We have heard endlessly about the Northwest-Delta merger and the Continental-United proposed merger, from which Continental walked away. This has become more topical given Microsoft and Yahoo acquisition games. We know cost cutting, synergies, efficiencies and scale to be primary reasons for a merger. So, it would follow that when the above mentioned factors are not in play, a merger is not a good idea. But is that why Continental walked away from a merger with United?
These are the typical factors that are considered in an airlines merger.
Scale: The Continental-United Merger would have created the world’s top ten carriers, even though, these airlines are separately part of that list, which is measured in annual RPKs (revenue passenger kilometers, (in millions)
1. American (224)
2. Air France/KLM (197)
3. United (189)
4. Delta (159) *
5. Continental (127)
6. Northwest (117) *
7. British Airways (115)
8. Lufthansa (110)
9. Southwest (109)
10. Japan Airlines (96)
* Delta and Northwest have since merged creating the world's biggest airline.
Complementary Routes: Continental’s presence in Europe, Asia and the Middle East would have complemented United’s presence in Asia and Australia.
Aircraft Integration: Continental operates an all-Boeing family of 737s, 757s, 767s and 777s. United, too, flies each of these. The only additions would be United's Airbus A320 and Boeing 747 fleets.
Employee Assimilation: The employees of both airlines will have to be integrated and this has historically been painful with seniority lists and benefits having to be restructured. So, this might have been a reason for pause in the otherwise media created foregone conclusion.
But the Continental Chief Executive and President wrote to their employee was that they decided to pursue the alternative route of forging alliances instead of merging operationally with another company. From what we know, one reason to walk away from the merger was to not put Continental at risk, financially and operationally even though Kellner would have been slated to run the combined entity.
The lesson here is that sometimes, a merger does not make sense despite the industry wide call to do so. This is especially true if one of the companies is profitable and well run and the other one is not. An alliance is probably going to give Continental all that it would have gotten from a merger with United but without the integration hassle and a hefty price tag. A merger is not good if it is not good for the shareholders and it is not a good option when it is not good for the employees of either companies, sans the regular attrition such events suffer.
But alliance or not, merger or not, this hardly would have been game changing in this very mismanaged industry. As we go forward in this globalized world, travel is only going to increase both for business and leisure.
So, what can the airlines do to save themselves?
-Understand the key drivers of profitability
-Develop businesses so that key drivers remain key both in strategy and execution
-Take preemptive action to keep those drivers protected
-Understand the consumers’ unspoken requirements
-Redesign processes to maximize the value captured across the chain
Thursday, July 31, 2008
Joint Ventures
The business reasons for a joint venture include synergies without the expensive price tag of the integration aspect. There also could be the transfer of know how for a market share. But a very critical reason is to gain entry into a foreign market, where the host company might not necessarily have operations before. And, that is also the reason the cultural aspect of the equation is very important. Another reason is foreign ownership isn’t completely allowed by the government.
Wall Street Journal's announcement that Danone and Wahaha are breaking up the joint venture and going their separate ways raises an interesting set of questions.
If the joint venture was successful for 12 years, can we attribute the problems to cultural issues? Probably not. These kinds of issues typically do not take that long to surface.
Could it mean that now that Danone has made its entry into the Chinese market, it is more beneficial for Danone’s bottom line to operate as an independent brand? Will claiming brand independence result in more brand ubiquity?
If Wahaha has control of a number of factories outside the joint venture, is this part of the joint venture agreement? If yes, why the objection now? If not, why did this not come to light before?
What is the legal recourse for both the parties of this joint venture?
As the article suggests, there are questions surrounding the valuation of the venture itself. It will be interesting to see how this case unfolds. Joint ventures or alliances are sometimes the way to go when companies don’t go the way of a merger or an acquisition. As to the success of such ventures, I do not think the results will swing the pendulum enough to speak to the viability of such ventures. But, maybe it will provide us with valuable lessons going forward, especially in the case of cross border ventures, be it a JV, an acquisition or a merger.
The complete WSJ article can be read here.
Wall Street Journal's announcement that Danone and Wahaha are breaking up the joint venture and going their separate ways raises an interesting set of questions.
If the joint venture was successful for 12 years, can we attribute the problems to cultural issues? Probably not. These kinds of issues typically do not take that long to surface.
Could it mean that now that Danone has made its entry into the Chinese market, it is more beneficial for Danone’s bottom line to operate as an independent brand? Will claiming brand independence result in more brand ubiquity?
