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COPYRIGHT 2005 Sloan Management Review
When you ask corporate executives why they are making a particular acquisition, they usually offer a strategic explanation, such as "The geographic spread lines up perfectly with where we are," or "Their product portfolio has remarkable synergy with ours." If you ask them two years later how the company has benefited from the acquisition, the answer is often dramatically different. They tend to focus at that point on the "softer" factors with comments such as "They made us rethink our decision-making processes," or "They introduced us to a new approach to product development," or simply "They shook up our culture." Usually, these softer considerations had nothing to do with the original impetus for the acquisition, yet they often turned out to be critical to the direction of their companies.
Indeed, revitalization is an important outcome of acquisition and should be a strong consideration when making the decision to acquire. In my research, I analyzed the acquisitions and subsequent performances of a number of large, successful companies, several of which, at some point in their histories, had become rigid and inert in their thinking--a well-known phenomenon that has been labeled the success trap. (1) (See "About the Research," p. 46.) The analysis showed that the acquisitions helped the companies restore a sense of vitality to their businesses and unleashed a subsequent surge in performance. Indeed, the acquired companies often stimulated the acquiring companies to develop new perspectives and different ways of doing things at times when they were most needed. Acquisitions kept their organizations fresh and vital. Even if the companies did not pursue acquisitions for this reason, the process of buying businesses and deciding how to integrate them into their corporate structures enabled acquirers to renew themselves before their products and operating methods became outdated.
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Consider the case of Pfizer, the pharmaceutical giant that acquired Warner-Lambert, a conglomerate that included the pharmaceutical division Parke-Davis, in June 2000. Management's rationale for this acquisition was fairly straightforward--it wanted to gain full control over the anticholesterol drug Lipitor, which it had been jointly copromoting with Parke-Davis. After the acquisition, Pfizer intended to sell off Warner-Lambert's other divisions while integrating Parke-Davis into its corporate structure. In the midst of this process, however, Pfizer saw that many of Parke-Davis' functions were organized differently from its own. In response, Pfizer decided not to impose its way of doing things on the newly acquired business but rather to allow managers to develop new processes. This created some integration challenges. There were many reports of culture clashes, power struggles and people trying to maintain the status quo. But gradually, new organizational practices began to emerge. For example, Pfizer developed new approaches to human resources ("Our people-management processes are better now; we learned the softer things like talent management"); to resource management ("Before, we were so used to having so much money that we didn't think about efficient use of resources"); and to decision making ("There is now a more open culture, a faster decision-making process"). (2) The infusion of new practices from Parke-Davis led to a revitalization of several areas that were at risk of becoming rigid. As a result, Pfizer became a looser and more nimble organization.
Similar changes have occurred in other organizations, changes that later on appeared vital to the companies' survival. Although it is well known that successful companies often encounter success traps, we know much less about the steps they take to get out of them or, more importantly, how to avoid falling into such traps in the first place. My research and analysis indicates that acquisitions can play a significant role. (See "About the Research.") Smaller acquisitions on a regular basis (say, every year or two) can help managers revitalize their organizations continuously, before rigidity and complacency set in. Acquisitions can trigger a process that I refer to as hybrid vigor, (3) a term borrowed from genetics that introduces variety to organizations and introduces managers to new things they may not even realize they need. Once managers are aware of this effect, some elect to undertake acquisitions specifically for this reason.
The Value of Cross-Fertilization
Companies make acquisitions for a variety of reasons: to get access to a new business or technology, to gain a foothold in a new geographical market or to consolidate a market. Some companies seek to learn something, such as a particular skill or capability that they identify as useful. All acquisitions, however, require that companies find ways to integrate organizations that do things differently. Pfizer, for instance, originally bought...
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