Growth or innovation ?

Apple Headquarter

Nearly each week, we can hear about merge or acquisitions of companies through the media. The acquisition race seems to be unavoidable if you want to develop or preserve a company or your business. Really? Everybody does not seem to agree with this fact. It is true, with Mr. Peter Mandelson, First Secretary of State in U.K., who declared in “The Guardian” that it is not a secret to say that during these last twenty years, the fusions and acquisitions did not create value on a long term basis, except for consultants”. Mr. Mandelson said these words in the context of the Cadbury takeover by Kraft.  Is it true or is it wrong?

As financial consultant, I was confronted with some business cases where the supposed financial setting-up did not produce the expected results, and finally represented a charge and not a benefit for the corporation, because the business was not running as expected or because some legal or tax rules changed. Was it predictable? Difficult to say, but a conclusion which could be done is that financial or business structure can produce positive effects, if we take all the parameters into accounts, and if these do not change afterwards.

Each business case is different. Most of companies are announcing merges or acquisitions because they found synergies between both businesses. Normally, when a company is acquiring another one, she is acquiring or consolidating business segment, new customers. We could believe that normally, one plus one makes two. There is of course some jobs cutting in order to suppress duplicate functions, but what we notice sometimes, is a lot of people laid off. In this case, it seems that the goal of such acquisition is purely for financial purposes.

Are the acquisitions an absolute necessity in order to survive in a competitive environment? This kind of operations arises always a level of risk, and the history shows sometimes these operations as unsuccessful. General motors for instance, acquired other automotive marks like Saab, Daewoo. We know what happened to this corporation. To take another example in the automotive industry, the merge between Daimler and Chrysler in 1998 was not a success and the two entities demerged in 2007. Where was the mistake? To big to fail does not seems to be a reality, but maybe to big to be managed with short term view is a good answer.

Is the size of a company an asset to stay alive? Is the size the only criteria to maintain or increase the revenues? Let’s talk about companies which make some acquisitions for strategic reasons, which are operating in businesses where they have not the most important market share. If we take the example of Apple Inc, this company has a much lower market share of the computer industry, compared to the other computer manufacturer running with Microsoft Windows operating systems. But why this company is still competitive and why the Apple products are still successful? A part of the answer is in the question. Apple is always focused on the product development. Apple creates hardware with original design and efficient technology. But on top of creating quality products, Apple builds a brand image. When you buy an Apple laptop, you do not buy only a computer, you buy a concept, a philosophy. In one word, Apple is innovating on an ongoing basis. Innovation means that you have a long term vision and that you need to have ideas or project in advance. The innovation is probably the best guarantee you have to get a sustainable business. It is probably why a slogan of Apple is “Think Different”.

It should be wrong to conclude that acquisitions are useless operations, but they have to be done in a long term perspective, which is a difficult exercise in a fast changing economical environment. Let’s think that maybe quality is still better than quantity.

The usage of the information

Akio Toyoda, president of Toyota

Few weeks ago, the Japanese car manufacturer Toyota, had to organize recalls of around 1,8 million of cars in Europe and 2,3 million of cars in the United Sates for potential technical problems of accelerator, after some complaints from customers and some accidents due to defects. This matter reached considerable proportions in the United States, where Mr. Akio Toyoda, president of the company was invited by the American Congress to provide explanations to the members of the parliament. Around 2600 complains were registered to the Highway Traffic Safety Administration (NHTSA), and the weight of legal actions seems to be appreciable.

I was a bit surprised by the proportion of the reaction of the American authorities, and the place it took on the media. I remember to talk with some American colleagues, and some of then told me that often, they were buying Japanese cars, because these cars never presented any troubles or failures, obliging you to go to the garage, and making you losing time. The question is: are the other cars more trustable than Toyota’s or not? Are they not presenting any problems or defects, bringing any legal actions and claims against the manufacturer? The question is relevant, when in the beginning of March, we could read in the newspapers that General Motors was obliged to recall around 1,3 million of cars for a potential steering problem. But this information did not have the same important media coverage, and it seems that the president of GM was not obliged to appear before the congress to bring explanations. By seeing this, I was wondering if we could not see here a kind of protectionist reaction in an important automotive market crisis context?

For Toyota, this media impact has important consequences in term of reputation. It is a fact that the recalled cars presented potential problems, but was the reaction proportional to the problem? The consequences for Toyota are important in terms of marketing and reputation, and could be profitable for the other cars manufacturers. What I mean here is that the way that an event or a fact is presented in the media, will bring a different perception to the people, a different image of the reality. By talking about this example to remind us that we have to develop and keep our critical mind. It is always difficult to have a clear picture of the reality. This reality appears as objective when the image we perceive from then is fitting with our subjectivity. The channel of information are numerous, we can be informed on time, but we have to make sure that the sources of information are trustable, we have to compare each other, to analyze then in order to have a correct judgment and to have appropriate behavior and provide appropriate answers.

