Resizing The Organization 19 doc

Changes such as M&As (and restructurings, downsizings, and strategic alliances) are often responses to outside pressures to increase the size or the short-term profitability of a company quickly. Acquiring company executives see M&As as a quick way to increase the size of their empires, please the stock market, and improve their standing with their boards of directors. Acquired company executives see M&As as a way to generate the resources they need quickly to expand or provide protection from a hostile takeover. Managers on both sides see an M&A as a route to expressing their personal ambitions and press executives to make an acquisition (Bastien, Hostager, & Miles, 1996; Haspeslagh & Jemison, 1991). Finally, outside advisers (financiers, accountants, attorneys, and so forth) also press for acquisitions to take place since these parties profit from their advice being taken (Mirvis & Marks, 1992). Of course, growth is not the reason for downsizing or restructuring. Rather, the goal typically is to maintain revenue size while dramatically cutting costs. Executives see the downsizing as a way to please shareholders (Cascio, 1998; Cascio et al., 1997). Retained managers see the change as a way to eliminate their personal rivals while they show how lean and mean they can manage. Accountants are able to generate many billable hours advising executives on where to make cuts (Downs, 1996). There are four common problems with this decision-making process. First, the process generally happens so quickly that the managerial implications of the proposed changes are rarely thought through (Mirvis & Marks, 1992; Zuboff, 1989). The process of actually making organizational changes is much more complex and difficult than the process of deciding on what changes to make. In fact, many times the decisions may not even be imple- mentable ( Jemison, 1986; Jemison & Sitkin, 1986). Second, there usually are interpersonal conflicts left hidden in order to get the basic decision made. For instance, Zuboff (1989) noted in cases of automation that midlevel managers and executives have fundamentally different reasons for automating and fundamentally different expectations of the outcome. In M&As, the acquirer and acquiree often have fundamentally different reasons for entering into the deal and have fundamentally different expectations of how it will be implemented: acquiring executives believe that since they bought the other, they should manage it, while RESIZING AND THE MARKETPLACE 161 TEAMFLY Team-Fly ® 162 RESIZING THE ORGANIZATION the acquired company managers believe that since they know how to run their business, they ought to be given the resources to run it. If these conflicts are addressed early, the deal will appear less attractive. Consequently, the bargaining parties keep the conflict hidden. Third, customers are not considered in the process. Certainly, the abstraction of market share is, but pre-resizing customers are not; only the idealized benefits to the changing company are. The analysis process reduces customers to market quantities such as market share and revenues. Moreover, the resizing decision is based on the assumption that the changes will not negatively affect customers’ continued patronage. In fact, Bastien (1994) found that at least 10 percent of an acquired company’s customers will look for new vendors simply as a result of the acquisition announcement, and subsequent changes are likely to affect customers ad- versely. Researchers of the downsizing process noted similar customer dynamics (Cascio, 1993; Leana & Feldman, 1992; Marks, 1994; Noer, 1993). Fourth, executive hubris (“overbearing pride or presumption, arrogance”; American Heritage Dictionary, 1994) also is a driving force behind a resizing effort (Roll, 1986). Mirvis and Marks (1992) observed that the pressures in the resizing decision process lead executives to think of themselves as infallible. Outside advisers and their subordinates use flattery to convince them of the wis- dom of their strategic change decisions. As one investment banker put it, “It’s my job to convince my clients that it’s their destiny to own and control other companies.” As a result, executives often are so unprepared for implementation problems that they not only misinterpret information contrary to their expectations and have no contingency plans, but sometimes they simply refuse to believe that there are problems even when company data clearly suggest that there are. These factors may lead to unrealistically high expectations for the outcomes of a resizing initiative. In the case of M&As, these expectations may lead acquiring companies to justify paying pre- mium prices for firms (Bastien et al., 1996). In the case of strategic alliances, they may lead to the expectation of unrealistically quick return on investment and justify taking resources from a core business to devote to the alliance. In the case of automating, they may lead to unreasonable expectations of immediately lowered cost and error rates. And in the case of downsizing, they may lead to expectations of unrealistically high-cost reductions (Byrne, 1999; Cas- cio, 1998; Cascio et al., 1997; De Meuse et al., 1994). The resizing decision process occupies a great deal of managerial attention and makes it difficult for executives to pay attention to the daily conduct of business. Executives become increasingly isolated from their organizations (Cameron et al., 1987). When it is time for implementation, new decision-making demands exacer- bate the problem, and executives remain isolated during the implementation phase (Bastien, 1987, 1989; Jemison, 1986; Jemison & Sitkin, 1986; Haspeslagh & Jemison, 1991). Midlevel managers also tend to isolate