Corporate Change

Firms, as organizers of productive activities, undergo a continuous process of change. To remain competitive in a world characterized by rapid shifts in technology and resource utilization patterns, firms need to commit themselves to all manner of transition and transformation. However, firms also need to deliver [Page 399]a dynamic response that takes into account all major stakeholders, including customers, suppliers, regulators, and global competition. Corporate change management thus strives to meet customer and market demands by reexamining the relevant processes of production and service delivery. The assumed response may be driven by specific needs of the firm: There could be a felt need for new product-market strategies that fully meet changing market demand or there could be a desire to maximize resources by dealing with managerial and control inadequacies.

One way of managing change is to undertake a merger. Mergers can redraw the boundaries of a firm. It is traditionally assumed that mergers are conducted when a firm with high asset valuations purchases another firm with low asset valuations. It is believed that under the better management of the high-asset purchaser, the assets of underperforming targets will be directed toward more profitable projects. Seen this way, a merger leverages the strengths of one firm by combining with another firm. A number of studies explained the merger waves of the 1980s and 1990s in such terms. However, recent evidence suggests that target valuations are much higher than the average firm, which casts doubt on such a motive for a merger.

A firm's strategic change and rapid growth objectives may also be important in explaining the motive for wanting to merge with another firm. Mergers can be undertaken to allow diversification or vertical integration, help achieve resource sharing and operational efficiencies, or permit access to global markets. Research on organizational change suggests that many such opportunities are more fully exploited by identifying and coordinating complementary products or processes. Strategic complementarities are about how two activities when joined together produce an outcome that is better than when activities are undertaken on their own account. Complementarities associated with new technologies, changes in people-oriented organizational systems, and globalization help make mergers successful and enduring.

The success of the modern corporation is built on possessing unique capabilities or resources. Such capabilities may be related to a product, process, or a way of doing things that meets an existing or potential market need. But any attempt to strengthen firm products, processes, or ways of doing things often carries within it the danger of an inflexibility that ensures operational efficiency but also an inability to build new skills and capabilities. As a result, it becomes harder and harder to anticipate and make changes that assimilate new technologies and processes effectively, turning firms' “core” businesses into “noncore” operations and making “unique” products not very unique. In these situations, firms may experience contraction, which will be noted in the processes of privatization, divestment, or many other types of restructuring programs. Corporate restructuring in the 1980s saw a major realignment of existing firm assets, resulting in divestment and selling off of a large number of activities and assets. The release of resources through the disposal of assets that are unimportant to the main operational areas of a firm is a major plank of the strategic approach to corporate change.

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