When an Acquisition Becomes a Distraction

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With business finally showing signs of recovery, the amount of M&A activity is sure to pick up again as money becomes more readily accessible.  We have already begun to see the increase with large corporations including ExxonMobil's acquisition of XTO Energy, Stanley Works purchase of Black & Decker, and Google's announcement to purchase AdMob.

Small company M&A activity has also begun to increase and I expect the trend will continue as the level of confidence in the future grows.  Although true of any size company, small companies must be especially careful that an acquisition does not become such a distraction that it pulls management attention away from running the organization, as a whole.

Fighting the Distraction

Since an acquisition ties up a lot of a company's capital, there  is often a great deal of pressure to assure the newly acquired company becomes profitable as quickly as possible.  Unfortunately, it is common for a number of problems that were undiscovered during the due diligence process to surface fairly soon after the acquisition takes place.  These problems have a tendency to become a drain on management resources, and can easily pull the attention of the company's senior leaders away from running the business.

Organizations do not run themselves.  Even with the most successful organizations, bad habits can creep in that will lead to long-term problems if not dealt with quickly.  Since senior leaders in small companies tend to be much closer to the organization's activities than do those in medium and large companies, they often have more of a direct effect on the company's operation than they realize.  A long-term distraction - like an acquisition requiring a lot of attention - can fundamentally change the parent organization before the leaders realize it has happened.

What to Do

If at all possible, attempt to understand the critical issues before the acquisition takes place.  For a variety of reasons, this is not always possible, so it is important to assess the acquired company quickly to learn about the problems that can prevent or delay success.

Once the issues are understood, it is critical for the leader to assign responsibilities and clarify expectations quickly to keep from getting too wrapped up in the issues.  There needs to be frequent updates about the progress in addressing the issues so action can be taken quickly to keep the changes on track.

Dealing with an acquisition without ignoring the overall business may require temporarily assigning people and/or bringing in outside help for a short period of time to help with the transition.

There will obviously be situations where additional attention is warranted by senior leaders to put the merger back on track, but it is essential to remain sensitive to the possibility of distraction in the process.  Above all, never forget the company's fundamental purpose throughout the process and focus effort on integrating the acquisition in a way that does not compromise the mission and vision of the new, larger organization.  Doing this will greatly enhance your ability to assimilate the acquired company quickly and successfully.

The Importance of Purpose

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Of all the reasons that an organization can fall into a death spiral, the most common and destructive is losing sight of its fundamental purpose. The Cambridge Dictionary of American English defines an organization as a group whose members work together for a shared purpose in a continuing way. Following this definition, without a shared purpose, there is no organization; there is nothing more than a group of people who come to work, put in their hours, and go home.

Whenever I bring up the subject of purpose, I get comments that it is passé for a company to develop mission and vision statements. It is true that this subject was addressed many years ago by W. Edwards Deming, Peter Drucker, and others, but it is also true that many organizations have not done it well and many leaders still don’t understand why it’s important.

Every organization was created for a reason – and it most likely was not to make a profit. The founders of many companies had a passion for fulfilling a need that they felt could be served better than what was offered at the time. Back in 1927, William Boeing founded The Boeing Company to, “so develop airplane design and construction that today’s spectacular feat of bravery will become tomorrow’s accepted mode of speedy transportation – inexpensive, dependable, safe!” More recently, Google was founded to, “organize the world’s information and make it universally accessible and useful.” What would happen if these companies forgot why they exist? What chance would they have to remain successful . . . or even survive?

It’s Not About the Money

A situation that is just as destructive as having no clear purpose is to define it in terms of maximizing financial gain – e.g., profits, shareholder value, stock price, etc. Although it is important for a company to earn profits over the long run, it is not a reason for its existence. Focusing on financial success above all else results in actions and decisions that drive short-term results at the expense of long-term health. Those aspects of the company that do not directly deliver profits today become seen as non-value-added and, therefore easier to eliminate. Research, new product or service development, training, and even workers become seen as interfering with success and pressure mounts on leaders to make cut.

In an interview in Quality Progress magazine many years ago, Peter Drucker was asked what he thought about the relationship between profit and purpose. His reply was, “[the statement that] the purpose of an organization is to make a profit is not only false, but is total irrelevant.” This is because the purpose is external to the business – it is in society. It is directly related to the value the organization provides to its customers. When an organization successfully accomplishes its purpose, it makes a profit. In this way, sustainable profit becomes the indicator of how well the company meets its purpose

The economic crisis we’re in today has exacerbated this problem. Companies have gotten so focused on cutting costs that many have act as if their purpose was to cut costs. In my experience, implementing across-the-board cuts is a sure sign that a company has lost its purpose. During a recession, it is critical to get back to the basics and focus on the organization’s fundamental purpose. As a result, some areas of the organization will become more critical than others and may actually need an increase in spending while others are cut back or even eliminated.


It’s About Value – Not Products

It is critically important to define the purpose in terms of the value provided to customers instead of a specific product offering. Manufacturers of typewriters, slide-rules, and carburetors demonstrated the importance of this concept. An organization that ties its purpose to a specific product offering can run into serious trouble when technology changes and their product no longer satisfies needs as well as it once did. Think about how many typewriter, slide-rule, or carburetor manufacturers are still around today. Each of these products was replaced by something that, although more expensive to purchase, met needs much more effectively than what they replaced.

Understanding the fundamental needs of customers and how a specific product or service currently meets that need can help a company change along with technology and the tastes of consumers.

