new heating division SBU. This resulted in a sharp decline between 2012 and 2014 in the turnover generated by the SBU (–70.7 per cent in total), which was greater than the decline in the heat pump market (–2.5 per cent) over the same period. This decline was due not only to external factors but to internal difficulties. The misalignment of both companies’ BMs was cited to explain this failure in light of the four BM constants. 3.4 BM constants and required capabilities before and after the acquisition We studied VA and DH before and after the acquisition (Figure 1). We note that good and bad performances were equally distributed between the two firms before the acquisition. Prior to the acquisition, there was a potential for balancing bad and good performance between VA and DH; following the acquisition, we observed that the acquirer was driving performance. In most instances, the acquisition did not improve VA’s performance (e.g. sensing customer needs). In the worst cases, the acquisition negatively Figure 1 Evaluation of BM constants PAGE 22 JOURNAL OF BUSINESS STRATEGY VOL. 38 NO. 5 2017 affected VA’s performance (e.g. intra- and extra-firm communication, focus on capabilities). Thus, we argue the acquisition results did not match the initial expectations, and this leads to our simple proposed recommendations related to BM constants during an acquisition. 4. Recommendations related to BM constants during an acquisition Downloaded by Rennes School of Business At 04:33 01 September 2017 (PT) 4.1 Recommendations related to customer analysis The sales and marketing staff of the two firms had difficulties understanding each other. The VA team had business-to-consumer experience, while the DH team had business-to-business experience. The Heating Division strategic business unit was unable to distinguish distinct types of clients and managed them separately. Consequently, the sales force was confused and the message to customers was unclear. Moreover, frequent changes in VA’s organizational structure (new task distribution between departments) and frequent employee turnover negatively affected customer relationships. To remedy this situation, the manager in charge of corporate marketing decided to apply VA’s former business principles and return to “business as before”. However, as a result of overlooking the other entity’s clients, the company lost consumer clients. Recommendation 1. To ensure accurate customer needs analysis during an acquisition process, the top managers should involve both firms’ managers. The managers of the acquiring firm should present a framework for corporate strategy implementation while listening to the acquired firm’s managers share their specific knowledge. 4.2 Recommendations related to value creation Value creation is closely related to one’s understanding of a client’s specificity and the competitive capabilities of the firm. Communication between the sales and marketing staffs of the two entities did not function properly. As a result, the value creation of the strategic business unit was produced, for the most part, by VA, which only had a partial understanding of the new targets (composed of clients from both VA and DH) and of the technology provided by DH. Instead of joining forces, the R&D, marketing and after-sales departments of VA and DH remained separate entities. There were no interactions between the members of the two firms, and this situation led to increasing difficulties in addressing customers. Recommendation 2. Give responsibilities to teams comprised of employees from both entities, so they can benefit from complementary knowledge bases. 4.3 Recommendations related to sustaining value Taken separately, the two value chains had many strengths: namely, supply chain and prescription sales forces for VA and relations with partners, including suppliers and clients, or DH. Nevertheless, the acquisition did not have the expected results because the partners were not able to combine the strengths of both entities and create synergies. Indeed, the process of sensing value is dependent upon the competencies of some key employees in the value chain, and it is their interaction that enables the firm to create value for customers. The absence of common challenges for the comparable ‘‘Value creation is closely related to one’s understanding of a client’s specificity and the competitive capabilities of the firm.’’ VOL. 38 NO. 5 2017 JOURNAL OF BUSINESS STRATEGY PAGE 23 ‘‘That most available examples concern large public multinational companies, but those cases are not representative of the reality.’’ managers of VA and DH resulted in their not focusing on the capabilities of each firm. Uncooperative work relations contributed to the poor financial results. This, in turn, demotivated the workforces, who then disengaged from the process of collaboration, leading to a vicious cycle of non-collaborative behavior that affected the whole value chain. Downloaded by Rennes School of Business At 04:33 01 September 2017 (PT) Recommendation 3. To successfully capture value during an acquisition process, top managers should understand the specificities of the value chain of each entity and promote staff commitment by promoting “best practice” in each entity, which will then ensure the transfer of their capabilities to the whole staff, with no exception. 4.4 Recommendations related to the monetization of value The monetization of value is related to the “how” (i.e. how does the entity derive money from the product or service sold, the purchasing of which satisfies clients’ needs). In our case, the “monetizing activities” of VA and DH balance each other: DH’s slow performance is compensated for by VA’s well-established activities. Indeed, VA has a well-developed supply chain and well-defined industrial processes, good management control with good performance indicators and a good enterprise resource planning system, which enables the firm to ensure that each stage of the value chain is effective and efficient. Thus, VA, supplied by the heating division, is able to sell products identified as highly profitable and is also in a position to determine the specific stages in DH’s manufacturing process that require improvement. However, VA’s sales force failed to successfully integrate DH’s products, and they did not sell. In the case of this acquisition, the synergy expected from the merger in the supply chain by using a common data storage and creating a wider range of products was limited to an improvement in DH’s manufacturing process. Recommendation 4. To ensure successful monetization of value during an acquisition process, top managers should include any new range of products in their data storage and in their distribution network, as well. 5. Conclusion Our study complements the existing literature on BMs and focuses on the failures of an acquisition of an SME. Based on the existing literature, we focused on four BM constants that managers should consider. In light of a single case, we have made recommendations concerning the factors that managers should take into consideration in the process of aligning the BMs of two organizations involved in an acquisition. Our findings suggest that, during an acquisition, practitioners should develop marketing and technical communication skills across entities, nurture organizational experiments at the level of the new SBU, acknowledge the specific capabilities/specific value chains of both entities, promote employee commitment and ensure that the entire range of products is monitored with similar strategic tools. Our article provided an example of BM misalignment in an acquisition; however, because a single case is not sufficient to conclude an empirical generalization, other cases in the literature and from business are needed to build our theoretical PAGE 24 JOURNAL OF BUSINESS STRATEGY VOL. 38 NO. 5 2017 generalization. We note that, most available examples concern large public multinational companies, but those cases are not representative of the reality. Between 2000 and 2004, around 3,000 mergers and acquisitions (M&As) occurred in France, and the large majority of them were private firms within the same industry (72 per cent of M&As) where the purchaser was larger than the target (56 per cent of the cases). By studying the acquisition of one private firm by another private firm from the same industry in which the buyer is larger, our case is unique, but also representative of the French setting. Consequently, we offer a useful preliminary basis for further investigations that could envision large-scale data collection and hypotheses testing. Keywords: Business model, SME, Failure, Acquisition, Practitioners, Key factors References Ahokangas, P. and Myllykoski, J. (2014), “The practice of creating and transforming a business model”, Journal of Business Models, Vol. 2 No. 1, pp. 6-18. 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(2010), “Business model design: an activity system perspective”, Long Range Planning, Vol. 43 Nos 2/3, pp. 216-226. Further reading Reilly, M., Scott, P. and Mangematin, V. (2012), “Alignment or independence? Multinational subsidiaries and parent relations”, Journal of Business Strategy, Vol. 33 No. 2, pp. 4-11. Corresponding author Downloaded by Rennes School of Business At 04:33 01 September 2017 (PT) Laurent Scaringella can be contacted at: laurent.scaringella@esc-rennes.com For instructions on how to order reprints of this article, please visit our website: www.emeraldgrouppublishing.com/licensing/reprints.htm Or contact us for further details: permissions@emeraldinsight.com PAGE 26 JOURNAL OF BUSINESS STRATEGY VOL. 38 NO. 5 2017