Case Study Project: MRA Associates, Inc. and Xecodynamics
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final_paper.doc1
MRA Associates and Xecodynamics – A case of M&A and Cultural Integration
MRA Associates Inc. is a successful, well-respected, mid-sized engineering consulting firm, based in Denver, Colorado. The company provides consulting services and innovative solutions to address environmental challenges faced by companies, government entities, and public agencies. The management of MRA Associates Inc. has made a proposal to purchase Xecodynamics – a small firm based in San Diego, California that designs and manufactures components used in clean-up operations at environmentally-contaminated sites. While MRA Associates sees this acquisition as a backward integration strategy which will help it reduce cost, increase margins and deliver more value to customers, Xecodynamics feels that the acquisition will help it in offsetting the financial challenges that it currently faces. In this paper, I attempt to highlight the challenges both companies will face in integrating operationally and culturally and also discuss the potential advantages that the deal might unlock for both parties involved.
Part 1
1. Organizational structure:
MRA Associates, Inc. is a leading environmental solution based consulting firm located in Denver, Colorado. The company’s primary business is delivering actionable solutions to clients, which can help them reduce their environmental footprint. MRA Associates specializes in the remediation of groundwater contamination, biohazards clean up, and industrial wastewater treatment solutions. The company’s offices are spread over 18 locations in major metropolitan areas throughout the US. Over the years, the company has developed extensive capabilities for designing and implementing breakthrough solutions, and uses cutting edge technologies to assess problems, design strategies, and implement solutions to successfully manage clients’ environmental challenges in a cost effective manner.
MRA Associates’ organizational structure can be classified as a ‘Functional Structure’. A functional structure can be generally found in organizations where employees tend to perform a specialize set of tasks. The ability to assimilate such an employee base helps the organization in delivering outstanding customer service. In case of MRA Associates, each of the 18 geographic offices acts as standalone profit center reporting to the head office in Colorado and are responsible for profit and revenue goals. The company specializes in three areas – groundwater contamination, biohazards cleanup and industrial wastewater treatment solution. All 18 offices house a technical specialist for these three areas of specialization. The founders make up most of the top management team and the regional managers own the majority of the company’s stock. In order to provide trans-regional service to clients, MRA Associates has deployed account managers across offices that are instructed to work cooperatively with regional managers to integrate services across profit center boundaries, working with technical specialists from more than one local office. The home office steps in when disputes arise between profit centers and account managers. This kind of dispute can occur when the goals and profit motivations of regional managers and account managers are not aligned.
2. Operational challenges:
MRA Associates is a technically complex organization. The services and solution that it specializes in delivering require its employees to possess a distinctly technical set of skills. Almost 75% of the 200 odd employees working for MRA Associates are engineers and scientist by qualification and most possess advanced degrees. One area where MRA Associates lags behind is general management. Just a handful of members have some training in management and/or practice. When compared with much larger competitors, MRA Associates believes that its competitive advantages are superior customer service and technological innovation. Consequently, the employee incentive compensation plan stresses client satisfaction and demonstrated technical excellence, as well as profit and revenue objectives. A recent survey of staff members at MRA Associates shows that the majority of employees feel committed to the company because of the high value placed on professionalism and technical excellence. Staff turnover is very low. MRA Associates has achieved several years of profitable growth and currently has strong cash reserves.
Given the limited size and scale of MRA’s business, the functional structure has served the company well so far. However, as the company grows in revenues and adds more clients to its roster, it will become inevitable to revamp the organizational structure. Given that MRA Associates has three major areas of specialization viz. groundwater contamination, biohazards cleanup and industrial wastewater treatment solution, it would be prudent to implement the matrix structure which helps an organization in grouping employees by both business functions and service categories. Once implemented, each of the functional areas i.e. groundwater contamination, biohazards cleanup and industrial wastewater treatment solution will have separate divisions for technical teams, management teams and account managers. Such a structure will not only help the organization take full advantage of the growth in business and also minimize friction between account managers and the technical team. For instance, when working for a client that wants solutions deployed in more than one region, account managers in the head office no longer need to coordinate with technical specialists in different regions. They just need to get in touch with the account manager in the regional office who in turn will coordinate with technical specialists hereby ensuring a seamless integration and timely delivery of solutions.
