Basilio Chen H. is Managing Partner of Evotech Management Corporation a strategic management consulting firm. Mr. Chen serves on the Board of a number of community organizations including the Asian Business Association, Inc., a non-profit organization, where served as President, and advisor to several corporations and government agencies including Wells Fargo and California State Assembly Select Committee on Asian Trade.  Mr. Chen, a native of Panama, was a high tech product developer and technopreneur in the telecommunication and computer industry for over 25 years, and over 15 years in general management and finance.  He is an Eta Kappa Nu and Tau Beta Pi graduate with an electrical and electronics engineering degree (cum laude) from California State Polytechnic University. A post-graduate researcher at both Florida State University Master of Business Administration program and at the University of British Columbia focusing in Dynamic Signature Pattern Recognition and Shannon’s Information Theory.  He is an honor member of Who’s Who in Computer and is listed in Marquis Who’s Who in the West and Who’s Who in the World.  He served on the International Technological University Board of Trustees. Mr. Chen was appointed in 2000 to the President’s Business Commission in Washington, DC.

Over the last several years, companies have captured the “easy” earnings from high demand,  improvements in operations or cost reductions yet they remain under considerable pressure to continue to increase earnings.

However, the landscape is increasingly changing and significant challenges lies ahead with inflation and higher interest rates as the main theme.  We cannot avoid the increased commoditization of core products and service offerings, profound shifts of value from manufacturers to channels, fragmentation of customer segments and proliferation of brands, increasing costs to serve, reducing scale and adding complexity to execution, to name a few.

Obviously if the bottom cannot get lower in terms of cost savings, then we must turn to opening the ceiling.  Companies must turn to marketing and branding to tap on the under-developed value of their quality products/service in addition to other fundamental internal functional improvements.

“Unlocking this growth potential requires a far greater integration of marketing into the main strategies, functions, and processes of the business, and even outside the business with channel partners and suppliers,” says Tom French, head of the North American Marketing & Sales Practice, McKinsey & Co. The best organizations are focusing on four priority areas in order to take the marketing function to the next level.

• Infusing customer insights into the business – Redesign core business processes so that customer insights are incorporated into every function of the company.
• Integrating business and brand strategies – Strong brands historically have yielded faster growth and higher returns to shareholders.  Use products brands to complement company brands and vice-versa.
• Go-to-market execution – go-to-market organizations have to evolve beyond the sales force to encompass multiple channels and functions, inside and outside the corporation.
• End-to-end redesign of core commercial processes – Marketing and sales functions need to become increasingly intertwined if companies are going to achieve the growth they require. In world class enterprise selling organizations, for instance, it is impossible to define where marketing ends and sales begins.  Sales is the heart and blood of any company.

Ultimately, integrating marketing into business strategy, functions, and processes requires a fundamental shift in the culture of the organization. Chief marketing officers and their organizations are in a unique position to lead this transformation. In Tom French’s view, “Those who succeed will gain a more significant seat at the table, driving growth and the broader corporate agenda.”

Research from a recent study at McKinsey & Co. suggests that a key problem is the tendency for integrating companies to pay too little attention to revenue growth and to focus almost exclusively on cost synergies. As one integration manager put it, “the CEO told me to put a knife between my teeth, dive down, slash deep, and not come up until it was done.” And while growth may be a stated objective in three out of four mergers,2 a study of 193 transactions between 1990 and 1997 worth at least $100 million found that only 36 percent even maintained revenue growth through the first quarter after announcement.

By the third quarter, 89 percent had succumbed to a slowdown, with a median revenue decline of 12 percent. Underperformance of target companies with a history of growth rates lower than their industry peers explained only half the post announcement result. Unsettled customers and declining staff productivity explained the rest.

In the end, flat or declining revenues may hurt a company’s market performance far more than a failure to nail costs. If balance is to be restored, the merger approaches of companies that maintain or accelerate revenue growth can be a useful starting point.

Identifying merger masters

To understand the impact of mergers on revenue growth, McKinsey researchers examined 160 mergers worth $100 million or more between 1995 and 1996 across 11 industry sectors, plus another 25 of the 100 biggest mergers between 1995 and 1999.

The sample was then screened down to 80 companies where it was reasonably possible to isolate the growth attributable to acquisitions between 1995 and 1996. Of these, only seven companies were able to accelerate revenue growth over the following three years and deliver strong total returns to shareholders (TRS) (Exhibit 1). In fact, most sloths remained sloths, while most solid performers slowed down.

Overall, acquirers posted organic growth rates 4 percent below their industry peers, with 42 percent of acquirers losing ground. These results were evident across a range of circumstances, including some commonly believed to enhance the probability of a successful merger. Mergers in fast growing sectors were as susceptible as any, smaller acquisitions were not significantly more successful than larger ones, and experienced 2 | McKinsey on Finance Summer 2001 acquirers did not demonstrate better success than novices.

