Optimize: Mind Over Merger
In short, CIOs should assess the impact of a merger or acquisition based on the disruptive-innovation theory, described in our book, Seeing What's Next: Using the Theories of Innovation to Predict Industry Change (Harvard Business School Press, September 2004). As we wrote in Optimize previously, the theory holds that companies have the best chance of creating growth by bringing disruptive innovations into a marketplace. These either create new markets or reshape existing markets by delivering a new, highly desired value proposition to customers.
There's a simple, important principle at the core of the disruptive-innovation theory: Companies innovate faster than customers' lives change. That's why companies end up selling products that are too good and too expensive for many customers. This happens for a good reason: Managers are trained to seek higher profits by bringing better products to the most demanding customers. But in that pursuit of profits, companies "overshoot" less-demanding customers who are perfectly willing to take the basics at reasonable prices. And they ignore "nonconsumers" who lack the skills, wealth, or ability to consume at all.
Disruptive innovators succeed by introducing relatively simple, cheap solutions that delight these overshot customers or nonconsumers. Some innovations disrupt an existing market from the low end. Dell's direct-to-customer business model, Wal-Mart's discount retail store, and Nucor's steel mini mill are great examples of low-end disruption.
Other disruptive innovations create entirely new markets by competing against nonconsumption. EBay democratized the auction process, seizing it from the wealthy. Similarly, the PC liberated computing from the cognoscenti and delivered it to the masses.
The disruptive-innovation theory can help distinguish between two types of mergers. The first type reacts to overshooting. As companies overshoot increasing swaths of their market, they have a progressively harder time achieving the growth that investors and managers demand. They find that price increases don't stick, and the number of new customers dwindles. Investments in innovation offer inadequate returns, so a natural path to growth is consolidation.
The second type of merger is a proactive attempt to drive disruption. Here executives recognize that a company has emerged with the potential to disrupt an industry. They snatch up the company before the market recognizes the potential, and ride the resulting wave of growth.
Not surprisingly, we believe that the right kind of proactive merger has much greater value-creation potential than a reactive deal. A CIO can judge the potential success of an acquisition by its likelihood to deliver a low-end or new-market disruption.
By this measure, many of the greatly hyped M&As of 2004 should prompt a few CIOs to update their resumés. They're examples of deals made in reaction to the forces of disruption as companies seek to squeeze out savings and generate efficiencies in mature industries. These combinations are unlikely to yield much additional value for stakeholders in the long run. The Sprint and Nextel pairing may be an exception—if it can overcome some tough integration challenges and accelerate the pace of disruption in telecom.
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