Thursday, February 23, 2006

Crying Colleagues

There were some nasty scenes at work this week as the marketing department (of which, bizarrely I’m a member) shut down.* This didn’t surprise anyone, as it’s been anticipated for months, but it’s still unpleasant to see talented hardworking people getting shown the door through no fault of their own.

As so often, I’m struck by the sheer good luck/bad luck randomness of this event, and how little it had to do with if the marketing department was any good or not.

Here’s what happened:

About two or three years ago, a huge bank decides that this Internet thing is hot, and to secure their future they need a piece of the action.

The bank employs a consultancy company, who produce a list of small/medium sized companies that seem good prospects.

The bank buys the companies, including three successful and profitable ones that all compete against each other. I currently work for one of these three companies.

The bank let things run for a year, then merges the three companies into one, with a single product range. As I type, this process is ongoing, and three marketing departments have just been merged into one – hence the redundancies this week…

Let’s step back a bit, and do a simple cost/benefit analysis of what this acquisition and merger has done.

On the plus side:

The huge bank has managed to establish itself on the internet, without having to do any costly/risky R&D work of its own.

The bank’s share price rose slightly with the news of the acquisition and merger of the three companies.

The owners of the three companies made a load of money, and will now be able to retire, if they couldn’t before.

Several legal companies that specialise in corporate law drew up elaborate and largely unreadable contracts.

A consultancy firm earned a nice consultancy fee for a fairly straightforward research job.

On the minus side:

Two years ago a consumer had three choices of Internet banking product, today a consumer has two less. The two “disappeared” products were killed off not by the market, but by a bunch of technicians who were looking at the easiest common platform to produce a ‘merged’ product that would be supplied to all the previous customers.

Three accountancy, marketing, administration, development, personnel (spit!), and management teams that were once competing against each other have been merged into one.

A large number of competent hardworking people are now looking for work, in the same way they would be if their companies had failed because nobody bought the products. Nobody said life was fair, but at the same time, it’s worth acknowledging just how unfair to people this is.

Three dynamic, innovative, and small/medium sized companies have been replaced by a single, slightly larger, much more cautious entity, which has two fewer competitors to deal with, and a huge bank as the back seat driver.

I could go on, but basically there is a huge amount of evidence that mergers and acquisitions often reduce consumer choice, promote monopolies, reduce innovation, and in the long run destroy shareholder value.

This M & A was actually quite benign compared to one I narrowly missed a few years ago. That was a case of a successful company being bought by its larger competitor and then closed down, to eliminate competition.

Unlike many friends, I’m actually a fan of capitalism, at least as practised in a lightly regulated but law abiding form. The innovation and inventiveness you get is brilliant and inspiring. But I also believe it has huge problems, since its ideal condition, which is many companies all competing fairly in the same market, is intrinsically unstable and in practice doesn’t last more than a decade or two.

In the real world what happens is this happy state of innovative competition results in a very rapid culling of companies, (many of which are merged and acquired) to be replaced by a few companies, then over a longer period one or two monsters emerge that barely compete at all in the accepted sense. This is exactly what happened to the civilian aircraft industry over the past 50 years, and what happened to the computer software industry in my own working lifetime (yes I can remember when Microsoft just made a rather clunky operating system!).

Keeping that weird wonderful and unstable market where a customer has a wide choice of products is very difficult, and it’s obvious that too much regulation is a great way of killing it. But given the unimpressive record of M & As, I’m surprised there isn’t more scrutiny of them, and more aren’t rejected as the patently anti-competition, anti-consumer moves they are…

* The tek riting dept’s future is secure, at least for now. We’re only part of the Marketing department because nobody knows where to put tek riting departments. For instance, in my last job we were part of the training department.

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3 Comments:

Blogger David Young said...

Are you familiar with the concept of a 'product life cycle'? I can't speak for your recent experience, but most products don't need endless R+D. Innovation takes place in the early stages and eventually the product becomes a commodity.

DY

5:37 PM  
Blogger roGER said...

Oh yes, I'm very familiar with both the theory and practice of the product lifecycle.

It's true that the R&D effort required to develop something from scratch outweighs subsequent R&D, unless the product has an exceptionally long life.

However in software at least, it's very rare to have no R&D going on since there is enormous pressure to develop new features, and also the necessity of keeping up with new hardware/server/networking technology.

Then of course a prudent company will always seek to develop new products, since relying on a single product, or just a few products is a big risk.

I'm not entirely sure what your point is, David - care to elaborate a bit?

8:17 PM  
Blogger David Young said...

In reference to:

"Keeping that weird wonderful and unstable market where a customer has a wide choice of products is very difficult..."

What I'm getting at is that you can't artificially maintain variety. There can often come a point where the product gets as good as it's going to get and becomes a commodity. Thereafter firms have to compete more on price - and that requires reducing overheads.

You make it sound like that's a bad thing for the economy in general. But it isn't in the long term. If the same work can be done by ten people that was previously done by twenty, then it means that there are ten people who can do something else and thus increase the amount of economic activity. In the short term of course, it involves considerable dislocation. But that's capitalism - high reward, high risk (compared to planned economies).

What of course is undesirable for the public good is oligopoly or worse, duopoly. That's why there is a competition commission (ex-MMC).

David

10:44 AM  

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