Essay: How do acquisitions affect the acquired subsidiaries' innovativeness?

Acquisitions have become of growing importance for organizations to obtain external innovativeness. Although they have become a popular method to diversify their business and gain competitive advantage, it is not obvious that an acquired company will remain as innovative as during the autonomous phase of the firm.
Innovative acquisitions can lead to competitive advantage.
2.2 Research Question
How do acquisitions affect the acquired subsidiaries’ innovativeness?
Restated: How does being acquired affect a company’s innovativeness?
The idea is to research acquired firms (new business units of corporations, e.g. diversification acquisitions) and see how it affects the innovativeness of the acquired firm/business unit. The research focuses on acquired firms that operate an autonomous business unit or subsidiary (e.g. Bol.com within the Ahold corporation). The starting point for measuring innovation in acquired firms will be the employee perspective of innovation. Due to the fact that I need to conduct a qualitative study, the idea is to interview employees of recently acquired firms and ask them about the innovativeness of the firm at that moment in comparison with the pre-acquisition phase.
In addition Karina provides measurement methods of how to measure innovativeness from the perspective of employees within the boundaries of qualitative research. (method section?)
Sub-questions:
– What is meant by innovation?
– Which types of innovations are feasible to research?
– What is an acquisition?
– What types of acquisitions are elaborated on in the literature?
– How do scholars write about acquisitions versus innovativeness?
Proposition 1: Being part of a bigger corporation will affect innovativeness
3. Literature Review (Theoretical background)
This chapter will address a brief introduction to the main concepts of this research. First, the existing literature about innovation will be discussed. Second, the main literature about acquisitions of a company will be outlined. These brief overviews will answer the first sub-questions and will state the definitions relevant for ‘ and used in ‘ this paper. The final part of this chapter will contain an overview of the discussion of the existing literature about the relationship between the two concepts.
3.1 Innovation
The growing importance of innovation for competitive growth is evidently according to Porter (1990). By innovating organizations are able to respond to changes that occur in the environment. However, there are different definitions of innovation. In this section an overview of the different aspects of innovations will be discussed.
Schumpeter (1934) was one of the first scholars who were convinced of the importance of innovation to gain a competitive advantage. He defined innovation as ‘new combinations of new or existing knowledge, resources or equipment’ (Schumpeter, 1934). Within this definition he distinguished innovation from invention. Schumpeter interpreted innovation as a specific social activity with a commercial purpose. Inventions, however, can also occur without commercial exploitation.
An important aspect of innovation that emerges from the existing literature is that is important to acknowledge that there is not one definition of innovation. Many authors have come up with a definition of innovation and they all formulated their own distinctive view. One thing that can be assumed from Slappendel (1996) is that researchers widely accept the fact that innovation distinguishes itself with ‘newness and novelty as key feature’ (Slappendel, 1996). Scholars often describe innovation as an abstract concept. In accordance with Rogers, innovation can be ‘an idea, practice, or object that is perceived as new by an individual or other unit of adoption’ (2003). Although other scholars argue that objectification of innovation (e.g. new products, newly acquired patents (Smith, 2005)) is more plausible (Slappendel, 1996). Fagerberg (2003), just as Schumpeter, on the other hand defines innovation as an invention or idea that needs to be commercialized.
Evidently, this research proposal first needs to clarify which definition of innovation is relevant for this particular research before elaborating on the research itself.
To do:
– clarify which type of innovation I will use for the paper. I’d like to discuss which type is feasible to research.
– Incorporate: Innovation At and Across Multiple Levels of Analysis
– Incorporate: Acquisition Integration and Productivity Losses in the Technical Core: Disruption of Inventors in Acquired Companies
3.2 Diversified acquisitions
In the US and Europe, acquisitions have become of growing importance for firms to obtain competitive advantage (Duysters & de Man, 2003). Acquisitions occur when independent companies combine their operations into one new entity, while the acquiring company has the majority of the stock. Or, to provide a more specific definition in the literature, an acquisition is ‘the purchase of the majority of a company’s capital by another company’ (Ernst & Vitt, 2000). The debate on acquisitions will be further outlined in this section.
Companies acquire other firms for a lot of reasons, but the most prevalent reason for an acquisition is to achieve strategic goals in a less expensive or less risky way or to make use of technological advantage of the acquired firm (Marks & Mirvis, 2011). The literature elaborates on more diverse types of reasons for a company to acquire another company. Motives for acquisitions are to minimize cost, increase market share, increase market power, minimize risk, minimize financial cost, speculative, managerial ambitions and synergy advantages (‘2+2=5’) (Gammelgaard, 1999). Finally, Gammelgaard (1999) finds out in his research that ‘to acquire competences’ as a motive for acquisitions is becoming more predominant.
The literature elaborates on three different types of acquisitions: horizontal acquisitions (combining efforts with an industry competitor), related or vertical acquisitions (combining operational synergies within the supply chain), unrelated/financial or conglomerate mergers (diversifying for new markets or products) (Chatterjee, 1986).
