​Impact Of Industry Consolidation On Productivity

How consolidating industries can affect productivity


Every industry has a unique competitive landscape. Some industries have hundreds or even thousands of competitors. Others have a small handful of major players. While there are benefits of high levels of competition, there are also benefits of shifting towards a more consolidated industry. This is a reality that consumers, key industry players and regulators must all consider as companies propose mergers and acquisitions.

One of the most overlooked advantages of industry consolidation is increased productivity. With that in mind, here are some ways that mergers and acquisitions can improve productivity.

Access to better benefits and compensation

One of the primary competitive advantages of mergers and acquisitions is that companies can eliminate redundant employees. While there is obviously a downside to lay off workers, it is a new opportunity for other employees. The money companies save on redundant labor can be reinvested into the remaining employees. Offering higher wages and benefits can spur productivity.

Employees of smaller companies also tend to benefit from mergers. Their new parent company usually has deeper pockets, so it can be more generous with compensation.

Inspiring workers through tougher competition

In a large and highly fragmented industry, qualified employees are virtually guaranteed employment. Mergers and acquisitions often lead to lower employment rates in those professions. Companies are forced to cut the deadweight and only hire the best remaining employees.

This can hurt employee morale, since workers realize they can be replaced by more talented workers. On the other hand, it can also boost productivity for the same reason. When employees realize that they can be easily replaced, they work harder to justify their position.

Mergers and acquisitions typically find a reasonable middle ground. Only the bottom 20% of employees are likely to be driven out of the industry. The remaining employees realize that their job is relatively secure, so morale doesn’t suffer as much. However, they are just uncomfortable enough to feel the pressure to work harder and be more productive.

Tapping new resources and knowledge

There are several reasons that companies participate in mergers and acquisitions. As stated above, one of the benefits is creating a leaner and more efficient workforce. Another benefit that is less discussed is sharing company knowledge and information, which is often done securely through the use of virtual data rooms. This allows organizations that merge to have access and control over which employees are accessing shared data.

Some organizations are inherently more productive than others. Some have developed highly effective productivity hacks that have drastically increased output. Others have picked up a number of bad habits that have stifled productivity.

Of course, the reality is usually more mixed. All organizations have their finer points and weaker points. Mergers give them the opportunity to blend the elements that give them a productivity advantage and rectify mistakes that hurt productivity.

They can pool their knowledge base and identify resources to make them be even more productive.

Higher profitability leads to key productivity benefits

As industries become more consolidated, individual companies tend to be more profitable. This is because they don’t face as much competition, which almost invariably drives down prices. They also have a higher share of the market.

There are a couple of reasons that this usually leads to higher productivity. First of all, as companies generate more revenue due to less competition, they can reinvested into new tools that will boost worker productivity. Another benefit is that workers may feel more pride in working for a large company, which can drive productivity and improve loyalty.

Industry Consolidation Tends to Lead to Greater Productivity, but Exceptions Exist

There are a number of reasons that mergers and acquisitions can cause employees to be more productive. However, there are also some reasons that this may not always be the case.

I mentioned that industry consolidation tends to make employees more productive because they fear the risk of being redundant when full employment isn’t possible in their industry. However, more senior employees may not feel that way, especially if they have gotten comfortable in a larger and more bureaucratic company.

Some industries may already have reached peak productivity if they have already met the market needs. In these cases, there may not be much room for improvement.

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