Manufacturers often acquire a small strategic supplier to ensure a ready supply of components at the right price. They might also do so to gain access to an emerging technology or perhaps to reduce exposure to price fluctuations or to own a critical part of their supply chain. However, despite such an acquisition, the manufacturer may not plan to openly compete in the market of the acquired supplier. For example, Apple recently acquired a flash memory design firm to secure access to a proprietary technology that increases the performance of flash memory drives, though Apple is not a supplier in the flash memory market.
Similarly, sometimes a company may set up a separate branch in a geography that houses an adjacent industry cluster to bring new ideas back into the parent company. European pharmaceutical giants have done this by establishing subsidiaries in California or Boston, close to new developments in fields like biogenetic engineering, to foster and disseminate innovation within their organization.
Such diverse operations force a company to grapple with a complex management issue: how to integrate such a diverse business into the company, yet still ensure their autonomy, so they continue to flourish and innovate. How should a balance between control, visibility and independence be successfully executed?
For example, consider a scenario when a utility acquires a power generation company to get predictable access to a power source. The core competency of a power generation company is asset management -- knowing how to extract maximum value from its current infrastructure/capacity. By contrast, a utility understands billing, repair and customer management processes very well.
Setting up independent subsidiaries is a natural way to organize in such scenarios -- the acquirer can get the leverage from its recent acquisition, while keeping the acquired company independent enough to retain the executive talent and continue to deploy different processes and systems to be competitive and innovative in its own market. Each has to work independently, but be able to take advantage of the strength of the other in order to maximize the leverage from such a strategy.