Maintaining or improving revenue growth in a merger is by no means easy. And while revenue growth is not the only factor for merger success—some companies may achieve high postmerger TRS  through such means as asset rationalization or cost reduction—it clearly matters. Declining revenues are a red flag to skeptical markets ready to question the price paid for an acquired company. Moreover, revenue growth is a powerful tool to offset cost savings shortfalls for the 20 to 40 percent of companies that fail to realize the synergies they identify premerger. Finally, growth creates positive dynamics both internally and externally that can help retain customers and talented staff.  The seven companies that emerged during our research generated impressive revenue growth and created shareholder value following their mergers. These “Merger Masters” grew revenues an average of 40 percent faster per year than industry peers, driving annual shareholder returns an average of 22 percent higher than the S&P 500 between 1995 and 2000 (Exhibit 2). While these companies came from a variety of industries and had very different merger experiences, we found through interviews with them that they all made conscious decisions to ensure future revenue growth. Furthermore, they did not compromise long-term value creation for the sake of short-term cost savings.

While their specific approaches to executing mergers vary, the common pattern among these top performers was to naturally emphasize four different priorities in executing postmerger management.

Planning for growth early in the merger process

Performance following the announcement of a merger can decline quickly, even before changes to finalize the integration are made, as the uncertainty that accompanies all mergers damages momentum.

One trait we witnessed in most of the “masters” was a bias for planning their moves well in advance. Before a merger announcement they systematically analyze all possible sources of cost and revenue opportunities and risks—including the impact of planned cost reductions on revenue aspirations. Such forecasting produces a payback during integration by easing the difficulty of making decisions on sequencing and providing resources for cost and growth initiatives, rather than focusing solely on cost.

Regulatory constraints do not make such early analyses easy. Some companies do everything possible to speed up the process. Several use clean teams—trusted third parties who will not pass sensitive information if the merger does not proceed—to start identifying cost synergies and revenue   opportunities as early as possible.

Protecting existing revenues first

The uncertainty that sweeps in with a merger announcement brings risks to revenues. Senior staff are distracted, and with good reason: on average 50 to 65 percent of target company senior executives are replaced.4 Substantial frontline changes can also occur. Headhunters typically target key employees within 5 days of announcement.5 And customers begin wondering if service levels will decline, often seeking alternative suppliers to mitigate supply risk. The results can be disastrous. Analysts estimate that US banks lost an average of 5 to 10 percent of their customers following 1990s mergers.6 But our research turned up several strong performers that made a priority of securing relationships with key customers and staff, and by extension, those existing revenues.

The stakes are high. Employees who own customer relationships or who are key to delivering the service can “take their eye off the ball.” Tyco CEO Dennis Kozlowski observes, “People are normally productive for about 5.7 hours in an 8-hour business day . . .any time a change of control [such as a merger] takes place, their productivity falls to less than an hour.”7 Customers may also defect if they sense that the merger will constrain their bargaining power, change their security of supply, reduce service levels, or even cause a loss of key relationships. We found that to address these risks the merger masters start with strong communication. They create a stream of communications to ensure customers know exactly how the merger will affect them. Sales representatives for Arrow Electronics, for example, hand-deliver letters to all customers outlining the merger process and its eventual benefits.

We found several CEOs who invest considerable time personally visiting key customers. Others ensure that the target customers receive tangible benefits immediately after the merger is   consummated in order to retain them. One oil and gas pipeline operator, for example, ensures that the customers of a merger target are given access to its proprietary product management software at little or no cost, enabling them to quickly identify ways to save money.

Explicitly balancing cost and revenues

In most mergers, quickly cutting costs makes sense. Cost savings, which may be necessary to enable growth, are the easiest opportunities to quantify, and their variables are all internal.

And markets frequently demand rapid savings. However, cost savings have a habit of never quite making it to the bottom line. Up to 40 percent of mergers fail to capture their identified cost synergies.8 The danger is that cutting too deeply can depress future earnings:

“In the rush to save costs, [one US bank] . . . really hurt revenue growth . . . they didn’t just take out the fat, they took out muscle.”9 Paradoxically, revenues actually hit the bottom line harder, since fluctuations in revenue can quickly outweigh planned cost savings. Understanding the opportunities a merger creates and deciding where to focus integration team efforts are critical in balancing cost and revenue targets. The most effective merger players make careful decisions about whether to attack revenue or cost synergies—or both. Some even launch separate revenue and cost teams. At Arrow, for example, the focus during integration is on revenue because CEO Steve Kaufman believes “you only get one chance at revenue, but you can always have another go at cost.”

