The study supports the affirmation of Ferrier (2001) that competitive actions do affect the company’s profitability. In fact, some characteristics of competitive actions, or combinations of competitive actions, were found which seem to lead to superior profitability and some characteristics of competitive actions, or combinations of competitive actions which, on the contrary, seem to lead to inferior profitability with respect to other firms in the same industry.
Organic Growth Versus Mergers and Acquisitions
In the sufficiency analysis it was pointed out, that organic growth as opposed to mergers and acquisitions was absent from both of the solution terms leading to profitability, and was present in both of the solution terms leading to poor profitability. In other words this means that a high degree of mergers and acquisitions characterized the solution terms for good profitability and lacked from the solution terms for poor profitability. Based on this I deduce that mergers and acquisitions are an important part of profitable strategy.
This finding supports the notion of Delmar et al. (2003), that there are significant differences in growing organically and growing via mergers and acquisitions. Much of the other affirmations are contradicted by these results, however. Hitt et al. (2001), Anderson (2006), Hitt et al. (1991) and King et al., (2004) pointed out the negative returns producing, value-destroying nature and the low probability of success of the acquisitions. In addition Hess (2006), stated, that companies that generate organic growth earnings are more likely to be sustainable high-performance organizations with respect to those which grow by mergers and acquisitions. There might be several explanations for these different results.
One of them is higher degree of similarity and relatedness of the acquiring and target
organizations. Hitt et al. (2001 and 2006) emphasized the synergy and scale economies benefits of these kinds of acquisitions which might partly make it more profitable to acquire in the forestry industry than in other industries. In fact, at least in this study, the majority of the acquisitions were made in the same or in a very similar sector with respect to the core sector of the firm, or at least within the forestry industry.
On the other hand the reason for the strong advantage mergers and acquisitions seem to have over organic growth might be explained partly because the effects of mergers and acquisitions are usually more immediate than that of organic growth as, for example, Kärri (1999) and Hitt et al., (2006) state. So, as a result, it might take more time before the effects of organic growth can be seen in the profitability figures.
I would also think that in the forestry industry the premiums, value-creating nature and transferability of assets -the critical issues related to acquisitions according to Hitt et al.
(2006)- might be easier to determine than in other industries where perhaps the brand name and other intangible and some ways more unpredictable assets play a bigger role. This could also enhance the profitability of mergers and acquisitions in the forestry industry with respect to other industries.
Even though Joyce’s studies (2006) emphasized more the importance of balanced growth between organic and inorganic growth instead of choosing only one of the growth paths, his interpretation was that inorganic growth seemed to make more sense for firms that have developed skills for managing organic growth over time. Forest companies, in fact, have had lots of time to learn how to manage organic growth, so maybe they are now ready take on the challenges of inorganic growth.
Expansions
The sufficiency analysis solution terms were also curious regarding the position of capacity expansions versus capacity declines. It seems that capacity expansions have the same kind of relation to profitability, as do mergers and acquisitions, namely low level of capacity
expansions lead to low profitability and high level of capacity expansions lead to high level of profitability (with one exception that will be discussed later on). This supports the statements about the importance of economies of scale (e.g. Kärri, 1999)– the bigger the company is, the more efficient, and that way more profitable it is. Even though there might be negative sides to the growing in size for a company, like more complex and heavy administrative structure, losing some agility in responding to customers’ needs and possible difficulties in making the personnel committed, the economies of scale and other benefits seem to prevail over these. In fact, it makes sense, as the investments in plants, machinery, and technology are so huge that it must be really of paramount importance to distribute the costs to as much output as possible. So, even though measuring the performance of a firm based only on the growth figures might not be the most accurate measure like Joyce (2006) suggests, it still seems in the light of this study, to be a significant factor in determining profitability at least in the forestry industry. The study seems to support the statements of Hitt et al. (2006) about the growth which can benefit an organization, for example, by creating value through strategic learning and increased firm knowledge, entrepreneurial behavior, innovation and further utilization of its resources and capabilities.
It seems like the managers interviewed by Kärri, who stated that their companies would be more competitive if they were a little bigger because of the scale advantages (1999, 11), and Geroski et al. (1997) who report the existence of a positive, statistically significant and robust correlation between growth rates and the long run profitability of the companies were mostly right in the light of this study. The worries of Hitt et al. (2006) of growth which might mask organizational inefficiencies are not supported by this study.
The only exception to the link between growth and profitability is the solution term which states, that the combination of low expansions accompanied by high level of diversification and low level of internationalization leads to high profitability. This solution term is represented by Packaging Corporation of America and Rayonier in the empirical evidence.
The reason for this exception might lie in the high level of diversification; when diversifying, it might be better to do it little by little as opposed to diversifying with fast pace. When diversifying with fast pace all the information of the new sector might not be
absorbed as fast as the diversifying takes place, and so slower pace might end up being more profitable as it takes time to get to know the new sector.
No other clear general indications of the effect of diversification and internationalization on profitability was got from the analysis. These causal factors, however, are not present in the solution terms for good profitability (except for the diversification discussed earlier combined with low rate of expansions). In both of the solution terms for the low profitability, however, one out of diversification and internationalization is present and the other one absent. This leads me to think that in general these causal conditions, when high, lower the profitability. This would support the claims of Markides (1995) and Wernerfelt and Montgomery (1988) of the dangers of overdiversifying, and, instead, oppose the Hitt et al.’s views of the importance of internationalization. On the other hand it is possible that it takes more time for diversification and internationalization to turn out to be profitable as opposed to expanding the capacity in the core sector or in the domestic markets. Thus, it is possible that the lag of one year used in this study might not have covered the longer term effects diversification and internationalization had on profitability.
Cooperation
Even though cooperation with other entities can undoubtedly offer many possibilities to enhance business, the level of cooperation of companies in this study was surprisingly low.
This would contradict the findings of Casson and Mol (2006) stating, that the meaning of cooperation has increased a lot lately. On the other hand, the forestry industry might not have been the first industry where the globalization and blurring of industry boundaries was expected to happen, but I would still have expected to see more of cooperative moves from the companies. Quinn (1999) suggested, that because of the alliances, firms can focus on a smaller set of activities while obtaining inputs from many specialized outside suppliers, and thus get a maximum result of their operations. But as previously discussed, in the forestry industry there are so many advantages in synergies and economies of scope that the forestry industry might not be the industry the alliances would enhance the most.