themselves from each other and cease commu- nicating horizontally or vertically during the implementation phase (Cameron et al., 1987). Since they see the organizational change as either a threat or a means of realizing their personal ambitions, they are reluctant to let executives know of operational problems that are surfacing in implementation (Mirvis & Marks, 1986, 1992). Managerial isolation creates a form of information constipation in a merging, downsizing, or restructuring organization (Bastien et al., 1996; Cameron et al., 1987), which in turn generates two important elements of the resizing syndrome: rumors become the basis of action in the absence of hard, official information, and a fight-or-flight response emerges to the change among staff of the changing organizations. Rumors proliferate as employees attempt to define their new situation without adequate information and sup- port from their isolated managers. Employees use horizontal chan- nels of information to make sense of the situation and speculate about the managerial motives behind the M&A. Consistent with Shibutani’s seminal study of rumors (1966), these rumors frequently are worst-case scenarios that include visions of an impending disaster and negative attributions of the motives behind the resizing effort (Marks & Mirvis, 1985; Mirvis & Marks, 1986; Bastien, 1987). Employees may find it demoralizing to have to rely on rumor mills for information (Shibutani, 1966). Rumor mills also may exact a toll on productivity: Bastien et al. (1995) found that employees facing the uncertainty of major organizational change RESIZING AND THE MARKETPLACE 163 164 RESIZING THE ORGANIZATION spent up to 20 percent of their time seeking and discussing unsanc- tioned information. Negative, pervasive rumor mills contribute to a flight-or-fight mentality among employees and managers. Two common indexes of flight are post-M&A increases in job search activity and turnover (Bastien, 1987, 1989, 1994; Marks & Mirvis, 1985; Mirvis & Marks, 1986, 1992). As job searches yield successful results for a few, others follow, creating added task demands for employees who remain behind. Critical organizational functions may seriously suffer since organizations often do not have redundant talent, and the best talent often is the first to leave. For example, Bastien et al. (1995) noted a case in which the person who designed the firm’s com- puter network left early in the implementation process, and none of the remaining employees were capable enough to adapt the sys- tem to the organization’s new needs. While the flight response is in full swing, managers and employees fight the M&A by mobilizing resistance to the changes that the merger is rumored to bring and by mobilizing political oppo- sition to the decision makers themselves. This fight side of the re- action usually takes the form of culture clash and culture conflict (Bastien, 1992; Marks & Mirvis, 1985; Mirvis & Marks, 1986). Some- times employees and managers mobilize attempting to dominate the postchange scene, in the hopes that their values and practices will dominate (Cameron et al., 1987). Sometimes the same employees and managers are no longer certain of work standards or the future of the organization, so they cease to be aggressive and proactive in their execution and pursuit of regular daily business. Both the substantive requirements of organizational change and the flight-or-fight response of personnel create a substantially increased workload and burnout for remaining employees and managers, exacerbating the problems with managerial isolation (Brockner, 1988). In this context, daily production suffers. Pro- duction declines, errors increase, and delivery schedules suffer (Bastien, 1989; Bastien et al., 1995; Cameron et al., 1991; Mirvis & Marks, 1986). Remaining employees become increasingly uncertain and demoralized, and they may take their negative affect out on customers (Burke & Nelson, 1998; Cameron et al., 1987; O’Neill & Lenn, 1995). As a result of implementation process problems, the ability to perform and deliver to customers declines. Customer dissatisfaction mounts, leading some to switch to other vendors. Customer losses contribute to higher levels of employee uncertainty and an escalating bailout of personnel. Customer losses also encourage isolated managers to mandate cost-cutting measures that further amplify the dysfunctional change syndrome (Bastien, 1994). Re- member that the resizing decision was predicated on the assumption of stable or increasing revenues. This alienation of customers is a critically important aspect of the change syndrome. Customers are the source of revenues and the object of all competitive action regardless of context. Bastien (1994) observed that when an organization goes through the dis- ruption of resizing change, not only are customers alienated but competitive rivals also can get into the act. He observed that when competitive rivals become aware of uncertain and dissatisfied customers, they might decide to capitalize on this dissatisfaction and uncertainty by trying to attract the resizing company’s customers. Furthermore, he noted that these same rivals might become aware of dissatisfied employees and try to recruit them away from the resizing company. This is especially important since customers in many instances take their patronage to whatever company where a particular sales or contact person works, thereby further increasing the loss of customers and their revenues. A vicious cycle is called a positive feedback loop in scientific parlance (Maruyama, 1963; Masuch, 1985; Weick, 1979). Bastien (1994) observed a positive feedback loop operating in M&As between organizational change and customer loss—the more change, the more