The Surprisingly Successful Marriages of Multinationals and Social Brands
What happens when small iconic
brands associated with social values—think Ben & Jerry's—are acquired by
large concerns—think Unilever? Can the marriage of a virtuous mouse and a
wealthy elephant work to the benefit of both? Professors James E. Austin and
Herman B. "Dutch" Leonard discuss their recent research. Key concepts
include:
- Such mergers pose unusually difficult challenges because the merging entities are often strikingly different in philosophy and operating styles as well as in scale.
- For the small company, an acquisition by a larger firm can allow much more rapid scale-up.
- For "elephants" a carefully considered and executed acquisition provides access to new ideas and radically different business approaches.
- Large companies recognize that preserving the social icon's distinctive culture and business approach is essential to preserving its key success factors.
- These fusions provide additional evidence that social enterprise is becoming an integral and embedded part of the marketplace and enriching avenues for businesses to generate simultaneously commercial and social value.
What happens when giant
multinational corporations acquire relatively small companies that enjoy iconic
status as socially progressive brands?
According to recent research out of
Harvard Business School, such marriages can be good for business and good for
society.
With an eye to providing guidance to
managers and stimulating reflection among scholars, a new working paper by HBS
professors James E. Austin and Herman B. "Dutch" Leonard looks at how
and why such acquisitions occur and how to manage the new combinations most
effectively.
"Can the Virtuous Mouse and the
Wealthy Elephant Live Happily Ever After?" focuses on acquisitions of
three social icons: Tom's of Maine acquired by Colgate, Stonyfield Farm Yogurt
purchased by Danone, and Ben & Jerry's bought by Unilever. (Similar deals
include L'Oreal's deal for The Body Shop, Cadbury Schweppes' acquisition of
Green and Black's, and Coca Cola purchasing a significant interest in
HonestTea.)
As the authors write, "Making a
virtuous mouse and rich elephant merger work is a delicate, but potentially
high-value undertaking in terms of generating both greater economic and social
value."
Austin and Leonard agreed to join
forces in an e-mail Q&A with HBS Working Knowledge to explain more.
Sarah Jane Gilbert: Your work examines the concept of a company being either a
"mouse" or an "elephant." What are the characteristics of
the two?
James Austin and Dutch Leonard: Actually, the key descriptor is not simply a difference in
size but rather in kind. We are not referring to every small company, but only
to those that have become social icons because an integral part of their
distinctiveness and success is rooted in the social value—and values—that they
bring to the marketplace … hence our nomenclature refers to "virtuous
mice." And there are a lot of large companies attracted to these
successful social icons, but not all "wealthy elephants" are capable
of entering into a successful marriage with this special breed.
Q:
Why is acquisition such an attractive strategy for the "mice"?
A:
A carefully executed acquisition—through a well-designed agreement—can have
many advantages over other ways of going to scale.
Compared to organic, self-funded
growth, it can allow much more rapid scale-up—for example, through the ability
to reach new markets faster through the existing distribution network of the
acquirer, or through the ability to invest quickly in significantly expanded
facilities. Compared to an IPO, it allows the careful delineation of
accountability and performance. An IPO puts pressure on the social icon to
perform in standard, measured terms familiar to a stock market analyst. Through
an agreement, a social icon can define with its acquirer terms of
accountability for its performance that may be much better suited to what it is
trying to accomplish. For example, it may set performance goals for the medium
term that emphasize expanding sales, with profitability to follow with a
lag—rather than having to produce high profitability along with rapid expansion
from the start.
And, finally, a key virtue of
acquisition from the perspective of the mice is that it may, if structured
correctly, provide access to managerial systems and capabilities that are
needed for going to and operating at scale that would take the social icon
years to build.
So structured correctly, an acquisition
strategy can effectively marry the brand strength and "social
technology" know-how of the icon with the access to capital and managerial
capabilities of the acquirer. The two organizations can be quite
complementary—indeed, when these arrangements are going to work out well, they
have to be complementary—and that is why the search for a partner should be
deliberate and careful.
