Why bigger is not always better: the strategic logic of value creation through M&As

Purpose – The strategic thinking behind numerous M&As is: “bigger is more important than better”. Such logic is also followed in the growth strategies of many players who believe that increasing scale via M&As will bring sustainable competitive advantage and generate above‐average financial performance and value creation for their shareholders. But numerous failed M&As and the modest financial performance of many large players compared to smaller ones question the universality of this logic. The aim of this article is to emphasize how important it is in strategic decision‐making to correctly understand and interpret contemporary concepts such as scale‐based completion, industry consolidation, and M&As. Design/methodology/approach – The discussion is guided by three leading questions which need to be answered in any strategy formulation process: does scale matter, and where? What are the implications of industry concentration? What should be the strategic logic behind M&As? These questions are addressed according to the key assumptions and premises of the merger and industry consolidation theory and the Rule of Three concept, and the discussion is enriched by several cases and examples from various industries. Findings – Scale does not necessarily bring competitive advantage, improve financial performance, or generate scale‐related synergies per se . To develop sustainable competitive advantage, executives must understand the true nature and mechanisms which drive the industry concentration process, value creation through M&As and the consequent advantages of increasing company scale. Originality/value – The article discloses key strategic elements to be considered when formulating effective corporate strategies in a complex business environment and a context of rapidly concentrating industries. The discussion also raises awareness regarding the importance of strategic logic, correct interpretation of strategic concepts and sensitivity toward differences in industries in avoiding false conclusions and poorly‐formulated strategies.