loss, and the more loss, the more change—and a positive feedback loop operating between a rivals’ marketing efforts and customer loss in the M&A: the more a rival tries to get customers away from the merging company, the greater the customer loss is for the merging company, and the more the customer loss, the greater is the marketing effort. Bastien noted that these two loops are connected through the customer, leading to the model shown in Figure 8.1. On the basis of these findings, we make the following predictions: RESIZING AND THE MARKETPLACE 165 166 RESIZING THE ORGANIZATION PROPOSITION 1: Competitors with the explicit purpose of taking customers and revenue from the resizing company will be more successful than competitors that are not intentionally pursuing these customers and revenues. P ROPOSITION 2: Successful efforts by a competitor at attracting customers and revenue from the resizing company will lead to further efforts by the competitor. An important aspect of vicious cycles is that once they start, they are self-reinforcing and very difficult to stop (Maruyama, 1963; Masuch, 1985; Weick, 1979). In fact, they tend to accelerate over time. Consequently, in the cases of downsizing, M&As, and other reorganizations, executives become isolated after the change decision is made. This leads to poor daily management, which leads to uncertain and unhappy employees, which leads to customer dissatisfaction and revenue loss, which leads to isolated executives’ making more change decisions to adjust to lower-than-expected revenues (Bastien et al., 1996; Cameron et al., 1987; Grubb & Lamb, 2000). Of course, this starts the loop again. Bastien et al. (1996) observed that customers of a resizing company would change vendors in three identifiable waves. In the first Figure 8.1. Vicious Cycle of Customer Loss During Times of Organizational Change. Change in the merging, downsizing, or reorganizing organization Sales and revenues –+ –+ Customer attracting behavior by a competitive rival wave, news of the resizing triggers high levels of uncertainty among employees (Cameron et al., 1987; Marks & Mirvis, 1992). The news may come in the form of a formal announcement or rumors (Bastien, 1989). This uncertainty leads to an increase in turnover as some managers and employees leave to find a more stable organization (Buono & Bowditch, 1989; Marks & Mirvis, 1985, 1998). Productivity drops as the remaining managers and employees try to understand their new situation and keep up with increased workloads (Marks, 1994). News of the resizing generates customer uncertainty about the changing company’s performance, quality, service, and prices (Bastien, 1994; Cameron et al., 1987). Loss of revenues result as customers reduce their uncertainty by switching to vendors that are not resizing. Bastien (1994) found that vendor switching is more likely if a customer had a prior negative experience with an- other resizing company. Customers may even change from a resizing vendor simply because they do not approve of the resizing effort. Bastien also reported an instance when a customer’s pur- chasing policies allowed it to do business with the smaller pre-M&A companies but prevented it from doing business with the larger post-M&A entity. Moreover, he noted that features of the post-M&A organization may discourage some pre-M&A customers from con- tinuing their patronage. In one case, the merger of a barbershop and beauty parlor alienated some of the existing clientele, who would not tolerate the coed nature of the new business. The ini- tial loss of customer revenue from a resizing may be as high as 10 percent (Bastien, 1994; Hughlett, 1997; Waters, 1997). Based on these findings, we predict that: P ROPOSITION 3: Successful efforts by a competitor at attracting customers and revenue from the resizing company will be tied to the announcement of the resizing change. The second wave of customer loss emerges when the details of the resizing implementation plan become public. For instance, if resizing involves changing product lines, delivery schedules, pay- ment routines, service schedules, contact personnel, or almost any other change affecting customers, these changes will remove the incentive for patronage of some customers who might not respond RESIZING AND THE MARKETPLACE 167 168 RESIZING THE ORGANIZATION to the first-wave announcements; the changes, though, may be nec- essary for the resizing company to achieve its goals. In other words, the very changes on which the resizing effort is predicated may alienate some customers. Importantly, this wave of customer loss, like the first wave, may not be anticipated by the resizing company decision makers (Bastien et al., 1996). The third wave of customer loss occurs during the resizing implementation process. As managers and employees attempt to change, errors occur and inefficiencies emerge. The resizing syndrome comes into play in this wave more than in the first two waves, and customer dissatisfaction can become greater. As managers become overloaded and fail to recognize the problems with employees, these employees start to take out their frustration on customers as they increase their job searches. When flawed prod- ucts and services are delivered, customers may increase their efforts at finding other vendors. Competitive rivals may recognize the opportunities and increase their marketing and employee re- cruitment efforts. The losses of customers and revenues in this wave are more a function of problems in management than are the first two (Bastien et al., 1996; Grubb & Lamb, 2000). Accordingly, we predict that: P ROPOSITION 4: The degree of success by a competitor at attracting customers and revenue from the resizing company will depend on the extent to which