INTRODUCTION

Much of this paper's analysis results from the author's own experience, observing the acquisition behavior of a large Belgian multinational firm (affiliate of a Fortune Global 500 company), where he acted as senior economic advisor for a period covering more than five years. The author is indebted to Lorraine Eden, JIBS Editor-in-Chief, for her suggestion to focus on the possibilities of extending the scope of the Bresman, Birkinshaw, and Nobel (1999) perspective on acquisitions, by including both social community and dominant logic dimensions. He is also indebted to three critical reviewers whose comments allowed improving greatly an earlier draft of the paper.

Bresman, Birkinshaw, and Nobel's (1999) acclaimed JIBS piece “Knowledge transfer in international acquisitions” has become a key intellectual foundation for research on international post-acquisition management. This piece focused on successful international acquisitions by Swedish multinational enterprises (MNEs) to achieve reverse knowledge transfers and to build innovation capacity. Such acquisitions triggered a process whereby two different social communities (namely those representing the acquiring and the acquired company respectively) grew to become one. Here, mutual adaptation and soft bundling mechanisms (two-way socialization) prevailed. In the cases studied, the newly established, unified social community supported intra-MNE knowledge flows and thereby the firm's capacity for innovating.

In this paper I build upon Bresman et al.'s (1999) social community perspective, arguing that it reflects the first of two dimensions of international acquisition success, with a reverse knowledge-seeking and innovation capacity-building purpose. This first dimension itself was revisited in Birkinshaw, Bresman, and Nobel's (2010) Retrospective and Zander and Zander's (2010) particularly insightful commentary on the JIBS Decade Award winner. The second dimension is the dominant logic dimension: the efficient and effective integration of an acquired company with its acquirer usually requires the latter to institutionalize at least some of its routines and more generally its “ways of doing things” in the newly formed unit. Such institutionalizing can also be interpreted as a type of knowledge transfer, but typically imposed by the acquirer on the acquired entity.

I propose that effective post-acquisition management requires balanced attention to the two above dimensions of success. Several other managerial trade-offs, critical to effectively transferring knowledge and building innovation capacity, have been discussed in the management literature, including inter alia the trade-offs between centralized decision-making and autonomy, between structural integration and integration through socialization, and between task integration and human integration. However, in this commentary I propose that unilaterally imposing routines (which may include inter alia pricing mechanisms, formalized coordination and control tools, and socialization) vs engaging in mutual adjustment with due attention to the needs and desires of individuals and groups in the acquired company represents the main balancing act to be performed. This trade-off holds especially in the R&D sphere, where highly qualified scientific personnel expect their input on how to conduct innovation activities to be considered seriously, and can choose to walk away from the firm at any time, but where at the same time managing the innovation process in its entirety does require generally accepted and consistently applied patterns in decisions and actions.

Building a unified social community through mutual adjustment and institutionalizing the dominant logic of the acquiring firm are both important. However, the relative weight that should be attributed to each success dimension in post-acquisition management critically depends upon the specific activity class involved: some activities may require more and others less commonality in dominant logic. If less commonality in dominant logic is required or can reasonably be achieved, more managerial attention can and should be devoted to social community formation, thus suggesting a contingency perspective.

ACQUISITION SUCCESS DIMENSION 1: CONSTRUCTING A UNIFIED SOCIAL COMMUNITY

Bresman et al. (1999) built their analysis of the post-acquisition integration of R&D units in Swedish MNEs upon five elements. First, as noted above, Bresman et al. (1999: 442) argued that an acquisition means “bringing together of two ‘social communities’ that over a period of years … become a single social community”. Second, Bresman et al. (1999) focused their analysis on R&D acquisitions, that is, foreign investments performed for strategic asset-seeking purposes in the upstream sphere, aimed at reverse knowledge transfer and innovation capacity building. Third, in line with Kogut and Zander's (1993) philosophy, the authors identified the factors that facilitate knowledge transfer and innovation capacity building. Here, more knowledge transfer and innovation capacity building are assumed to be better, since – according to the authors – these features are critical to financial success (Bresman et al., 1999: 445). Fourth, Bresman et al.'s (1999) sample selection led to a strong focus on success factors, though recognizing the presence of barriers to post-acquisition performance, as illustrated by the Alfa Laval case and the problems caused by suspicion and the presence of a “thin integration group” in the ABB case (Bresman et al., 1999: 454). Fifth, the authors gained a number of substantive insights into the conditions for success in international acquisitions. These insights included the observation that more communication, as well as more visits and meetings by personnel from the two original entities, facilitated mutual adjustment and tacit knowledge transfers. Furthermore, rather limited explicit integration efforts in the early stages initially fostered transfers of patented knowledge, but ultimately it was social community building that facilitated tacit knowledge transfers and innovation capacity building in the longer run.Footnote 2

As regards specific international business (IB) challenges, such as those rooted in differences in national entrepreneurial cultures, corporate governance systems and routines, Bresman et al. (1999) briefly noted the importance of cultural elements.