Q:
What is attractive about these arrangements from the perspective of the
"elephants"?
A:
Most successful large companies excel at business planning, allocation of
capital, and execution. Many are also good at product innovation in the small,
continuous improvement of their existing products, and some are good at
larger-scale innovation like developing quite new products. But few are good at
exploring significantly new ideas and radically different business approaches.
Empirically, it is hard for these more novel ideas to compete inside large
businesses in business planning and investment allocation processes against
better defined, more traditional innovations.
So, while it is not impossible, it
is less likely that large and successful companies will be the setting for the
development of the kinds of novel combinations of business and social ideas
that constitute the special social technology that our small firms are
inventing. This implies that, if large companies want to get the benefits of
these new products and the potential growth of these markets, acquisition may
be the most effective route and, indeed, it may be the only effective route.
Q:
How can elephants protect the mouse's social value and brand integrity?
A:
The more effective large companies have recognized that preserving the social
icon's distinctive culture and business approach is essential to preserving its
key success factors. Consequently, they retain a large degree of organizational
independence so as to prevent "contamination" of the social
technology.
This stands in contrast to the
common approach in acquisitions to integrate and rationalize the assets into
the new owner's systems, structure, and culture. Some of the specific
mechanisms used in successful mouse-elephant agreements include governance
structures and processes that give the "mice" review and even veto
power over actions by the "elephants" that might jeopardize those
elements that are deemed essential to the social values underlying the brand's
integrity.
Retaining the social entrepreneur in
the joint venture is highly desirable. It is important for the large company to
recognize that they do not fully understand or have mastery over the social
technology and therefore need to respect the social icon's distinctive
knowledge and competencies. In fact, it is most productive to view the
acquisition as an opportunity for learning this new approach and identifying
how it can enrich the rest of the company's operations.
Q:
What are some obstacles that companies considering these kinds of acquisition
strategies need to be mindful of?
A:
Avoid assuming that these acquisitions are the same as others. Failing to
understand and appreciate the social value dimension of the mice's missions or
failing to respect their distinctive operating culture can create
incompatibility and conflict that will probably cancel the courting or sour the
marriage. Don't look first for cost rationalizations, but rather concentrate on
the top line growth opportunities. The former often disrupt the very culture
that is essential to the mice's success.
Q:
So, in the end, do mice and elephants live happily ever after?
A:
The marriages we have looked at are still in their early stages, so we will
need to continue observing how they unfold. Nonetheless, the emerging evidence
suggests that both the virtuous mice and the wealthy elephants are well on their
way to attaining their respective goals.
Scaling is occurring, thereby
enabling the social entrepreneurs to achieve greater impact. Market penetration
and positive financial results are being achieved, thereby meeting the large
companies' aspirations. There have been bumps, but it does appear that the
partners are capable of learning and adjusting, and are well on their way to
capturing the potential synergies.
From a broader perspective, these
fusions provide additional evidence that social enterprise is becoming an
integral and embedded part of the marketplace and enriching the avenues for
businesses to generate simultaneously commercial and social value.
Q:
Do you think these kinds of deals will become more frequent?
A:
Definitely. For one thing, the number of social entrepreneurs developing new
for-profit organizations with a social component is growing and is likely to
continue to grow. Once their concept is worked out and proven, these
organizations will naturally want to seek scale, both to capture the potential
economic gains but also to maximize their social value. Their owners and
initial investors will, just as naturally, want to find some appropriate exit
point (or, at least, liquidity event). And, for a variety of reasons, being
acquired (through a well-designed acquisition agreement!) may be the preferred
form of both scale and exit or liquidity.
Large companies will continue to
seek out ways to enter into the emerging market segments that place a premium
on the social dimensions that accompany the inherent attractiveness of the
innovative products. The social entrepreneurs have mobilized a social
technology that is very difficult for the big companies to replicate, so
acquisition is an efficient route into these new segments and business approaches.
by Sarah Jane Gilbert, a Web product manager at Harvard Business School.
http://hbswk.hbs.edu/item/6082.html
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