Inside Business: Big becomes beautiful for continental companies

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.

Start your day with The Independent, sign up for daily news emails
PROMOTED VIDEO
ebooks
ebooksA special investigation by Andy McSmith
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Recruitment Genius: Software Development Manager

£40000 - £50000 per annum: Recruitment Genius: This is an exciting opportunity...

Ashdown Group: Product Manager - (Product Marketing, Financial Services)

£30000 - £35000 per annum + Benefits: Ashdown Group: Marketing Manager - Marke...

Recruitment Genius: Compliance Assistant

£13000 per annum: Recruitment Genius: This Pension Specialist was established ...

Ashdown Group: Market Research Executive

£23000 - £26000 per annum + Benefits: Ashdown Group: Market Research Executive...

Day In a Page

As in 1942, Germany must show restraint over Greece

As in 1942, Germany must show restraint over Greece

Mussolini tried to warn his ally of the danger of bringing the country to its knees. So should we, says Patrick Cockburn
Britain's widening poverty gap should be causing outrage at the start of the election campaign

The short stroll that should be our walk of shame

Courting the global elite has failed to benefit Britain, as the vast disparity in wealth on display in the capital shows
Homeless Veterans appeal: The rise of the working poor: when having a job cannot prevent poverty

Homeless Veterans appeal

The rise of the working poor: when having a job cannot prevent poverty
Prince Charles the saviour of the nation? A new book highlights concerns about how political he will be when he eventually becomes king

Prince Charles the saviour of the nation?

A new book highlights concerns about how political he will be when he eventually becomes king
How books can defeat Isis: Patrick Cockburn was able to update his agenda-setting 'The Rise of Islamic State' while under attack in Baghdad

How books can defeat Isis

Patrick Cockburn was able to update his agenda-setting 'The Rise of Islamic State' while under attack in Baghdad
Judith Hackitt: The myths of elf 'n' safety

Judith Hackitt: The myths of elf 'n' safety

She may be in charge of minimising our risks of injury, but the chair of the Health and Safety Executive still wants children to be able to hurt themselves
The open loathing between Barack Obama and Benjamin Netanyahu just got worse

The open loathing between Obama and Netanyahu just got worse

The Israeli PM's relationship with the Obama has always been chilly, but going over the President's head on Iran will do him no favours, says Rupert Cornwell
French chefs get 'le huff' as nation slips down global cuisine rankings

French chefs get 'le huff' as nation slips down global cuisine rankings

Fury at British best restaurants survey sees French magazine produce a rival list
Star choreographer Matthew Bourne gives young carers a chance to perform at Sadler's Wells

Young carers to make dance debut

What happened when superstar choreographer Matthew Bourne encouraged 27 teenage carers to think about themselves for once?
Design Council's 70th anniversary: Four of the most intriguing prototypes from Ones to Watch

Design Council's 70th anniversary

Four of the most intriguing prototypes from Ones to Watch
Dame Harriet Walter: The actress on learning what it is to age, plastic surgery, and her unease at being honoured by the establishment

Dame Harriet Walter interview

The actress on learning what it is to age, plastic surgery, and her unease at being honoured by the establishment
Art should not be a slave to the ideas driving it

Art should not be a slave to the ideas driving it

Critics of Tom Stoppard's new play seem to agree that cerebral can never trump character, says DJ Taylor
Bill Granger recipes: Our chef's winter salads will make you feel energised through February

Bill Granger's winter salads

Salads aren't just a bit on the side, says our chef - their crunch, colour and natural goodness are perfect for a midwinter pick-me-up
England vs Wales: Cool head George Ford ready to put out dragon fire

George Ford: Cool head ready to put out dragon fire

No 10’s calmness under pressure will be key for England in Cardiff
Michael Calvin: Time for Old Firm to put aside bigotry and forge new links

Michael Calvin's Last Word

Time for Old Firm to put aside bigotry and forge new links