Insights -- April 2005

An Acquired Taste
Aligning business and IT strategies, regardless of M&A plans
It's no secret that consumer goods companies are under extreme pressure to reduce costs and increase their revenue. The two primary sources of pressure come from investors and customers. Most notably, the customer base in the consumer goods industry is continuously consolidating and growing stronger.

One example is the recent announcement of the Sears/Kmart merger. Another example is the growing power of Wal-Mart -- which is almost always the largest customer for any consumer goods company.

As the retail sector consolidates and fewer and larger players grow stronger, many consumer product manufacturers -- such as Adolph Coors Co. and Molson Inc., Hershey Foods Corp. and Wm. Wrigley Jr. Co. -- are executing merger or acquisition strategies. On January 28, the M&A trend in the consumer goods industry accelerated when Procter & Gamble announced its plans to acquire The Gillette Company for $54 billion. The announcement foreshadows additional large deals in the consumer goods industry.

Questioning Consolidation
The question on everyone's mind is, "Is consolidation a good thing for consumer goods industry?" On the surface, M&A activity appears to be positive. However, the obstacles to achieving purported M&A benefits such as supplier rationalization, distribution efficiencies and trade fund optimization are numerous:

• Unifying leadership and strategic direction

• Rating and reducing the supply base

• Optimizing manufacturing assets

• Divesting duplicated manufacturing and distribution facilities

• Reducing general and administrative overhead

• Harmonizing corporate cultures and right-sizing organizations and functions

• Rationalizing demand channels and SKUs

• Maximizing brand identity and management

The Alignment issue
One of the largest and often overlooked barriers to a successful merger or acquisition is the alignment of information technologies with the business goals and strategies of the new organization. The alignment is particularly challenging if one of the companies involved in the merger or acquisition runs a highly centralized and standardized IT environment and the other company runs a highly distributed IT environment that is not standardized.

To successfully align information technologies within the consolidated organization, the planning, transaction and execution systems must support the new organization's strategic goals and operating practices.

For example, if the merged company wants to reduce costs by negotiating lower prices with suppliers, then it must centralize and cleanse all purchasing data and analyze the supplier performance. Accomplishing this means the merged company must have the right supply management application, a data warehouse and analytics software, or a relationship with a vendor that provides all those capabilities.

Another example is if the company wants to optimize price, channel and SKUs, then it must have pricing, marketing analytics and trade fund management tools in place with employees trained to exploit the value of the technology.

The Bottom Line
Bigger is better in the consumer goods industry only if the larger entity can use information technology to reduce supply chain costs and deliver improved sales, marketing and channel effectiveness at equal or greater customer service levels.