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.
- 15 Dec 2008
- Research & Ideas