The main focus of this research is the acquisition of relatively small innovative companies. In addition, diversification or conglomerate acquisitions will be the domain of research from the perspective of the acquired firm.
Motives for diversification acquisitions are extensively discussed in the literature. Avoiding sales and profit instability, eluding unfavorable growth development and avoiding adverse competitive shifts are mentioned by Gammelgaard (2006). Other arguments are avoiding the loss of technology application and responding to uncertainties within their industries. Trautwein considers three types of motives for conglomerate acquisitions. First, he argues that firms can finance other business units with the profits of the more profitable business in order to sustain the competitive advantage in that market. Second, a firm can try to limit the competition in more than one market at the same time. And last, the firm can proceed to a diversification acquisition to dissuade new market entrants.
3.3 Innovation performance in acquired firms
As mentioned in the former section, acquisitions are a common way for companies to gain access to new resources and competences. Although the literature hardly elaborates on the effect of an acquisition on the innovativeness of an acquired company, there are a few scholars stating that an acquisition influences an incorporated firm’s innovativeness. According to Puranam (2006) there is an organizational dilemma in these cases: ‘Acquirers must integrate acquired firms in order to commercialize their technologies in a coordinated manner; at the same time, they must preserve organizational autonomy for acquired firms in order to avoid disrupting their capacity for continued innovation’.
Acquisitions are often motivated by a belief that the combination of two or more companies’ resources and skills can create more value than is possible by the two companies separately or by engaging in other ways of co-operating, e.g. through alliances. These synergistic benefits from resource combinations, it has been argued, are more likely to be uniquely valuable when based on complementarities rather than similarities (Harrision et al., 1991, 2001). Thus, acquisitions of companies possessing complementary technological capabilities and entrepreneurial abilities may be seen as a way for large, more bureaucratic, companies to increase their innovativeness.
Karina (2006) asserts that it is not obvious to remain innovative after being acquired by a larger company. In a way this intersects the theory of Puranam (2006), i.e. that ‘acquiring resources through acquisition does not necessarily mean that the mature organization is able to handle a new entrepreneurial subsidiary and its innovativeness and creative ways of working’. She argues that the acquired company will eventually adapt to the acquiring company’s systems. This can lead to a more deliberate (in contrast to the relative recklessness of a small innovative and creative company) type of strategy where the acquired company has a difficult task to remain innovative. Her results indicate that ‘entrepreneurial spirit, innovativeness, and creativity in the case company were related to the lack of boundaries to and contact with customers.’ These driving forces could not be sustained when the organization matured and was acquired by a larger company (Karina, 2006).
The degree of integration of the acquired business is considered the tension for this research. The paradox between multi-business synergy and business responsiveness will determine the extent to which innovation can flourish (De Wit & Meyer, 2014).
To do: elaborate further on how to incorporate the tension between multi-business synergy and business responsiveness in the theoretical background as a third construct.
8. References/bibliography
Chatterjee, S. (1986). Types of synergy and economic value: The impact of acquisitions on merging and rival firms. Strategic management journal, 7(2), 119-139.
De Man, A. P., & Duysters, G. (2005). Collaboration and innovation: a review of the effects of mergers, acquisitions and alliances on innovation. Technovation, 25(12), 1377-1387.
Ernst, H. and Vitt, J. (2000), ‘The influence of corporate acquisitions on the behaviour of key inventors’, R&D Management, Vol. 30 No. 2, pp. 105-19.
Fagerberg, J. (2003). Innovation: a guide to the literature. Oxford.
Gammelgaard, J. (1999). Competence: A Dynamic Extension of the Existing Typology of Acquisition Motives (No. 12-1999).
Hitt, M. A., Hoskisson, R. E., Johnson, R. A., & Moesel, D. D. (1996). The market for corporate control and firm innovation. Academy of management journal, 39(5), 1084-1119.
Karina, S. C. (2006). Losing innovativeness: The challenge of being acquired. Management Decision, 44(9), 1161-1182.
Marks, M. L., & Mirvis, P. H. (2011). Merge ahead: A research agenda to increase merger and acquisition success. Journal of business and psychology, 26(2), 161-168.
Porter, M.E. (1990). The Competitive Advantage of Nations. London, MacMillan.
Puranam, P. (2006). Organizing for innovation: Managing the coordination-autonomy dilemma in technology acquisitions. Academy Of Management Journal, (2), 263-280.
Rogers, E. M. (2003), Diffusion of Innovations, 5th edition. New York: The Free Press.
Schumpeter, J. (1934) The Theory of Economic Development. Cambridge, Massachusetts: Harvard University Press
Slappendel, C. (1996). Perspectives on innovation in organizations. Organization Studies, 17(1), 107-129.
Smith, K.H. (2005). Measuring innovation. In: The Oxford Handbook of Innovation. Oxford University Press, New York, US, pp. 148-177.
Trautwein, F. (1990). Merger motives and merger prescriptions. Strategic management journal, 11(4), 283-295.
Wit, B. D., & Meyer, R. (2014). Strategy: process, content, context-an international perspective. 5th Edition. London, Connecticut: Thomson.