's short stature tucks in 21 honorary doctoral degrees and more than a dozen awards in leadership. The Ernest L Arbuckle professor of business administration at Harvard Business School and former editor of the Harvard Business Review has been ranked among the top 10 business thinkers of the world. In India to address the IBM Forum, Kanter spoke to R Jagannathan and Prasad Sangameshwaran about how the success rate for mergers and acquisitions (M&As) can improve. Excerpts:
Diversification across businesses is coming down among conglomerates. But even in the same business, companies are adopting a more narrow focus rather than being fully integrated players that control the entire chain. Is that wise?
Yes and no. Focus has been guiding the strategic thinking of many companies. There is a lot of value in getting the right focus.
But there is seldom questioning on whether it has been overdone and whether companies are giving away their ability to create new products because they have even outsourced their R&D. So what is their value for the future?
A few of my colleagues have been doing research on the contract manufacturing giant, Flextronics. The company has been creating new vertical offerings.
As they developed a greater know-how, they started building their engineering services and are now no longer into just manufacturing. Business is a fluid thing.
Sometimes as a company becomes very good at doing something, it will discover a new application that opens a new line of business. But I think that it is the unrelated diversification with little income that will disappear, except when it is a purely financial holding that operates separately.
Despite the vast majority of M&As failing to deliver value, why are companies still fascinated with the concept?
I have several answers. One is that while the vast majority may deliver less value over the first year or two, it's often a part of the consolidation process.
The other reason is that most CEOs have a certain degree of arrogance and ego. They all believe that they are different and will make M&As work when everybody else has failed.
But some alliances do work. I worked on a portion of the Novartis creation (merger of Ciba-Giegy and Sandoz). I consider that a marriage of equals. They did a lot of things right. Around the same time Pharmacia merged with Upjohn and that was a disaster.
Novartis was a new name and started building on a value proposition. They focused everybody's attention on the future. Pharmacia and Upjohn did not even create a unified name.
Things were so obvious that you could have predicted [the outcome]. They created a new headquarter in a place where nobody had any attachment.
They paid no attention to the people. However, in the case of Novartis, Daniel Vasella, their CEO, had a deep understanding of culture. Paying attention to culture and relationships makes a difference. A merger in Korea is proving very successful.
It has created the largest financial group in South Korea called Shinhan. I was very impressed with what they did. It was a small entrepreneurial bank taking over a large ailing bank that the government had rescued.
They were barred by union agreements to begin operational integration for three years. So they had to focus on people relationships and culture.
They focused deliberately on emotional integration and managed to make a lot of progress despite not being able to change the name of the enterprise. This requires some sensitivity.
What about cases where M&As did not work?
Take DaimlerChrysler. When Germans trample all over Americans saying, "We bought you, so we tell you what to do," these are one of those things that fail mergers.
Verizon was created through a series of mergers "" Verizon won the bid to take over MCI. Then they merged with Bell Atlantic. They took Bell Atlantic's name. But Ivan Seidenberg who was the CEO of Verizon, did not become the CEO as he shared the seat of power with the chairman of Bell Atlantic, Raymond Smith.
He also shared power. When Bell Atlantic took over GTE, Seidenberg again shared power, with the GTE head, with an agreement that he would become CEO when the other person retired.
Value gets subtracted in many of the mergers. In theory, M&As are a great idea. In practice, they don't know how to manage the human dynamics.
A huge global company acquired a small local company because the company was so good that there were things to learn. The minute the deal happened, they started to systematically fire people from the acquired enterprise because of the "we bought you" approach.
As a result they destroyed the very qualities in that company that made it work.
The example of Shinhan in South Korea was a marriage of unequals. How do you make such a merger work?
Marriage of equals is generally a joke. The Novartis example was more or less a marriage of equals in terms of who they put on the executive team or how they used each company's assets.
Gradually, over time, there were some issues that were managed well. But most are not a marriage of equals. In the case of the Shinhan and Chohung banks merger, the unions protested dramatically "" 3,500 employees shaved their heads and piled up their hair in front of the headquarters.
The two banks had an equal representation on the management committee. You can have a formal structure and still not have the commitment behind it, but the CEO of Shinhan was smart. Instead of imposing power, he invited people into a discussion of the future.
The emotional integration consisted of bringing 1,500 managers to a historic city in South Korea to listen to speeches, hear about strategy and climb a mountain together. They gave a chance to people at the grassroots to build working relationships.
They made it clear that employees from both organisations have an equal stake in shaping the future of the company.
What kind of initiatives will Indian CEOs have to take to run diverse companies and integrate with the global economy?
There are many family businesses that have hired professionals. Even if family members continue to be at the helm of affairs, they understand that they may not have an automatic advantage. They are going to have to meet global standards. So some control by the family will erode even if the family is still involved.
The issue of conglomerates is interesting. Having worked with conglomerates all over Asia, I think that most of them were created in response to a particular condition in the developing world. They had to do everything themselves in the absence of sophisticated partners.
These kinds of highly diversified conglomerates will go. There will be less diversification and more focus. But that does not mean that there won't be multi-skilled enterprises.
The other great trend sweeping this region is the development of marketing sophistication and understanding the value of a brand name.
Increasingly, over the last decade, erstwhile contract manufacturers are putting their names on products and selling directly to the market place. That requires a different mindset from being a supplier to a big company.
Can Indian conglomerates maintain diversity at home while staying focused in global markets?
Certainly. You can go global with your best. But at-home diversification will be reduced and not disappear entirely.
If a conglomerate can meet global standards in all of its businesses, it's fine. GE is a conglomerate. But they have virtually narrowed down the number of businesses by holding their standard of getting out of businesses where they are not No.1 or No. 2. IBM has been systematically getting out of consumer markets to focus on areas where it can truly add value.
Some of the conglomerates in developing countries that were protected from global market pressures never really examined portfolios. Sometimes they held certain businesses for prestige. Like, everybody wanted a bank.
As more and more companies are exposed to the capital markets there is a pressure to focus. Mergers and acquisitions are marching again in the West. They will soon be everywhere. In a world of change you seek the best combination and the strongest businesses where investors no longer want to subsidise a weak business for reasons that are not strategic.
Your latest book is on confidence. Is confidence inborn or created?
I do not describe confidence as a character trait but as a response to a circumstance. Yes, by character there are some people who have a more positive outlook.
Success itself produces confidence. Once you have a history of having succeeded in reaching goals, it gets easier to have confidence and then build it into the circumstance.
People who are encouraged and given opportunities to succeed will create small victories. If employees are surrounded by others who give them respect and are held in high esteem, they will gain in confidence.
In the Korean banks' merger, Shinhan bank was on a classic winning streak. One of the things that Shinhan did when they took over Chohung was to increase their confidence.
They increased the pay of workers at Chohung. That was a great signal of "we believe in you. You will deliver performance and we will pay." All of that inclusion boosted the confidence of the people that they would have something to contribute.
So, I do think that confidence can be created in very large enterprises. And then it does make a difference in performance. However, it is not confidence that produces success.
It gives you the will to continue the effort when things are difficult. I think what separates the winners from losers is how they handle problems. It is easy to feel good when you are successful and think that you don't have to work hard.
So, you create success to generate confidence.
Yes. You can do it in small ways. In turnarounds, what leaders do is that they give people a chance to take small steps. And in these small steps we rebuild the confidence.
So if you have a grand strategy and a long term goal, you have to divide it into small incremental wins and people feel that they tried it and it can work.
Now they will try something bigger the next time. People soon develop more respect for each other. So they listen to each other's ideas. We see it in every workplace.