The implementation of a matrix structure will also have an impact on individual staff incentive, which in all probability will spike. Under the current structure, there are conflicts whenever the goals and profit motivations of regional managers and account managers are not aligned. Every time such a conflict occurs, the top management intervenes. This implies lots of time and resources in resolving the conflict. However, under a matrix structure, such conflicts will eventually diminish because each profit center will have its own dedicated team of account managers.
3. Fostering innovation:
In an age where competitors invest billions of dollars to ramp up capabilities, innovation has become the hallmark of high growth companies. Whether a small business or a Fortune 500 corporation, innovation is no longer an option, it has become a necessity. With the implementation of a matrix structure, which gives MRA management, more flexibility in terms of managing resources also facilitates an environment where innovation is possible. The management needs to make sure that there are processes in place, which facilitate the sharing of ideas. Planning specific events where teams from all of MRA offices regularly meet to discuss the new things they are working on can do this. Alternatively, another way to do this would be by creating an environment where the sharing and implementation of new ideas is incentivized.
Additionally, the management team at regional offices can themselves initiate a process wherein they deliver on innovation. By doing so, the company would be able to establish a competing environment where each regional office will work towards outperforming others. Further, account managers need to interact more often with technical specialists. Doing so would help each of the teams understand the other’s roles and responsibilities. By working collectively, not only will they improve productivity but will also be able to present a strong case in front of top management for their respective divisions.
Part 2
1. Organizational structure:
Xecodynamics is a small firm based in San Diego, California that designs and manufactures components used in clean-up operations at environmentally contaminated sites. These components — which are used widely throughout the environmental remediation industry — include electronic systems such as groundwater level monitors, remote chemical sensors, and remote electronic data storage devices. Xecodynamics has three key divisions — marketing, sales and customer education; product development and testing; and manufacturing, shipping, and customer support. The company hires independent contractors to install products at the request of its customers.
Most of Xecodynamics’ sales efforts are focused on companies like MRA Associates who recommend Xecodynamics’ products to their clients for purchase on specific projects. Manufacturing occurs in a single location at the San Diego facility. Most manufacturing staff have a high school level education, have learned their tasks on the job, and are hourly, non-unionized employees. Three people, an engineer who developed the original products and two venture capital investors who are not technically trained own Xecodynamics. The company has expanded rapidly in the seven years since it was started, but has been struggling recently due to a shortage in investment capital plus the emergence of new competitors. As an organization, Xecodynamics has a pre-bureaucratic organizational structure. This is not by conscious planning but by design.
A pre-bureaucratic organizational structure lacks standardization of work. This kind of a structure is most prevalent in smaller organizations and helps in resolving tasks quickly because most communication often occurs on a one to one basis. The top management (which is not too large) makes all key decision pertaining to general management, allocation of resources and strategic direction. This organization structure succeeds as long as the organization remains small because it helps the founders in exercising control of growth and development.
However, this sort of an organizational structure backfires once the business starts growing and demands more resources and employee base. In fact, with the current leadership team (an engineer and two venture capitalists who have no technical knowledge of the business) it will increasingly become difficult to maintain the growth that Xecodynamics has managed to achieve this far. The fact that the top management is now struggling to set a future strategic direction for Xecodynamics shows that a proper board consisting of exemplary individuals from different business functions needs to be brought in. It is for these very reasons that Xecodynamics welcomes a potential purchase by MRA Associates because of the influx of both cash and management expertise that Xecodynamics leadership believes will help the firm better respond to the market need for well-designed components. The company hopes that some of its internal leadership struggles over the vision and future direction of the company will be mitigated by merging with MRA Associates, a much older and more stable company.
2. Possible acquisition by MRA Associates:
MRA Associates believes that acquiring Xecodynamics will give the firm a distinct advantage in the highly competitive environmental remediation industry because the acquisition will enhance the image of MRA Associates as a technological innovator. Xecodynamics covets MRA Associates’ client list as high value potential customers. MRA Associates believes that the addition of products will provide a new profit stream and a platform for the technical experts at MRA Associates to create innovative new products, which can be manufactured in-house. The current venture capital owners of Xecodynamics believe they can make major changes in the profitability of MRA Associates, once they join the management team.
