Inside Business: Big becomes beautiful for continental companies

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The Independent Online
The development of a three-way takeover battle between Banque Nationale de Paris, Societe Generale and Paribas at the same time as Olivetti is stepping up its attempt to take control of Telecom Italia would appear to demonstrate that continental Europe is embracing Anglo-American-style merger mania.

However, while we might still regard euroland as a fairly sleepy thoroughfare, there is evidence to suggest that continental companies have been attempting to wake up for some time.

According to Tony Clayton, director of the consultancy PIMS Associates, as long ago as the late 1980s it was becoming clear that size was beginning to have an effect on the margins of Europe-wide businesses. Though this seems obvious enough, prior to 1985 factors associated with strong returns included smaller but more focussed market position, the choice of particularly fragmented markets, the avoidance of huge investment in research, and fewer but highly profitable customers.

As Mr Clayton says: "Businesses with these traits are unlikely to be the ideal candidates to deliver growth." So he is understandably encouraged that it is becoming less worth while to adopt such policies.

Instead, he says in an article in the current issue of the Business Strategy Review (produced by London Business School in association with the Strategic Planning Society) that after 1985 the most profitable businesses tended to be those with the biggest share of the market. They were more dependent on "mass marketed" products, with little customisation and so more likely to be able to exploit scale economics. They were likely to be in markets where advertising was a big part of the cost structure, supporting the belief that consumer businesses were exploiting economies of scale faster than most.

Additionally, they were no longer likely to be "followers" in technology development and might invest more heavily in R&D, which could permit "catch- up" growth against international competitors. And they were even more likely to focus on big suppliers for the bulk of their purchases.

This pattern suggests, says Mr Clayton, that the more successful businesses in this period are those that have succeeded in exploiting some economies of scale - in production, in the development of a better "offer to customers", or in the use of marketing resources .

Reports that Olivetti's chief executive, Roberto Colaninno, has said he intends to shed 13,000 jobs from the telecommunications company as part of a strategy to back the Telecom Italia bid suggest that perhaps the best-known economy of scale - reduced headcount - is catching on.

In going down this route, successful European businesses appear to be showing that the success factors for profit on the Continent are falling into line with the success factors for growth - innovation, quality and intellectual property.

And British businesses are responding in kind. One strategy apparently adopted with a view to overcoming the "geographic stretch" associated with the single market is to focus on key processes within their operations, and the outsourcing of non-essential functions.

While this shows up as a reduction in scale at the individual level, it has reportedly not affected what is said to be the policy objective of the single market to promote competition through scale economies. And more encouragingly, it seems to have helped make investment for innovation a key factor in the EU-wide businesses examined by Mr Clayton and his colleagues.

The French bank tussle does not really fit in since - for all the novelty of involving three parties - it essentially looks like an attempt at an old-fashioned cost-cutting merger, where the only other real identifiable aim appears to be acquiring market share.

But it is perhaps symptomatic of the way things are going. And Mr Clayton, for one, can see evidence that - in encouraging companies away from little niches and the like - the single market has "started to deliver the goods". Which, at a time when the problems at the European Commission are dominating the front pages, is just as well.