At the right place at the right time

The mentor and the pupil

When each of us are remembering our career, our life, when we are looking back where we are coming from and where we are today, we begin to think about the things and the circumstances which made that we had such course.

I remember watching a video of a MBA school professor, talking about chance. He was explaining that the chance is something we can work on it in order to get it. When most of people are thinking that we have chance because born under a lucky star, this professor was explaining that you can bring the chance to you by applying concrete acts.

As always, the most important thing is to define your goals, your objective, and what will you do to reach then. And even if you have no precise ideas about it, but that you are a curious mind, you will probably clarify it soon. By looking to realize an objective, you will be looking for opportunities. And some opportunities could be ..a chance to realize, to reach your goal.

But how concretely could we define these opportunities? It could be a project with characteristics which could bring you new competences, or increase your expertise. Most of us, we probably remember a position or an assignment representing a significant step in our career evolution. But we probably remember also about a colleague or a manager who was a mentor, bringing us know-how and methodology. I remember one or two managers in my life, with whom I learned a lot, who made me progressing on a fast way. Without any collaboration with such people, I would not certainly get the same course than the one I did.

We could summarize the opportunities as follow; to be at the right place at the right time with the right people. But to meet such situations depends on you. You have to take care if the work we are doing will lead us somewhere, to have a long term vision, and to stay with it. As I mentioned in a previous posting, each of your jobs should prepare the next one. An entrepreneur needs to have always a project in advance. Each opportunity could lead you to another one. But opportunities will not only come to you, you have to go to then. In this way, you will convince your future partners by showing our motivation, and you will maximize your chance to gain these opportunities and to reach your goal.

Colorier en dehors des lignes (G.Noels)

Geert Noels

 

Geert Noels is a very appreciated Belgian economist. Former chief economist of the brokerage cabinet Petercam, he launched his own company Econopolis (http://www.econopolis.be)

I found an article published in the magazine Trends-Tendances. The article talking about entrepreneurship is written in french, but very interesting : http://trends.rnews.be/fr/economie/opinion/chronique-tendances/colorier-en-dehors-des-lignes/opinie-1194686774342.htm

Please feel free to leave comments !

Financial people: added value for companies?

Finance people, cost or investment for companies ?

During my career, I often heard about this sentence: “Finance and administrative people are a cost for the company and do not really provide added value!” For me, it songs a little bit if you are saying that the dashboard of your car is useless and do not provide any added value. And what about if your car engine is loosing oil, and that you are not noticed about it ? You will not drive for a long time.

That sentence was said in the way that only sales people are making money for the company. It is obvious how much important it is to have good sales people in order to generate sales and revenues for a company. But sales are only a part of the business cycle. There are a lot of question related to that cycle and to the others: How much have we to sale and at which price, in order to generate enough margin to cover direct and indirect costs? What about the solvability of the customers? The basics of accounting are very simple: the arithmetic! When I was at school to study accounting, I remember a teacher of financial management explaining this on a very easy way: “You buy a good 1 Usd, you sell it 2 Usd, you generate 1 Usd of cash!”..and if you add the other principle saying that “The deal is closed when the check is in the bank”, then you are able to understand what is accounting.

When people are saying that finance people cost more that they provide added value, they are still seeing the accounts like beans counters. My grand father was entrepreneur, and I remember the time when he was visited on a regular basis by his accountant, who was doing accounting following the old method. No computer, only books, papers and a pencil. But this was a long time ago, and there were a lot of changes since that time ! First of all, it is not necessary to underline the development of information technologies which have a major impact on company organizations. And the major function of these systems is to transform data into information. With the development of technologies, there were transformations in the financial department activities. Today, with these tools, we are able to compile huge ranges of data and provide detailed analysis and reporting.

The other major point is the implication of finance people in the business. Figures have no senses if you ignore what is behind then. The quality of a controller, of a financial analyst is to have a clear picture of the business and the processes related to it, and to ensure that the figures he is providing make sense. The accuracy of figures is important in an aggressive competitive environment where the margins are decreasing. Recently, a media distributor of the Brussels region, with important market shares, felt in bankruptcy, victim of the cd’s market fall, but also of a lack of financial management. When the margins are comfortable, management mistakes have sometimes not big consequences, but when the margins are thin, then it is the beginning ..of the end!

To say that finance people represents more costs than added value is not correct, but it depends the role you are giving to then in the organization. Finance people, as the members of other departments, are partners of the company. They are playing also a key role in the company management. It is true, when you see the frequency the quoted companies have to publicize figures. Finance people have to be aware about the goals and targets, the defined strategies and business plans, in order to provide the appropriate advices and services, and to measure the financial impact of each alternative, to translate each alternative in figures. Let us underline the fact that finance people are not only here to provide statements and figures of the past, but they are here also to ensure the daily business, and to plan the future with the other departments of the company, they are internal services providers.

Do not forget that the success of a company is a common success and not a personal success, there is no personal success without common success.