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Published: December 17, 2008

 
 

Follow the Customer, Follow the Car

Embracing Consolidation
In Japan, after the Asian financial crisis of 1997, 13 banks merged into four groups. Something similar will inevitably happen in the U.S. and Europe during the next year or two — not just in financial services, but in all sectors. Large companies will have to consider consolidating their excess capacity by acquiring (or allying with) overseas companies and their potential customer bases. 

In Japan, this was a particularly important lesson for the financial and industrial sectors; they both had to solve excess capacity problems. But whereas the banking sector consolidated, Japanese industrial companies have been slow to follow suit. Instead, they have largely continued competing with one another. There are only a few models of constructive consolidation, such as the global alliance between the Renault Group and Nissan Motor Company. The two parties jointly pursued real synergies (for example, in reducing the costs of sourcing) rather than each seeking full control of the other party (as Daimler-Benz AG had sought with the Chrysler Corporation). 

Some might argue that the Japanese consolidation was unique, because of the unusually close relationship between banks and borrowers. Japanese companies had depended on their banks for financing as well as overall corporate governance. After the bubble, industrial companies were forced to reduce their debt because banks had become too cautious about the soundness of borrowers’ balance sheets. Japanese companies realized at that point that limited profitability (in terms of return on assets) was hurting their stock prices, and consolidation — in domestic retail industries, in particular — quickly followed. Only after the domestic industrial sector rid itself of its excess capacity did the Japanese economy became relatively stable.

But even though the context is different, multinational companies today face a similar challenge: excess supply, caused not only by financial leverage, but by excessive competition. Once again, consolidation is needed to provide stability. That consolidation will probably be driven by those with strong R&D leadership. Companies in the U.S., Europe, and Japan are rightfully spending a relatively high proportion of their research and development budgets outside of their home regions. Global access to R&D capabilities in, for example, energy or environmental innovation will drive demand in the future economy and position the companies that have it as industry leaders.

One exception to this trend is the global financial-services industry; it will also face consolidation in the future, but innovation will not shape the results. The overpopulation of this industry is a consequence of the global economy. In the past, banks did not compete across state lines (in the U.S.), across national borders (in the E.U.), or even across prefectures and provinces. But with the advancement of global economies, and the increasing cross-market competition among global players, banks no longer secure high enough profit margins in their home territories. Innovative financial products and services have limited power to solve excess competition in this sector, where they rapidly become commodities. Credit default swaps, high-risk solvency and leverage ratios, and other excesses were the products of a short-lived effort to compete through innovation, and they will all be regulated in the future. Banks and other financial-services firms will now have to refine their business models: Low cost structures, global economies of scale, internal risk management capability (as opposed to risk transfer technology), and a sufficient capital base will be hallmarks of this new, more mature business model. 

During the 1990s, many Japanese business leaders waited years for recovery. After all, the fundamentals of the world economy were solid. They did not believe they had to do anything different. Productivity and quality were increasing, and global markets were expanding. Only a few companies took the measures that helped them rebuild: reducing supply, building a business based on repeat customers, and embracing consolidation. Many global companies, unwilling to forget the boom times, will make the mistake of waiting for recovery. Others may learn to be more proactive, in part from the Japanese example — and they will be the corporate leaders of the next decade.

 
 
 
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Resources

  1. Shumeet Banerji, “Navigating Through the Financial Crisis,” Booz & Company white paper, October 2008: Why the downturn may lead to a saner financial system, and create opportunity.
  2. Edward Chancellor, Devil Take the Hindmost: A History of Financial Speculation (Plume, 2000): Why people continue to make the same mistake with bubbles.
  3. Lawrence M. Fisher, “The Prophet of Unintended Consequences,” s+b, Fall 2005: Profile of a pioneer of system dynamics modeling who predicted this type of economic crisis precisely because of the problems of excessive financial growth. 
  4. John Kenneth Galbraith, A Short History of Financial Euphoria (Penguin, 1994): Galbraith analyzed historical bubbles (from Dutch tulip speculation to the Japanese bubble) and concluded that the common root cause is leverage.
  5. Klaus-Peter Gushurst, Ivan de Souza, and Vanessa Wallace, “Taking a Calmer View,” Booz & Company white paper, October 2008: For the financial-services industry, out of the severity of the downturn will emerge a sustainable new regime.
  6. Evan R. Hirsh, Louis F. Rodewig, Peter Soliman, and Steven B. Wheeler, “Changing Channels in the Automotive Industry: The Future of Automotive Marketing and Distribution,” s+b, First Quarter 1999: Introduced the concept of “follow the car” and “follow the customer.”
  7. David Magee, Turnaround: How Carlos Ghosn Rescued Nissan (Collins Business, 2003): Well-written account of the Nissan-Renault “constructive consolidation.”
  8. Steven Wheeler and Evan Hirsh, Channel Champions: How Leading Companies Build New Strategies to Serve Customers (Jossey Bass, 1999): Emphasizes the importance of downstream revenues and customer retention. 
 
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