In contrast, Alberta Energy focuses almost entirely on cost, deliberately buying underperforming assets where the existing performance culture cannot be relied on to deliver cost savings. At the same time, the company ensures growth by buying only those oil and gas production assets that complement their existing distribution assets, thus quickly and inexpensively exposing those newly acquired assets to a wider distribution network.

Instilling a performance culture geared for growth

Focusing on growth in a merger can help a company build a positive internal dynamic that makes it easier to achieve other merger objectives, including cost reductions. Why? A focus on growth is a far more attractive proposition and more powerful motivator for key talent on both sides of a merger. The 4 | McKinsey on Finance Summer 2001 merger masters we encountered nurture the autonomy of high-performing entrepreneurial teams and set aggressive targets and generous incentives.10 They typically commit to growth targets early, often during the deal stage. One result: responsibility for achieving  growth moves from the deal team to the integration team to the line as soon as possible. Even in mergers where cost reductions are a priority, incentives are structured to require some growth or, at a minimum, to prevent managers from jeopardizing future growth. Arrow Electronics, for example, found that setting up a competition between the sales force of a target company and Arrow’s own reps to claim “top dog” honors at a mergers’ close boosted sales growth in the first quarter after the merger announcement.

Similarly, Tyco business unit managers have aggressive EBIT targets that require both acquisition and organic revenue growth. This drives managers to find deals. To obtain capital approval, managers   must commit to additional specific targets for each deal. Performance bonuses are uncapped for exceeding EBIT targets and are reduced when targets are not met. As a result, ease of integration becomes a criterion for evaluating deals, those executives leading the integration effort are in closer touch with the sources of value from the start, and growth is high on the merger agenda.

Companies that pay closer attention to revenues instead of focusing exclusively on cost cutting are likely to boost their chances of pulling off successful mergers. Practitioners that grow revenues and deliver on TRS stick to a few basic principles. They plan early for growth, protect existing revenues, balance revenues and costs, and creating a growth performance culture. Companies that employ these steps can build a reputation that fosters loyalty, tolerance for short-term disruptions, and faith in long-term outcomes among target employees, customers, and the financial markets.

Since its reform in the late 1970s, China has decentralized its system and opened its doors to a more liberal, diversified international marketplace, widely expanding its private sector while playing a vital role in the global economy. With this reform also came the increase in living standards, with millions of people being lifted out of poverty. By 2005, China’s official statistics reported a 2.5% poverty rate, a significant drop from over 50% in the early 1980s. In 2007, China surpassed Germany with a $3.4 trillion GDP, its fastest growth ever since 1994.

With an emerging economy and industrial deregulation, many industries in China are still in their infancy stages and thus attract numerous businesses and large corporations to enter the market at an early point, not to mention China’s favoritism towards foreign investment. The Wall Street Journal reports more than 10 million small businesses in 2010, accounting for over 60% of China’s economy and 80% of jobs. In addition, China’s global trade surpassed $2.4 trillion in 2008.

Forecasted to spend over $1 trillion in environmental products and technology by 2013[ii], China has paved the way to larger import and export trends with an import value surge of 47.2% early 2010, according to China Knowledge. Global Water Intelligence states that China’s 5-year plan to protect the environment will cost over $450 billion. Current plans include waterwaste management and treatment, as well as pollution control, a pending issue that China has faced for a long time. The country has already invested $34.6 billion in clean technology in 2009, and is looking at adding more funds into this project.

The Chinese currency, Renminbi (RMB), was previously pegged to the U.S. dollar, which has resulted in criticism of its stability and negative impact on world trade. Up until mid 2005, the peg was removed and the currency was revalued at 8.11 per U.S. dollar[iii]. Other names for RMB are “yuan” and “kuai”.

Of the vast lands and space in China, Beijing, Shanghai and Guangdong rank the top three Mega Cities in the country. The latest study of the Hunan Research Institute based in Shanghai, Beijing along has over 151,000 individuals with personal wealth of over 10 million RMB, making Beijing the richest capital city in China. Also known as Peking, Beijing is the capital of The People’s Republic of China and serves as a major transportation hub for the country.

China’s population stands at over 1.3 billion people[iv] and is also the second largest consumer of energy in the world today[v].

[ii] http://www.china-greentech.com/sites/default/files/CGTR2009-FullReport.pdf

[iii] http://www.danwei.org/china_information/china_currency_trade_revaluati.php

[iv] http://en.wikipedia.org/wiki/Demographics_of_the_People%27s_Republic_of_China

[v] http://www.china-greentech.com/sites/default/files/CGTR2009-FullReport.pdf

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