I recently spoke at a call center conference in Portugal and had the chance to listen to other presentations and talk to many of the attendees. There was real concern from those in attendance about the effect low cost call centers in Asia will have on the industry in Portugal. Labor costs are much higher in Portugal than in India, China and the Philippines, and Portuguese companies do not feel they can compete with companies in these areas. If they define their companies in terms of providing low cost call center services for their customers, they are correct – they cannot compete. If they dig deeper to understand the real value they provide, however, and define their purpose in terms of helping companies serve their customers better and more efficiently than they can themselves, they have a much better chance of competing successfully. Defining their purpose in this manner can help them focus on high quality, as well as cost effective service. It can also help encourage innovation of new technology and services that can redefine what call centers provide to customers.

Practicing What You Preach

Defining your purpose is not about creating slick or catchy mission statements. It is about clarifying why the company exists and guiding team member behaviors and actions. It is critical that leaders believe enough in the purpose to stick to it – in good times and bad – and allow team members to question decisions that appear counter to the organization’s purpose.

Technology and consumer tastes will change but, when defined clearly and correctly, a company’s purpose will never change. It is the one thing that must remain constant within an organization.

Practices Leading to a Death Spiral

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Keeping up with business news today can be depressing. Layoffs, plant closings, and job moves continue to occur and have become so commonplace that they don’t warrant much more than a mention in the news. It’s also interesting that, not too many years ago, many of the companies in trouble today seemed pretty much invincible. They were large, strong, and very profitable. So what happened?

Many of the reasons blamed for the downfall of companies are somewhat sensible: poor economic conditions, rising energy costs, natural disasters, terrorism, etc. There is no doubt that these external issues affect company performance. If these are the causes of a company’s troubles, why do competitors in the same industry serving the same customers perform much better?

It comes down to the job of managing – which is to continually build the health of an organization. Just like the human body, an organization has an immune system. As long there are no severe external stressors, an organization with a weak immune system can appear successful (just as a person with a weakened immune system can appear healthy). As soon as something external – and completely out of the control of the business – occurs, the weakened immune system becomes evident and performance drops off severely.

By the time external events occur and a company’s profits and/or market share shrink it is too late. Company decline has begun and executives do not feel they have the time to work on issues that don’t have immediate impact. The company enters crisis-mode and begins to make drastic cutbacks – including plant closings, layoffs, and severe budget cuts – in order to return the company to profitability. Although these items are often well-intentioned, these actions cause damage that often cannot be repaired and the company sinks further into the death spiral.

Companies that continually work on improving their health still have problems. In fact, they recognize that the job of improvement is never done. Toyota is a very strong company, but still runs into problems now and then that affect its performance.

Improving Organizational Health

There are six common practices in organizations that gradually break down its immune system and set it up for failure. Even if the organization appears to be successful, the existence of any of these practices is a sign that troubles are ahead. Stopping these practices begins the process of building the company’s health, thereby reducing the effect of external events on its future.

Practice 1: Losing Purpose

The first practice is forgetting the purpose of the organization and focusing on purely financial results. Companies need profits to survive, but they are not the reason for their existence. An organization is created to serve a need in society. It is vital to remember that need in order for the company to stay focused and successful. The more it strays from its fundamental purpose, the more teamwork breaks down as people define purpose within their own area of specialization (e.g., salespeople define it in terms of sales; accountants define it in terms of cost control and financial results; etc.).

Profits result from sticking to the purpose and doing it well.

Practice 2: Number-Obsession

Number-obsession occurs when managers attempt to run the organization from a spreadsheet instead of through people, processes, and purpose. It is not uncommon today for a manager or executive who spends more time with a spreadsheet than his or her team members.

Meetings that consistently start with review of numbers and financial results is a sign that number-obsession exists. Unfortunately this practice, which was initiated during the 1950s has become pervasive throughout American industry to the point that, a person who is not good with numbers little chance of rising to the executive ranks.

Practice 3: Squeezing Suppliers

Supplier squeezing refers to basing the relationship with suppliers on the basis of price and payment terms. Suppliers are a part of a company’s system and it is important to understand that, when a supplier suffers, its customers also suffer. Squeezing suppliers results in lower quality products and services, longer leadtimes, and a breakdown of trust with your suppliers.

To measure suppliers accurately, it is important to include the costs of extra inventory due to quality and delivery problems, longer processing time due to variation in incoming materials, cost of incoming inspection, rejections by the customer, and nonmeasurable costs like design support and expertise that a supplier can provide.

Practice 4: Undervaluing Employees

Balance sheet aside, companies that treat employees as an expense do not value their contributions. On the employee side, there is little pride of association with the company. Employee turnover is high, layoffs are common, and employee morale is low.

On the other hand, companies that treat employees as assets invest heavily in training and development. Employee turnover is low and morale is high. The management team is made up of people who have risen through the ranks and have a great deal of experience with the company’s products, processes, culture, and customers.

Practice 5: Dirt, Clutter and Damage

Workplaces that are dirty, unorganized, and equipment is worn and broken. Productivity and quality is usually low, while accidents rates and costs are high. Companies that do not respect their assets – do not respect their people.

There is an unfortunate preventive maintenance paradox characteristic of American companies: When business is good, there is no time for preventive maintenance – When business is bad, there is no money for preventive maintenance.

Practice 6: Operational Fragmentation

Operational fragmentation occurs when the organization is managed by breaking it down into individual departments and setting separate objectives for each component. All to common, objectives are set for individuals and departments that conflict with each other. People meet their objectives – especially when tied to compensation – which does damage to the organization as-a-whole.

Organizations need to be led as a system – not as individual components. Objectives should be organization-wide so everyone can work together for the good of the company.

More detail about the practices, including how to identify their existence and eliminate them, is available in my book, Avoiding the Corporate Death Spiral: Recognizing & Eliminating the Signs of Decline (Quality Press, 2006).