ACQUISITION SUCCESS DIMENSION 2: DIFFUSING THE ACQUIRER’S DOMINANT LOGIC

Bresman et al.'s (1999) focus on social community building through mutual adaptation was – and remains – a refreshing addition to the strategic management literature on international acquisitions, which often neglects this important dimension of post-acquisition success. A second dimension of success, in addition to the social community dimension, is ex post dominant logic commonality.

Attending to the second dimension of post-acquisition success implies unilaterally imposing the acquirer's own dominant logic, in the spirit of Prahalad and Bettis (1986) and Bettis and Prahalad (1995). A dominant logic reflects “[firms’] entrenched habitual modes of functioning based on prior successes and failures and the strategic contingencies they have had to face in the past” (Côté, Langley, & Pasquero, 1999). In the specific context of acquisitions, a firm's dominant logic reflects: “(a) top managers’ conceptualization of the role of the firm and of acquisitions; (b) criteria for decision-making and evaluation; and (c) the organizing and management principles adopted” (Côté et al., 1999: 927). In the post-acquisition integration process, whereby assets and capabilities of both firms are bundled, the acquirer's dominant logic mainly expresses itself as a mix of (b) and (c) above, that is, as routines. Routines are stable patterns of decisions and actions that coordinate the productive use of resources (with assets and capabilities representing resource combinations) and aim to create value (Verbeke, 2009). Such routines are partly determined by the environment (e.g., industry recipes) and are partly firm specific. In the IB sphere, country-level characteristics also significantly co-determine an acquirer's dominant logic (Child, Faulkner, & Pitkethly, 2001).

Imposing routines does not necessarily need to occur through organizational design or structural means only. For example, expatriates and socialization mechanisms can be used to introduce the acquirer's routines: the critical point here is the lack of mutual adjustment. Imposing a dominant logic on an acquired firm does not necessarily follow from a “superior technology” held by the acquirer (compare with Bresman et al., 1999: 445) or an initial lack of “trust” between the two parties that needs to be alleviated (compare with Bresman et al., 1999: 454), a point illustrated by Bresman et al.'s (1999: 453) cases of Alfa Laval and ABB. The dominant logic view, though not the focus of Bresman et al. (1999), is actually consistent with their observation of a sequence of one-directional knowledge flows from the acquirer, followed by reverse knowledge transfers. Indeed, in a first stage, the acquirer institutionalizes his routines, and this is then followed by reverse knowledge flows within the confines provided by these routines.

Dominant logic commonality does matter when engaging in asset and capability bundling, especially if reverse knowledge transfer and an increase in innovative capacity are desired outcomes. The ease of asset bundling depends largely on the nature of the assets involved. Here, the question is what patented or fully codified knowledge assets are available from the acquired firm, and more specifically whether these assets are modular and can be effectively grafted onto the acquirer's assets because of knowledge relatedness or overlap, which is mainly a technical issue. In contrast, effective capability bundling constitutes a more complex challenge. Here, relevant questions include how the acquired firm performs innovation activities, and how its scientists are motivated and rewarded, that is, what routines drive the innovation process. Effective capability bundling depends largely on the commonality/divergence between the two firms’ routines, and it involves interpersonal, inter-group and broader acquirer-legitimacy challenges, since routines reflect values. To put it differently, the net benefits of an acquisition intended to achieve reverse knowledge transfers and boost innovation capacity will decrease vis-à-vis other operating modes (such as internal R&D within newly established operations, or the use of joint ventures) as the two economic entities involved in the post-acquisition process exhibit less dominant logic commonality, since this complicates especially the capability-bundling process.Footnote 3

Institutionalizing routines in the acquired firm by the acquirer de facto demands the (costly) destruction of pre-existing, diverging routines in the former. Costs come in many forms, including demotivated scientists leaving the acquired firm, delays in new product launches because of employee disorientation and disaffection, and attempts to subvert newly imposed resource allocation systems, as well as accounting and human resources management tools, etc. Alternatively, simply superimposing a small set of new routines on top of existing ones in the acquired firm seldom works in international acquisitions aimed at transferring knowledge and building innovation capacity. Here, capability bundling is an intricate process, because individuals and groups of both organizations must share sufficient common ground in terms of how they create, recombine, report and diffuse knowledge with the view to making this knowledge actionable. Making knowledge actionable refers to managing the innovation process in its entirety (Verbeke & Kenworthy, 2008).