If Wahaha has control of a number of factories outside the joint venture, is this part of the joint venture agreement? If yes, why the objection now? If not, why did this not come to light before?
What is the legal recourse for both the parties of this joint venture?
As the article suggests, there are questions surrounding the valuation of the venture itself. It will be interesting to see how this case unfolds. Joint ventures or alliances are sometimes the way to go when companies don’t go the way of a merger or an acquisition. As to the success of such ventures, I do not think the results will swing the pendulum enough to speak to the viability of such ventures. But, maybe it will provide us with valuable lessons going forward, especially in the case of cross border ventures, be it a JV, an acquisition or a merger.
The complete WSJ article can be read here.
Outsourcing and Innovation
The Business Insights section of the Wall Street Journal presented an article on how Offshore Outsourcing can impact customer satisfaction. The line of reasoning was that if the labor cost arbitrage is used for increasing investments in technology or customer services, the company will see an increase in customer satisfaction. Corollary, the arbitrage savings from non-customer services functions, if invested might not show up as increases customer satisfaction.
While this is well researched and true, I propose another way to think about this.
If the cost saving received from labor arbitrage is significant enough, check and recheck that premise that the company is saving money. The desire to show savings and therefore improve the bottom line is so great, especially in today’s short-term Wall Street driven company strategies that functions might be offshored that are very critical to the business. I had read excerpts of an interview by an ING Direct executive, who seriously questioned the prevailing wisdom of outsourcing the customer service function.
A report by McKinsey identifies three main innovation challenges faced by financial institutions. These are ‘limited use of customer insights and external idea networks; lack of organizational mechanisms, such as dedicated innovation funding; and poor capabilities in specific areas critical to innovation’. When companies are so focused on their bottom line as to go around the globe in the eternal labor cost chase, what is lost is more than the short term growth potential. They lose the ability to innovate and generate sustainable growth over the long term. When that happens, growth becomes more a function of luck than strategy.
I am going to tie the findings above to my case for a well thought out outsourcing plan.
Outsourcing really serves an organization best when a function is outsourced for significant savings but when there are opportunities for the outsourcing partner to collaborate with the outsourcing organization. If we can pull innovation from various such channels, we have begun to form an innovation strategy around external idea networks.
The next step is to then to look at our complete supply chain and evaluate how might the organization collaborate more rather than have a supplier/client relationship. An honest and spirited exchange of feedback is one of the best and least inexpensive ways to elicit innovative ideas.
The savings realized from outsourcing should be spent according to organizational priorities. That said, innovation focuses on top line growth rather bottom line savings and anytime that is the focus, the organization has a chance to reinvent itself or capture a greater piece of the value chain thereby improving its’ capabilities.
The Business Insights article can be accessed here.
The McKinsey report referred to above can be accessed here.
While this is well researched and true, I propose another way to think about this.
If the cost saving received from labor arbitrage is significant enough, check and recheck that premise that the company is saving money. The desire to show savings and therefore improve the bottom line is so great, especially in today’s short-term Wall Street driven company strategies that functions might be offshored that are very critical to the business. I had read excerpts of an interview by an ING Direct executive, who seriously questioned the prevailing wisdom of outsourcing the customer service function.
A report by McKinsey identifies three main innovation challenges faced by financial institutions. These are ‘limited use of customer insights and external idea networks; lack of organizational mechanisms, such as dedicated innovation funding; and poor capabilities in specific areas critical to innovation’. When companies are so focused on their bottom line as to go around the globe in the eternal labor cost chase, what is lost is more than the short term growth potential. They lose the ability to innovate and generate sustainable growth over the long term. When that happens, growth becomes more a function of luck than strategy.
I am going to tie the findings above to my case for a well thought out outsourcing plan.
Outsourcing really serves an organization best when a function is outsourced for significant savings but when there are opportunities for the outsourcing partner to collaborate with the outsourcing organization. If we can pull innovation from various such channels, we have begun to form an innovation strategy around external idea networks.
The next step is to then to look at our complete supply chain and evaluate how might the organization collaborate more rather than have a supplier/client relationship. An honest and spirited exchange of feedback is one of the best and least inexpensive ways to elicit innovative ideas.
The savings realized from outsourcing should be spent according to organizational priorities. That said, innovation focuses on top line growth rather bottom line savings and anytime that is the focus, the organization has a chance to reinvent itself or capture a greater piece of the value chain thereby improving its’ capabilities.
The Business Insights article can be accessed here.
The McKinsey report referred to above can be accessed here.
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