Statement of the Problem
The acquisition of A.T. Kearney by Electronic Data Systems (EDS) has just been completed and the integration of the two companies had lasted for one year. A.T. Kearney was one of the most respected and largest management consulting firms of the world, whereas EDS was a global leader in the information services industry. The issue of the concern after acquisition was how the two companies could fully exploit the new relationship. Regardless of the optimism associated with the acquisition, the concerns were caused by the fact that the two companies had completely different cultures. In addition, clients had concerns as to whether A.T. Kearney would still make objective recommendation in choosing the right suppliers and whether competitors of EDS and general motors would still use A.T. Kearney. Despite such concerns, the integration was successful. However, the main issue of concern was how the two companies would fully exploit the synergy obtained as a result of the merger through leveraging each firm’s capabilities and strengths and develop new products.
Summary of the Facts
Trends in the management consulting industry suggested that the sector was poised for strong growth and tremendous change attributed to a number of factors. They include the convergence of information services, technology and telecommunications and the rapid technological development, as well as the adoption of technology in frontline operations. As a result, management consulting firms, such as A.T. Kearney, has to exhibit greater industry expertise in order for them to advise clients and ensure their survival in dynamic business environment. The underlying inference leading edge information technology had to be adapted to business solutions. In addition, consulting firms were gradually becoming partners in long-term business relationships. It means that they had to exhibit multidisciplinary consulting capability in order to find and develop successful relationships with clients across the globe. In addition, information technology companies develop consulting services besides their core system integration and outsourcing skills. It was projected that information technology giants offering consulting services would have 15% market share at the end of the 20th century.
Given such industry trends, the acquisition of A.T. Kearney (global management firm) by EDS (a global leader in information services industry) became a strategic move due to the possibility of high valued-added consulting and technologies integration. EDS had tried to expand its services portfolio to include management consulting, which resulted in the establishment of the EDS – Management Consulting Service (MCS). Nevertheless, the attempt was unsuccessful. The acquisition was considered a superb match for both MCS and A.T. Kearney owing to the geographical and functional strengths and complimentary and synergistic industry. The technology and operational strengths associated with MCS supplemented the value-added operational strengths and strategy of A.T. Kearney. In addition, the acquisition helped A.T. Kearney involve new and talent consultants. In addition, the process created well-balanced and matched industry coverage, since MCS showed high results in electronics and communication industries, whereas A.T. Kearney specialized in manufacturing.
The combined capabilities attributed to the acquisition resulted in diverse skills and innovative solutions for the clients of both companies. The A.T. Kearney/MCS relationship offered A.T. Kearney the investment resources that the company required to achieve rapid geographical growth and increase the scope of its consulting practice. The relationship provided MCS with a high-level perspective regarding the business issues that helped the company in selling its system integration and outsourcing services.
Despite the optimism associated with the acquisition, concerns were connected to the fact that the two companies had completely different cultures. Other concerns were raised by the clients regarding the objectivity of A.T. Kearney in helping them choose the right supplies. Concerns were also raised as to whether competitors of General Motors and EDS would continue using A.T. Kearney consulting services. Despite this skepticism, the integration was successful. However, the greatest potential from the merger has still to be fully realized. There was a need for A.T. Kearney and EDS to fully exploit the synergy resulting from the acquisition through leveraging the strengths of both companies. Three alternatives were presented that could enable both companies exploit the acquisition. The first alternative was to utilize the cross-marketing opportunities attributed to the insignificant client overlap. EDS focused on defense, aerospace, electronics, communications, insurance and healthcare sectors, whereas A.T. Kearney focused on pharmaceuticals, transportation, consumer products and manufacturing industries. The companies also had mutual achievements in such sectors as retail, energy and financial services. The second alternative was to develop a combined product portfolio of the same products to the new clients, as EDS and A.T. Kearney were not previously in a position to meet the needs of such consumers. Most of the joint initiatives were undertaken during the integration period using such approach. The third alternative suggested by Brian Harrison, the CEO of A.T. Kearney, relates to exploiting the strengths of both companies in order to develop completely new products offered to either current or new customers. The newly developed products should seek to differentiate the newly established enterprise from rival companies and produce revenue that could not be gained by EDS or A.T. Kearney without the acquisition.
Strategic Alternative 1: Cross-Marketing
Such strategic alternative foresees that the companies will have an access to each other’s customer bases, which will provide an opportunity to cross-sell their offerings. One of the motives of the merger between EDS and A.T. Kearney was to benefit from the cross-selling synergy. As a result, A.T. Kearney received an opportunity to sell its management consultancy services to the clients of EDS and EDS could sell its information technology and outsourcing solutions to the clients of A.T. Kearney. It is consistent with the approaches adopted by the information technology giants, establishing management consultancy services in addition to their outsourcing and information technology services. Similar examples include AT&T establishing AT&T solutions and IBM establishing IBM solutions to sell IBM hardware. For the case of A.T. Kearney/EDS merger, cross-selling is a viable strategic alternative. It stems from the fact that there is marginal overlap in the client base of the two companies. EDS focused on defense, aerospace, electronics, communications, insurance and healthcare sectors, whereas A.T. Kearney focused on pharmaceuticals, transportation, consumer products and manufacturing industries.
Cross-marketing provides an opportunity through which EDS and A.T. Kearney can leverage their existing customer relationships (Spiro, Rich, & Stanton, 2008). In such arrangement, synergies are generated through combined customer knowledge in order to exploit the sales offerings. Simply stated, cross-marketing would result in improved penetration by EDS and A.T. Kearney of the market, comprising of old and new customers. Other benefits associated with cross-marketing include reducing sales costs, which positively influences the building of customer relationships (Klier, 2009). Cross-marketing can also lessen unhealthy internal competition; however, it is not an issue of concern for the A.T. Kearney/EDS merger due to the marginal client overlap. The only issue of concern relates to the clients, especially with respect to whether A.T. Kearney will still be objective in advising its clients to select the right supplies. In addition, it will be difficult for A.T. Kearney to sell its services to companies competing with EDS and General Motors. Another limitation of cross-marketing is that it is a temporary source of differentiation.
