No Limits
Go for growth and you may end up with falling profits. A new study from Roland Berger shows why this is so, and how the downside of upping business volumes can be avoided.
“Economies of scale” is the rallying cry of managers initiating mergers. “Diseconomies of scale” is the explanation of the analysts chronicling the mergers’ failure.
Achieve the economies, and, most importantly, avoid the diseconomies, and you are well on your way to "Overcoming the limits to growth", points out the new Roland Berger study of the same name.
The study starts by providing an answer to two interrelated and essential questions.
Why, according to recent surveys, do between 50% and 90% of all mergers fail to attain their goals?
How do so many companies manage to knock themselves off the "algorithm of growth", the cycle in which high performance and long-term development sustain each other?
Because the companies have a one-sided strategy of growth answers the study.
“Economies of scale” is the rallying cry of managers initiating mergers. “Diseconomies of scale” is the explanation of the analysts chronicling the mergers’ failure.
Achieve the economies, and, most importantly, avoid the diseconomies, and you are well on your way to "Overcoming the limits to growth", points out the new Roland Berger study of the same name.
The study starts by providing an answer to two interrelated and essential questions.
Why, according to recent surveys, do between 50% and 90% of all mergers fail to attain their goals?
How do so many companies manage to knock themselves off the "algorithm of growth", the cycle in which high performance and long-term development sustain each other?
Because the companies have a one-sided strategy of growth answers the study.
Look, what else we've got...
This strategy features a concentration on lowering the unit costs of production and provision by increasing scales and scopes of operation. There are two ways to do this, points out the study: by undertaking mergers and acquisitions or by achieving internal growth.
Both courses of action can in fact lead to gains in cost-efficiency. In fact, points out the study, these gains can be substantial, provided - and this is a big "provided" - that the accompanying strategy properly considers all of the very many variables incorporated in the chain of value creation.
As the study next reports, the problem is that increasing volumes of operation tends to cause jumps in expenditures for the initiating, launching and monitoring of the processes of manufacturing and supply.
Caused by disharmonies of corporate cultures and technologies and the ballooning of administrative complexity, these rises in "transaction costs" often eat up the improvements in cost efficiency, finds the study.
The study has, however, good news for managers. These rises are avoidable and amenable to alleviation. Do what many growth-hungry companies fail to do - institute policies based upon the deployment of tracking and motivation tools -and these rises can be precluded or palliated.
The study has other welcome tidings for managers. Technology and international ties are driving down transaction costs. Viewed on a per unit basis, the costs of communication, information processing, and supply have been cut drastically over the last few decades.
These reductions stem from the reductions in tariffs and improvements in technology. The latter, in turn, enables companies to reap full benefit from inter-corporate specialization, in which transaction components are in- or outsourced to specialists.
Both courses of action can in fact lead to gains in cost-efficiency. In fact, points out the study, these gains can be substantial, provided - and this is a big "provided" - that the accompanying strategy properly considers all of the very many variables incorporated in the chain of value creation.
As the study next reports, the problem is that increasing volumes of operation tends to cause jumps in expenditures for the initiating, launching and monitoring of the processes of manufacturing and supply.
Caused by disharmonies of corporate cultures and technologies and the ballooning of administrative complexity, these rises in "transaction costs" often eat up the improvements in cost efficiency, finds the study.
The study has, however, good news for managers. These rises are avoidable and amenable to alleviation. Do what many growth-hungry companies fail to do - institute policies based upon the deployment of tracking and motivation tools -and these rises can be precluded or palliated.
The study has other welcome tidings for managers. Technology and international ties are driving down transaction costs. Viewed on a per unit basis, the costs of communication, information processing, and supply have been cut drastically over the last few decades.
These reductions stem from the reductions in tariffs and improvements in technology. The latter, in turn, enables companies to reap full benefit from inter-corporate specialization, in which transaction components are in- or outsourced to specialists.
Click here to download Overcoming the limits to growth (PDF, 157 KB).
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