In international acquisitions, the two original economic entities typically face higher levels of geographic, economic, cultural and institutional distance vis-à-vis each other than would be the case with uni-national acquisitions.Footnote 4 These distance components have their origin in the cross-border nature of the acquisition, and make it more likely that the two firms’ dominant logic will exhibit substantial differences. Distance may obviously be a potential source of value, and may have contributed to selecting a particular foreign acquisition, namely to gain access to locally embedded, knowledge creating capabilities. However, knowledge capabilities confer value only if they are truly accessible. Here, distance further amplifies the importance of imposing common routines throughout the newly formed entity, in spite of the cost thereof. Common routines allow double bridging, that is, overcoming two sources of substantive divergence in dominant logic. The first source is related to differences in founders’ values, firm size, administrative trajectory, sectoral influences, etc., whereas the second source reflects additional differences representative of the international dimension. Here, home country differences (e.g., cultural distance) between the acquirer and the acquired firm may be more important than micro-level differences (e.g., corporate level cultural differences) (Weber, Shenkar, & Raveh, 1996).

A major problem is that ex ante perceived commonality in dominant logic may be very different from the ex post reality. The ex post reality refers to how commonality appears after the formal acquisition has been performed, that is, after moving from the realm of conventional due diligence in analyzing accounting data, evaluating information on research output and productivity, calculating hypothetical synergies and formulating optimistic business plans based on increased innovation capacity, towards actually trying to make the acquisition work by bundling assets and capabilities in practice. As noted above, this bounded rationality problem may be amplified in the international context. Here, asset and capability bundling face IB-specific challenges, such as differences in national entrepreneurial cultures, and in the prevailing corporate governance systems and routines considered legitimate.

Paradoxically, in high-distance environments the acquirer's dominant logic may simply not be workable, and social community building only through soft forms of mutual adjustment may be effective, at least if initiated soon after the acquisition. For example, Inkpen, Sundaram, and Rockwood (2000) provided an outstanding analysis of how European acquisitions in Silicon Valley led to systematic value destruction, at least from the perspective of the acquiring firms. When trying to impose the prevailing dominant logic of the acquiring companies, stock option plans were cancelled; expatriates sent by the European companies socialized mainly among themselves; time-consuming, alleged consensus-building decision-making prevailed. These new routines were supposed to replace the patterns of decision-making and action characteristic of entrepreneurial companies operating in the high-velocity Silicon Valley environment. The point is that distance matters: higher geographic, economic, cultural and institutional distance make it more difficult to impose the acquiring firm's dominant logic, even if such distance is also the source of potential value (see also Krug & Hegarty, 2001). Social community building may then be a valid alternative, but trying to establish in a timely fashion a unified social community across all company units and all activity classes involved may be equally challenging in the short run.

The above analysis implies that in “high distance” environments the acquirer's dominant logic should be imposed only in activities where this does not negatively affect the acquired firm's ability to contribute value to the newly formed economic entity. In the other activities, which actually could be negatively affected, there may be more potential for value creation via social community building through mutual adjustment, assuming this can be achieved in a timely fashion. “In a timely fashion” means: before all the valuable human resources embodying the acquired firm's capabilities have gone out the door at night without intending to come back the next morning.

Figure 1 clarifies the above analysis. Here the vertical axis describes the level of desired reverse knowledge transfer and innovation capacity building by the acquirer (high or low), whereas the horizontal axis represents the commonality in dominant logic (high or low). Bresman et al.'s (1999) Swedish success stories describe situations whereby a high desired level of reverse knowledge transfer and innovation capacity building are combined with a relatively high, ex post commonality in dominant logic. The positioning of these cases in quadrant 3 in Figure 1 may reflect a superior capability of the Swedish MNEs involved at assessing ex ante the potential fit in dominant logic with acquisition targets, thereby also explaining their subsequent focus on social community creation.

Figure 1
figure 1

Reverse knowledge transfer and dominant logic commonality in the post-acquisition bundling process.

