THE CONSOLIDATION PROCESS
The crown of success in management is worn by those who have achieved significant growth in profits. Profitability, of course, depends on profit margins and sales volume. The margin of profit is very attractive when a new product is successfully launched, but a high profit margin attracts competitors. The first casualty in a competitive shuffle is the profit margin. As a product enters its maturity stage, the presence of a few major competitors is sufficient to drive the profit margin to a relatively thin net after tax profit of 5 percent, or less, of revenues. Those seeking the crown of success must look elsewhere to achieve their laurels. Market share is all that is left.
In today's global economy, managers are encouraged by their shareholders, and by their governments, to view the earth as their marketplace. However, whether a New York company is selling its wares in California or in Germany, the parent organization needs some type of local presence. Frequently, the first step in establishing a local presence is for the home office to set up a branch operation to handle the marketing and distribution of its product line. A branch operation requires its own set of books for both reporting and control purposes, and to establish a measure of its financial performance. Branch financial reports must be combined with the parent's in order for the financial performance of the parent to be fairly portrayed to its shareholders.
As business grows, the next step in pursuing continual growth in profits, or market share, is usually establishing operating affiliates. Whereas a branch may be an integral part of the parent organization, an operating affiliate may be an independent entity whose stock is owned by the parent company. Its purpose may go beyond marketing and distribution, to include producing goods to be sold in the local market or to be exported to other markets. Once again, the