222 Part 2: Strategic Actions: Strategy Formulation
firms to be targeted, the nature of the negotiations, and so forth. Company experiences
show that participating in and overseeing the activities required for making acquisitions
can divert managerial attention from other matters that are necessary for long-term com-
petitive success, such as identifying and taking advantage of other opportunities and
interacting with important external stakeholders.^72
Both theory and research suggest that managers can become overly involved in the
process of making acquisitions.^73 One observer suggested, “some executives can become
preoccupied with making deals—and the thrill of selecting, chasing, and seizing a
target.”^74 The over-involvement can be surmounted by learning from mistakes and by
not having too much agreement in the boardroom. Dissent is helpful to make sure
that all sides of a question are considered. For example, research suggests that there
may be group bias in the decision making of boards of directors regarding acquisitions.
The research suggests that possible group polarization leads to either higher premiums
paid or lower premiums paid after group discussions about potential premiums for target
firms.^75 When failure does occur, leaders may be tempted to blame the failure on others
and on unforeseen circumstances rather than on their excessive involvement in the acqui-
sition process. Finding the appropriate degree of involvement with the firm’s acquisition
strategy is a challenging, yet important, task for top-level managers.7-3g Too Large
Most acquisitions result in a larger firm, which should create or enhance economies of
scale. In turn, scale economies can lead to more efficient operations—for example, two
sales organizations can be integrated using fewer sales representatives because the com-
bined sales force can sell the products of both firms (particularly if the products of the
acquiring and target firms are highly related).^76 However, size can also increase the com-
plexity of the managerial challenge and create diseconomies of scope; that is, not enough
economic benefit to outweigh the costs of managing the more complex organization
created through acquisitions.
Thus, while many firms seek increases in size because of the potential economies
of scale and enhanced market power size creates, at some level, the additional costs
required to manage the larger firm will exceed the benefits of the economies of scale
and additional market power. The complexities generated by the larger size often lead
managers to implement more bureaucratic controls to manage the combined firm’s oper-
ations. Bureaucratic controls are formalized supervisory and behavioral rules and policies
designed to ensure consistency of decisions and actions across a firm’s units. However,
across time, formalized controls often lead to relatively rigid and standardized mana-
gerial behavior.^77 Certainly, in the long run, the diminished flexibility that accompanies
rigid and standardized managerial behavior may produce less innovation. Because of
innovation’s importance to competitive success, the bureaucratic controls resulting from
a large organization that might be built at least in part by using an acquisition strategy
can negatively affect a firm’s performance. Thus, managers may decide their firm should
complete acquisitions in the pursuit of increased size as a path to profitable growth. At the
same time, managers should avoid allowing their firm to get to a point where acquisitions
are creating a degree of size that increases its inefficiency and ineffectiveness.7-4 Effective Acquisitions
As we’ve noted, acquisition strategies do not always lead to above-average returns for the
acquiring firm’s shareholders.^78 Nonetheless, some companies are able to create value
when using an acquisition strategy.^79 Research evidence suggests that the probability