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Large Semi-Test Memory Co Acquires Rival - But Fails to Integrate
In 2010, sales of Memory chips dropped precipitously – from $2B to $600M – leading to draconian action in the semi-test equipment market. Attempting to offset a dramatic downturn in revenues, the largest overall player in Memory semi-test equipment (“Large MeM”) with a small presence in System-on-a-Chip (SoC) aggressively pursued and acquired a smaller player with a strong presence in SoC semi-test equipment (“Large SoC”).
Bottom line: the acquisition did not realize the deal thesis until well after it could or should have due to Strategic Framework integration mismanagement.
Situation: Large SoC’s CEO characterized his company’s pre-acquisition Strategy Framework outlook as follows:
VISION
“We viewed ourselves as the leaders in product development in semi-testing equipment”
PRODUCT
“Our testing equipment improved yield of sellable chips at a ROI that was compelling”
OPERATIONS
“We aligned our organization to match how customers made buying decisions in SoC”
KPIs
"R&D spend was a critical metric; it tied directly to product leadership"
Large SoC’s VISION, PRODUCTS, OPERATIONS, and KPIs were clear, well-aligned, and permeated the organization from top to bottom.
As noted, Large SoC deliberately established a global management structure because it aligned well with how customers and suppliers made buying decisions. They were deliberate in engaging customers with a ‘partnering’ style for installation, yield increase, and addressing error resolution issues – in a mood of ambition for finding and exploiting new ways to add value – all of which established enduring, trusted relationships.
Large SoCs engaging, well-aligned and integrated Strategic Framework set in motion a cultural dynamic that we call out as a Synergistic Culture State, high in resilience and adaptability, as
depicted here:
Corporate performance is ultimately a reflection of resilience and adaptability. Resilience – reflects organizational viability for selling and delivering products and services that customers continue to buy at a price that affords acceptable profits. Adaptability reflects ability for staying abreast of changes in the 'eco system’ and investing in capabilities that afford 'turning on a dime' when threats and opportunities dictate.
Resilience and adaptability evolve as a function of how people in the organization align themselves to the organization’s Strategic Framework. This alignment does not happen in a straightforward, linear way. Rather, it follows non-linear behavior that is best explained by the principles of Dynamic Network Science (DNS). According to DNS, networks whose elements cohere or go together in a special way grow the most and/or the fastest – continuously
adapting to changes in the eco-system – becoming more unified, integrated, and dominant.
Riding the wave of synergetic performance, Large SoC were ambitious to ‘push their chips into the casino table’ for even higher returns - actively pursuing a target of their own when seemingly out of nowhere, Large MeM pounced.
Post-acquisition:
Within a relatively short timeframe after acquiring Large SoC, Large MeM’s share value dropped nearly 50%. The absorption of Large SoC, which had been reliably delivering increasing returns, was now a breeding ground of rapid decay. Performance dropped to the lowest Culture State, which we call Mercenary, where self-preservation is the main focus.
Why did this happen?
According to Large SoC CEO, the Strategic Framework that emerged post-acquisition, at least in terms of how it affected employees, was dramatically different, as depicted here:
From a DNS perspective, the difference was significant enough to cause a ‘catastrophic disturbance’ - lethal enough to ‘puncture’ the resiliency of Large SoC. Worse yet, the new Strategic Framework, once established, also ‘cohered in a special way.’ Unfortunately, it cohered in a way that triggered a sudden reversal; the system generating increasing returns was now generating rapid decay.
Listen to how Large SoCs CEO enumerated the effects of the disturbance:
“There was no compelling vision or customer-oriented objectives to focus and unite the company
“The new regional management organization disrupted former effectiveness of Global management; for example, now a German subject matter expert was required to get the Asian Regional GM’s ‘ok’ before talking to a customer in his region.
“The new owner’s ‘follow orders’ decision-making style clashed with the ‘play to win’ style that enabled timely adapting to changes in the very competitive SoC eco-system
“The R&D budget, though increased, was fraught with fear of making mistakes; this made it slow, more expensive, and put product leadership at risk.
Predictably – attrition spiked, customers and suppliers became more contractual, remaining key subject matter experts fell into moods of resignation and resentment.
What can we learn from what happened?
While there are many lessons to be learned, we focus on the implications for harnessing synergy immediately following acquisition. Success in bringing two entities together quickly and
efficiently requires careful analysis of how resilience and adaptability
in the two organizations can be best preserved and combined.
Synergy associated with post acquisition should focus first and foremost on customer viability – ensuring products and services are what customers want and continue to buy at a price that affords acceptable profitability. Large MeM mistakenly prioritized their own survival. They were woefully ignorant in understanding what was driving Large SoC’s potent performance. Had they emulated rather than usurped Large SoCs Strategic Framework, they could have continued or even accelerated the increasing returns enjoyed by Large SoC.
Forcing the adoption of their own familiar regional organizational structure and home office decision making style - which worked well for Memory, torpedoed what they had just acquired.
Conclusion:
What could have and should have happened from all outward appearances worked in reverse – instead of triggering increasing returns, Large MeMs decisions triggered accelerating decay. This is characteristic of the non-linear environment that high-tech, and many other industries operate in today.
As a starting point, for any executive looking to harness a potential performance lift via acquisition, we suggest making a close inspection of your own and your target’s Strategic Framework. What kind of Culture States are at play? What strengths do each bring in terms of resilience and adaptability? Where do those strengths complement each other and where do they conflict? Do both organizations have a good grasp of your target’s customers engagement style? How does that align with your own decision-making style? Finally, grasping the fundamental concepts and principles of DNS will help guide decisions in creating and executing
an effective 100- day plan. To read more case studies, blogs and to learn more about Resilience,
Adaptability and Business Ingenuity’s Strategic Framework, visit our website.
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