For MRA Associates, the acquisition of Xecodynamics will lead to backward integration. This will enter the very functional structure, which is entrenched in MRA’s culture. In order to accommodate Xecodynamics’ staff and operations, MRA Associates will have to undertake an extensive restructuring. From here on, MRA Associates will have three choices:
i) Matrix structure: MRA Associates might do well by considering the new company another business function. The employees are already there. All MRA needs to do is deploy a management team which will handle this division and ensure smooth coordination with account executives and technical specialists.
ii) Bureaucratic structure: A bureaucratic setup (though harmful after a certain extent) helps organization to bring elements like precision, speed, unambiguity, strict subordination, reduction of friction and of material and personal costs up to optimal levels. Given the fact that after the acquisition, the scope of MRA’s business function will increase significantly a bureaucratic organizational structure will help bringing on board a fair amount of standardization. Additionally, a bureaucratic setup establishes defined roles and responsibilities, promotes a hierarchical structure and creates an organizational culture where merit is respected.
iii) Pursuing Xecodynamics as a standalone business: While the appeal of acquiring Xecodynamics and merging it with MRA is no doubt tempting, it will require MRA Associates to reconsider organizational structure, policies and strategic vision in order to fully integrate Xecodynamics with itself. As such, an alternative could be to keep running Xecodynamics as a standalone unit with a separate top management and employee base with the President of Xecodynamics reporting to the CEO of MRA Associates. By doing so, not only MRA avoid the nightmare of changing almost every aspect of its business but will also ensure that by investing significantly in Xecodynamics, productivity will increase and the company will be more successful in delivering products and solutions that appeal to MRA Associates’ client base.
3. Outsourcing manufacturing:
From a strategic perspective, outsourcing the manufacturing function of Xecodynamics does make sense. After all, by outsourcing, MRA Associates will be able to take advantage of the lower wages and costs of doing business across the border. This will have an impact on the culture of the MRA Associates because the company will see a shift from being able to do and control everything on its own to that which has to just order and overlook. It might be negative because such move might lead MRA employees to think that their jobs might also be outsourced. For a business that depends entirely on the skill set of a specific group of people, such apprehension will not spell well for the company.
The second issue, which will come up by outsourcing, is more ethical in nature. As is evident, a large percentage of employees at Xecodynamics are manufacturing staff. Would it be right kick them out outright from the company they’ve been working for, for so many years? This might even invite the irk of labor rights activist. That’s not very good publicity when you’ve invested significantly in an acquisition. In short, MRA Associates would do well by not outsourcing initially. However, if it becomes evident in later months that the advantages of outsourcing outweigh the disadvantages, then MRA can pursue the outsourcing strategy in planned and phased manner.
Power sharing at the top:
Nevertheless, apart from the operational challenges the MRA will face with the acquisition, the more pressing challenges are cultural in nature. Most of the staff working at Xecodynamics have a high school level education, have learned their tasks on the job, and are hourly, non-unionized employees. MRA Associates does not have the experience of managing this sort of an employee base. Further, it will be difficult for MRA account managers and technical specialists to work with the Xecodynamics workers on a one to one basis.
The second cultural issue lies with the management of Xecodynamics. The two venture capitalists believe that they can make major changes in the profitability of MRA Associates, once they join the management team. Given that Xecodynamics is smaller than MRA Associates in size and scale, it is difficult to imagine the kind of roles these venture capitalists will be offered on the board of the new entity. Any tension between two parties can lead to a rift, which will in turn disrupt productivity and hamper profitability. This will also have an impact on the power equation that exists in both companies. Managers at Xecodynamics might feel that they are being undervalued compared to MRA managers.
In summary, the management team at MRA Associates will have to be very careful while accommodating the top management of Xecodynamics. A frictionless relationship between the two is will be integral to the success of this acquisition.
As history holds, mergers and acquisitions have mostly been a recipe for disaster. Except for the few, which have been executed with brilliant planning, most M&A’s have ended up destroying more value than they could individually create.