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In the absence of sufficient ex post commonality in dominant logic, the acquiring firm must impose its own routines, precisely to facilitate transferring knowledge and building innovation capacity. This means moving from a quadrant 1 to a quadrant 3 situation in Figure 1. However, as noted above, if distance is too high, the acquirer's dominant logic may actually destroy the acquired firm's capability to create new knowledge, meaning that the choice of an acquisition as operating mode was a mistake, an often observed phenomenon in the IB arena (Ghemawat & Ghadar, 2000; Verbeke, 2009). Fortunately, in many international acquisitions, asset and capability bundling – even if performed to increase the MNE's overall innovation capacity – do not require much reverse knowledge transfer. Here, the acquired firm may simply be allowed to pursue its own innovation trajectory, and to retain its own dominant logic in the R&D sphere (and more generally at the upstream side). This may occur in the absence of high ex post commonality with the acquirer (quadrant 2 in Figure 1). However, the acquirer's routines may then still be imposed in more downstream activities, especially if the MNE wishes to use its production and distribution network to commercialize internationally the acquired firm's innovations. This amounts to creating a quadrant 4 situation in Figure 1 at the downstream end of the value chain. New routines may also be imposed in parts of the R&D function itself, namely those parts where the acquirer wishes to engage in rationalization or specialization of affiliates, taking into account R&D activities performed elsewhere in the MNE network.

A VALUE CHAIN DECOMPOSITION PERSPECTIVE ON INTERNATIONAL ACQUISITIONS

As noted above, every acquisition reflects the bundling of assets and capabilities from two different firms. R&D-related acquisitions aimed at transferring knowledge and building innovation capacity are no exception. Obviously, a predator or vulture approach, whereby the MNE wishes mainly to capture the existing knowledge assets of an acquisition target and shows little interest in this target's higher-order capabilities, cannot be excluded, especially in industries with very short product cycles. In this case there is no complex and time-consuming post-acquisition integration process. However, predator and vulture strategies are unlikely to be sustainable in the international acquisition sphere, because of the potential detrimental effects on the MNE's reputation and legitimacy in the variety of foreign institutional environments where it operates, as Chinese state-owned, foreign direct investors are now well aware (Roberts & Balfour, 2009). In other words, the “bird in hand” strategy (focus on the rapid transfer of existing, codified knowledge) may be far less preferable to the “two in the bush” approach (focus on future innovation capacity): (cf. Puranam, Singh, & Zollo, 2003). Here, it may also be less meaningful to implement bundling through unilaterally imposing formal elements of the organizational structure (and associated routines) across all “activity classes”, to the extent that such structural elements may destroy the acquired firm's value creation capabilities in activity classes where it does “know better” than the acquirer, especially in high-distance international acquisitions, whereby the acquired firm is deeply embedded in an idiosyncratic home environment (cf. Puranam, Singh, & Zollo, 2006).

Of course, the term “activity class” itself may also be misleading. Paruchuri, Nerkar, and Hambrick's (2006) brilliant piece highlighted that acquirers should be especially careful with disrupting routines of inventors in technological areas different from the acquirer's, especially because non-overlapping technologies could potentially have the highest value to the acquirer. The same holds for disrupting the work of scientists whose work is deeply embedded in the acquired company in terms of deep, routine interactions with multiple other employee-scientists, many of whom resign or are fired in the post-acquisition bundling process. As Paruchuri et al. (2006: 558) argue, keeping such scientists productive may require mutual adjustment through a variety of social community-creating initiatives, such as “special forums, communication programs, and incentive systems in efforts to overcome the distinctive apprehensions and fears of these valued subgroups of knowledge workers”. New incentive systems could be viewed as a “hard” bundling mechanism, but the point is that such systems should be designed according to the knowledge workers’ preferences, rather than imposed on them as a component of the acquirer's dominant logic.

Finally, Hennart and Reddy (1997, 2000) have argued that successful acquisitions require the digestibility of the acquired firm's assets and capabilities. Digestibility implies on the one hand the efficient bundling of desirable assets and capabilities of the two firms, and the easy shedding of undesirable ones on the other. For the latter, the acquirer's dominant logic can probably be imposed without much concern for social community building. Imposing the acquirer's routines in the activity classes associated with unwanted assets and capabilities may be necessary if some restructuring must be performed before disposal, so as to increase their market value.

The point is that for some activity classes the acquirer's routines should indeed be imposed in full (e.g., introducing standardized accounting control systems and critical ICT systems shared by all affiliates in the MNE network). In contrast, there may be many activity classes where efficient asset and capability bundling requires more attention to social community formation, with a focus on mutual adjustment through soft bundling mechanisms. As noted above, an activity class may sometimes need to be defined in a very narrow fashion, for example, specialized R&D performed by just a few scientists deeply embedded in the acquired firm and its local environment.

