Mergers and long term industrial performance
A dynamic approach.
Martin Kunc
London Business School
Decision Science PhD Programme
mkunc.phd2000@ london.edu
Introduction
Mergers are considered an important strategic option for firms pursuing vertical
integration or diversification. Mergers create value for firms, enabling them to exploit
competitive opportunities, to reduce costs or increase revenues through economies of
scale. But the expected sustainable competitive advantage in the long term may be
offset by an industry not able to manage change. The paper address the long term
industrial consequences of mergers level using System Dynamics and strategy theories
like Resource Based View and Organizational learning process.
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Conceptual Model
Mergers as a short term strategic action
Mergers are strategic option for firms trying to achieve competitive advantage. Mergers
increase firm size achieving economies of scale and reduce the diversity and the
number of competitors thereby increasing industry concentration.
But bigger firms in a concentrated industry will have the most to lose from industry
constraints (resource and transaction dependence) so they will engage in inter-industry
merger with suppliers/buyers to reduce resource dependence.
Long term consequences
As the number of competitors decrease, the diversity in industrial strategies decreases
so all firms in the industry finish with similar strategies. Industries also learn from
operating and competitive experience. Operating experience contributes to internal
efficiency while competitive experience is built from other competitive moves and
failures. Few big firms reduce the industrial leaming process, thus reducing the
responsiveness to innovations.
High specific assets increases complexity and costs due to the need for large investment
in time and resources to reconfigure the fimms.
Final C onsiderations and Future Directions
I have just presented an outline of the industrial implications that mergers can
produce in the long term.
System Dynamics can be an important tool for Strategy since it helps to structure clear
frameworks and explicit theories including important characteristics that theories in
strategy may have to address: feedback processes and reference modes for the
behavior of the organization.
Morecroft and Sterman (1994) described the use of System Dynamics for structuring
frameworks using mapping symbols that can provide building blocks to assemble and
connect knowledge, in this case: theories and events, that can be converted into
algebra and simulation models.
After presenting the conceptual model of the theory, the next steps in the research will
be:
¢ Build a model to test the dynamic hypotheses.
¢ Gather empirical data.
¢ Confirm the dynamic hypothesis.
* Policy Analysis.
Acknowledgements
I thank John Morecroft, System Dynamic Group at LBS and London Business School
Ph.D. Programme for these challenging experience. I gratefully acknowledge the Ph.D.
Programme at London Business School and System Dynamic Group for providing
financial support for this research.
Main References
Barney, J.B. 1996. Gaining and sustaining competitive advantage. Reading, Mas:
Assion-Wisley
Cooke, T. 1986. Mergers and acquisitions. Oxford, Uk: Basil Blackwell LTd.
Finkelstein, S. 1997. Interindustry merger patterns and resource dependence: a
replication and extension of Pfeffer (1972). Strategic Management Journal 97-18, 787-
810.
Ingram, P & Baum, J.A.C. 1997. Opportunity and constraint: organizations’ learning
from operating and competitive experience of industries. Strategic Management J ournal
97-18, 75-98
Oliver, C. 1997. Sustainable competitive advantage: combining institutional and
resource-based views. Strategic Management Journal 97-18, 697-713
Teece, DJ, Pisano, G. & Shuen, A. 1997. Dynamic capabilities and strategic
management. Strategic Management Joumal 97-18, 509-533
Morecroft, J. and Sterman, J. 1994. Modelling for Learning Organizations.
Productivity Press