It is very costly to transfer specific knowledge and this transfer of knowledge can encourage the decentralization of decision rights. Decentralization can generate the rights assignment and also control problems. It is not necessary to ignore agency problems, assigning decision rights to individuals who have the decision-relevant knowledge abilities because they all increase organizational efficiency. Self-interest of individual decision makers, which requires some kinds of control system in order to motivate individuals by using their decision rights optimally. In a capitalistic economy, rights assignment and control problems are resolved by granting decision rights to individuals who are alienable.
Organizations can resolve the rights assignment and control problems by creating alternative means. Organizations can also alienate the decision rights assigned to individuals. The organizations can resolve these problems by establishing rules within the organizations. This process can be implemented in two ways: (1). Provide a system for partitioning decision rights among agents in the organization, and (2). Create a control system that provides a performance measurement and evaluate system and a reward and punishment system.
There are many limitations on human sensory and mental faculties. There are two levels, which limit decision-makers, (1). Technological feasibility this process is where reflections on currently limited human knowledge about physical laws. There is also economic analysis, which reflects that limitation that knowledge is given and also depends on technology available at that time. (2). The physical limitations are specific concern to each individual. The storing, processing, transmitting, and receiving knowledge are costly activities, which give limitations on human mental and sensory faculties. There are many characteristics of potential interest but the cost of transferring knowledge between people is the most concern of this paper. The organizational environment, technology, and the nature of the knowledge will determine the cost of transferring knowledge. The word transfer is not merely communication but it is actually effective transfer.
Rights Systems
When organizations take actions and decide on that action, it is referred to as a decision rights. Decision rights are when individuals have the power to take actions with resources and have power to make decisions. When the decision made by a party is operative, that will define the meaning of power. In today’s society, police powers are the core source of power.
The Functions of Alienability
In order to analyze markets and organizations, special attention should be given to the alienability of rights because it will actually clarify some critical functions that must be performed in organizations. There are two rights if implemented properly can be the combination of effective alienability and these rights are: (1). The right to sell or transfer rights and (2). The right to capture the proceeds of exchange. Alienability is a core condition to exchange but it is actually the foundation for markets and the institutional instrument that markets collocate knowledge with decision rights and control decision-makers.
In many organizations, alienability can actually resolve the rights assignment problem. In a market system, those with knowledge can acquire decision rights. The rules governing the measures of performance and process, and the rewards and punishments meted out in response to individual actions would be referred to as control. Organizational analysis can be compliments of control and knowledge.
Recommendations:
The proposed acquisition of Xecodynamics by MRA Associates is no different than those attempted by thousands of corporation – small and large alike – in the past. MRA Associates needs to be extremely careful in avoiding cultural shock. Just imagine IBM acquiring Google or via versa. One has a culture dominated by business suits and one has a culture where people are encouraged to relax as they work. Trying to integrate such cultures only spells disaster. In case the differences between the cultures at MRA Associates and Xecodynamics are as contrasting as that at IBM and Google, then it would be wise to consider not pursuing this acquisition.
When a number two player makes an acquisition, the idea is to takeover number 1. If this is the sole objective, then the customers of both the acquirer and the acquired get confused and eventually end up with the competition.
References:
1. Balaji Narasimhan. Nine reasons why mergers fail Retrieved from http://www.mid-day.com/lifestyle/2009/sep/030909-Nine-Reasons-Failed-Mergers-IT-Adda-Bangalore.htm
2. Burns, T. and G. Stalker: (1961). The Management of Innovation. London: Tavistock
3. Jossey-Bass Publishers: Explaining Organizational Behavior. San Francisco
4. Jensen, M. C., Foundations of Organizational Strategy, Harvard University Press, 1998
5. Max Weber: Essays in Sociology, translated, edited and with an introduction by H. H. Gerth and C. W. Mills
6. Pearson Education: Organizational Behaviors. 12th edition. Pearson Education
8. http://www.brownandcaldwell.com/Heritage.asp
9. The inherent limits of organizational structure and the unfulfilled role of hierarchy: Lessons from a near-war