CONCLUSION

The great paradox in contemporary international acquisition activity intended to transfer knowledge and build innovation capacity is the following. Large MNEs typically select this operating mode to compensate for a relative weakness in their extant reservoir of knowledge-based assets and capabilities (Hennart & Park, 1993), but at the same time effective asset and capability bundling requires imposing some of the acquirer's routines on the acquired company. In other words, one economic actor with explicit weaknesses unilaterally imposes his way of doing things on another economic actor supposed to remediate these weaknesses. This paradox is especially visible in acquisitions explicitly aimed at transferring knowledge and building innovation capacity. An exclusive focus on the acquirer's dominant logic in the post-acquisition bundling process is therefore unlikely to go over well in the acquired firm, which is supposed to provide access to its crown jewels, in the form of knowledge assets and capabilities. Here, Bresman et al. (1999) compellingly advocate the construction of unified social communities through mutual adjustment in a bona fide fashion as a complement to dominant logic imposition, although creating a unified social community faces its own set of challenges.Footnote 5 A joint focus on the two dimensions or faces of acquisition management success is obviously very different from two-faced acquisition management, whereby the acquirer promises ex ante to engage in mutual adjustment with the acquisition target, whereas the ex post reality is one of non-negotiable, one-directional imposing of routines on the acquired firm.

Bresman et al. (1999) emphasized transferring knowledge and building innovation capacity. These are expressions of knowledge exploration. However, the authors appropriately never argued that knowledge exploration would somehow be divorced from subsequent knowledge exploitation. Unfortunately, some recent strategic management literature suggests precisely such a dichotomy, namely that an acquisition's main purpose as exploitation vs exploration of knowledge would constitute the most critical variable determining how the post-acquisition process should be governed. But such an alleged dichotomy between exploitation and exploration is a complete non-starter, especially in the international context. Acquisitions are performed because of dual market failure, combined with the assumed modularity and digestibility of the acquired firm's assets and capabilities. Here, bundling at least some knowledge from the acquirer (at a minimum the transfer and deployment of its dominant logic in carefully selected activity classes) with assets and capabilities held by the acquired firm always needs to occur for the acquisition to be the preferred operating mode. This process of bundling two existing knowledge bases includes by definition knowledge-exploiting and knowledge-exploring components, from the perspective of either company involved in the post-acquisition bundling process. Success in post-acquisition bundling therefore also by definition requires ambidexterity. An acquisition would not make any economic sense in the absence of either exploitation or exploration of knowledge. The international dimension further amplifies the ambidexterity point, since each of the firms involved has assets and capabilities the other firm lacks, at least partly because of its specific location in what constitutes a foreign host environment for the other firm.

Finally, it has also been suggested that limited dominant logic imposing in a first stage may be beneficial in the longer term (Puranam et al., 2006). The problem with this suggestion is that it cannot be generally applied across activity classes. It ignores the differential costs and benefits of dominant logic imposing in various activity classes. In other words, selecting (a) an optimal mix of efforts towards social community creation through mutual adjustment vs transfer of routines, and (b) the optimal timing of achieving the desired level of post-acquisition bundling, needs to be differentiated per activity class. Unfortunately, in North America and Europe, the “100-day” rule is now often advocated by consultants and post-acquisition integration managers, meaning that the integration process is supposed to have been completed within slightly more than three months (Angwin, 2004). This may seem credible and feasible advice for activity classes related to senior management staffing, general accounting and financial management systems, ICT operations, procurement, etc. However, this rule is certainly not applicable to knowledge-creating activities, simply because it may take much more than 100 days to figure out even basic elements such as the identity of the true knowledge generators in the acquired firm, the importance of personal relationships among R&D team members, the extent to which some knowledge bases are not (and perhaps cannot be) codified, and the functioning of the innovation process in its entirety.

Implementing the acquirer's dominant logic in selected activity classes may be achievable in 100 days, and may lead to perceived acquisition success in terms of this key dimension. However, Bresman et al. (1999) have taught us that achieving acquisition success in terms of the other key dimension, namely building a unified social community, requires substantially more managerial effort than can reasonably be exerted during the first 100 days. Birkinshaw, Bresman, and Håkanson's (2000) sister piece to the 1999 JIBS Decade Award winning article further amplifies the point: intra-MNE integration became a priority only once the acquired unit had achieved a satisfactory performance on a standalone basis, and effective task integration required prior human integration as a precondition for acquisition success. True success should be assessed a number of years down the road after the acquisition, rather than within unrealistically short time lines, at least if one is genuinely serious about improving innovation capacity. Social community building through mutual adjustment is expensive and time consuming, but there are no shortcuts to long-run survival, profitability and growth in knowledge intensive industries.