Strategic Alternative 2: Offering the Same Products to New Clients in Search of a “One-Stop Shop”
The approach is similar to the first one, but is more institutionalized and involves collaborative initiatives that can result in growth synergies through increased customer utility. Creating a one-stop shop can add value through the increased convenience and reduced complexity for clients (Müller-Stewens & Knoll, 2008). For the case of acquisition, a one-stop shop may become a source of differentiation and competitive advantage over competitors that are more focused. For instance, in the United States, customers prefer purchasing all their financial services (such as investment services, insurance policies, mortgage loans and checking account) from one provider; therefore, in the financial services sector, a one-stop shop is a source of competitive advantage. Similarly, management consulting services and information technology develop in parallel; therefore, offering the same services and products under a one-stop arrangement can be a source of competitive advantage of EDS and A.T. Kearney. It is essentially important as a result of the industry trends that suggest the importance of management consulting firms having multidisciplinary expertise (Müller-Stewens & Knoll, 2008).
The one-stop approach is differentiated from cross-marketing in the sense that product/services offerings are combined together and specifically designed and marketed as a single unit. The one-stop approach has been successfully used in the telecommunications sector, which is characterized by the convergence of offerings from the broadband and mobile services. As a result, many diversified telecommunication firms have embarked on combining their product/services offerings across various fields their businesses in order to exploit growth strategies and address the preferences of their clients. For instance, companies such as Deutche Telekom, British Telekom and Swisscom provide single triple play bundles comprising of video on demand/cable TV, high-speed internet access and mobile phone and fixed line service (Müller-Stewens & Knoll, 2008). For the case of acquisition, there is a possibility that some of the customers may require services from each of the companies to deal with a specific issue; as a result, combining the product/services offerings gives an opportunity to address the needs of such customers (Müller-Stewens & Knoll, 2008). For instance, A.T. Kearney could offer consultancy services on IT planning, while EDS could offer the systems development services and hardware required to implement the recommendations provided by A.T. Kearney.
The one-stop approach is capable of generating growth synergies attributed to higher revenue at reduced costs of sale. Both new and existing customers can purchase more offerings from the various businesses if the offerings are combined and marketed as a whole. In addition, the one-stop shop approach can also result in additional customer value via lessening complexity and costs of transaction. Moreover, combining the offerings can generate differentiation advantages when compared to individual firms providing components of the bundled offerings. According to Müller-Stewens & Knoll (2008), the potential of a one-stop shop in contributing to differentiation and competitive advantage is usually high when customers prioritize the convenience associated with using a single supplier. Moreover, the one-stop shop can be used to develop exclusive selling relationships and trusted partnerships with core customers, which are critical success factors in the consulting business.
Strategic Alternative 3: Developing Entirely New Products
Current alternative places emphasis on cross-business combinations of complementary resources that lead to the creation of new products for existing and new markets. The resources may comprise of customer knowledge, product knowledge and technological expertise among others. Under such approach, the emphasis is not placed on integrated offerings; instead, emphasis is placed on developing completely new products that involves the merging of capabilities and resources of the A.T. Kearney and EDS. The newly developed products should seek to differentiate the new merger from rival firms and generate revenue that could not be obtained individually by A.T. Kearney and EDS on their own. EDS and A.T. Kearney has already embarked on current approach by developing a new service known as CoSourcing. Considerable success has been reported in joint product development efforts in various industries. For instance, in the consumer electronics sector, Canon combined its microelectronic skills with skills obtained from the camera business to produce cameras with advanced features (Müller-Stewens & Knoll, 2008). Joint product developments that focus on creating new products are capable of creating growth strategies through increasing profits and revenues of the partnering business. In addition, they make significant contributions to differentiation, especially in cases where the newly developed products produce a distinctive customer value that cannot be matched easily by focused firms. In addition, joint product development can also result in timing advantages when EDS and A.T. Kearney decide to bring the new product to the market earlier than rival firms (Klier, 2009).
The three alternative courses of action can be evaluated in terms of their contribution to differentiation, creating growth synergies and implications on autonomy and independence of parent firms, which are crucial variables for success in the consulting industry. In this regard, cross-marketing does not contribute to differentiation and moderately creates growth synergies. In addition, cross-marketing has no implications on the independence and autonomy of consultants in the partnering companies. The second strategic alternative, the one-stop shop approach, contributes significantly to differentiation and creates vast growth synergies. In addition, such approach does not have any implications on the autonomy and independence of consultants in the partnering companies. The third strategic objective, joint development of new products for new and existing customers, significantly contributes to differentiation and enormous growth synergies. However, a limitation of such approach is that it poses the significant changes within the partnering firms in order for any joint initiative to work. Under such arrangement, it is almost impossible for the companies to remain apart (autonomous and independent) and, as a result, they have to work together. Therefore, using the information from the case, A.T. Kearney and EDS should pursue the second strategic alternative, which focuses on creating a one-stop shop approach that combines the same product/services offerings of the companies. Such alternative guarantees differentiation and creates growth synergies and, at the same time, ensures the autonomy and independence of the consultants in each partnering company.
The purpose of current case study was to analyze the various strategic alternatives and make recommendations on the best course of action for EDS and A.T. Kearney to fully exploit the synergies associated with the acquisition. From the three alternatives, it is recommended that EDS and A.T. Kearney should embark on combining the products offered by the companies to new clients who prefer using one-stop shops.