the competitor is knowledge- able about the internal processes unfolding within the resizing company. P ROPOSITION 5: The degree of success by a competitor at attracting customers and revenue from the resizing company will depend on the extent to which the competitor is knowledge- able about the resizing company’s customers. P ROPOSITION 6: The degree of success by a competitor at attracting customers and revenue from the resizing company will depend on the extent to which the competitor is successful in recruiting employees from the resizing company. With these propositions from the literature specified, we will outline a study of customers and competitors in a corporate acquisition, one of the several resizing strategies under study in this book. A Case Study in Resizing In order to examine the resizing propositions, an organizational case is required with access to information regarding customer and competitor perceptions of the resizing, customer and competitor responses to the resizing, and outcomes of the responses for competitors, customers, and the merging company. The banking in- dustry is particularly well suited to these requirements, since performance (outcome) data for competitors and merging companies are publicly available. The Federal Reserve publishes comprehen- sive quarterly performance data for all banks, credit unions, and savings and loans doing business in the United States. To expedite access to information on resizing perceptions and responses by customers and competitors, a locally well-known bank merger was selected by the researchers. This case involved the acquisition of a moderate-sized, multi- branch, single-state bank by a large, multistate, regional bank head- quartered in a neighboring state. Since banks can expand in a state only through the use of a state-granted charter and since performance is published at the state charter level, data were available at the state charter (rather than at the corporate) level. Performance data on two key indicators, deposits and loan growth, were ob- tained for periods before and after the acquisition announcement: Preacquisition deposits (acquiring bank charter) $1,603,199,000 Preacquisition deposits (acquired bank charter) $864,870,000 Preacquisition deposits (combined) $2,468,069,000 Postacquisition combined deposits (combined) $2,159,038,000 Deposit growth ($309,031,000) Deposit growth percentage (12.52 percent) Overall, the merged bank lost $309,031,000 in deposits over this period, with a deposit growth rate of −12.52 percent. During this same period, a cohort of twenty-seven community banks was tracked. Community banks were identified through membership in the Independent Bank Association of America. The combined deposit growth among these community banks was $356,225,000, with an average growth rate of 13.37 percent. Loans are the second key indicator of bank performance: RESIZING AND THE MARKETPLACE 169 170 RESIZING THE ORGANIZATION Preacquisition loans (acquiring bank charter) $1,797,918,000 Preacquisition loans (acquired bank charter) $ 618,097,000 Preacquisition loans (combined) $2,416,015,000 Postacquisition combined loans (combined) $2,276,562,000 Loan growth ($139,453,000) Loan growth percentage (5.77 percent) In total, loan volume at the merged bank dropped by $139,453,000, with a loan growth rate of −5.77 percent. During the same period of time, among the twenty-seven community banks in the cohort, loan volume increased by $329,412,000, with an average loan growth rate of 18.8 percent. These data document an overall growth in deposits and loan volume among the cohort in- stitutions that exceeds the losses experienced by the merged bank. However, both deposits and loans are considerably affected by the substantial amounts displaced through these losses. A review of the performance of the twenty-seven community banks reveals that several of these banks increased both deposits and loans at rates substantially above average, several others performed above the average in one of the two indicators but near average in the other, while most performed at or below average in both indicators. Of course, this implies that some of these firms were very effective at competing with the merged bank, others were somewhat effective, while the remainder appear not to have improved their positions at all despite the huge amounts of deposits and loan demand in this market. The sample for this exploratory study was selected from the frame of twenty-seven community banks operating in the same ge- ographical areas as the branches of the acquired bank. Several credit unions and branches of other large regional banks operated in the same area, but they were excluded from the sampling frame due to the presence of confounding factors that made it difficult to attribute their performance outcomes to merger perceptions and responses. Of the twenty-seven banks in the frame, managers and executives at ten banks agreed to participate in the study. All respondents were either chief executive officers or vice presidents of marketing, and all were in a position to make strategic and competitive decisions. Of the ten participating banks, five performed at or . in the M&A: the more a rival tries to get customers away from the merging company, the greater the customer loss is for the merging company, and the more the customer loss, the greater is the. Team-Fly ® 162 RESIZING THE ORGANIZATION the acquired company managers believe that since they know how to run their business, they ought to be given the resources to run it. If these conflicts. isolate themselves from each other and cease commu- nicating horizontally or vertically during the implementation phase (Cameron et al., 198 7). Since they see the organizational change as either