Supervising dozens or even into industries with as yet unforeseen potential. Their data cover the period up through takeover, but not subsequent divestments. But imag- ter-off test. Provided that the target industries are ined synergy is much more common than real synergy.
Instead of cooperating, business units ripe for transformation. The same insight is neces- often compete. A company that can define the syner- sary to actually turn the units around even though gies it is pursuing still faces significant organizational they are in new and unfamiliar businesses.
These requirements expose the restructurer to con- But the need to capture the benefits of relationships siderable risk and usually limit the time in which the between businesses has never been more important. The most skill- Technological and competitive developments al- ful proponents understand this problem, recognize ready link many businesses and are creating new their mistakes, and move decisively to dispose of possibilities for competitive advantage.
In such sec- them. The best companies realize they are not just tors as financial services, computing, office equip- acquiring companies but restructuring an industry. Another important difficulty To understand the role of relatedness in corporate surfaces if so many other companies join the action strategy, we must give new meaning to this ill-de- that they deplete the pool of suitable candidates and fined idea. I have identified a good way to start—the bid their prices up. I call them value activities.
Hu- It is at this level, not in the company as a whole, that man nature fights economic rationale. Size supplants the unit achieves competitive advantage. I group shareholder value as the corporate goal.
The company these activities in nine categories. Primary activities does not sell a unit even though the company no create the product or service, deliver and market it, longer adds value to the unit. While the transformed and provide after-sale support. The categories of pri- units would be better off in another company that had mary activities include inbound logistics, operations, related businesses, the restructuring company in- outbound logistics, marketing and sales, and service.
Gradually, it becomes a portfolio Support activities provide the inputs and infrastruc- manager. The perceived need to keep growing intensifies procurement. The restructuring company turns into a con- tionships that may create synergy. The second is the ability to share activities. Two business units, for example, Transferring Skills can share the same sales force or logistics network. The tionship with each autonomous unit.
While each venor. In articulating them, how- the units. For example, a toiletries business unit, ever, one comes face-to-face with the often ill-defined expert in the marketing of convenience products, concept of synergy. Newly can offset the acquisition premium or lower the cost entered industries can benefit from the expertise of of overcoming entry barriers. The industries the company chooses for diversifi- These opportunities arise when business units cation must pass the attractiveness test.
Even a close have similar buyers or channels, similar value activi- fit that reflects opportunities to transfer skills may ties like government relations or procurement, simi- not overcome poor industry structure. Opportunities larities in the broad configuration of the value chain to transfer skills, however, may help the company for example, managing a multisite service organiza- transform the structures of newly entered industries tion , or the same strategic concept for example, low and send them in favorable directions.
Even though the units operate separately, such The transfer of skills can be one-time or ongoing. If the company exhausts opportunities to infuse new Of course, some similarities are common; one can expertise into a unit after the initial postacquisition imagine them at some level between almost any pair period, the unit should ultimately be sold. The cor- of businesses. Countless companies have fallen into poration is no longer creating shareholder value.
Few the trap of diversifying too readily because of simi- companies have grasped this point, however, and larities; mere similarity is not enough.
Yet a com- Transferring skills leads to competitive advantage pany diversified into well-chosen businesses can only if the similarities among businesses meet three transfer skills eventually in many directions.
If cor- conditions: porate management conceives of its role in this way and creates appropriate organizational mechanisms 1. The activities involved in the businesses are to facilitate cross-unit interchange, the opportunities similar enough that sharing expertise is mean- to share expertise will be meaningful.
Broad similarities marketing intensive- By using both acquisitions and internal develop- ness, for example, or a common core process ment, companies can build a transfer-of-skills strat- technology such as bending metal are not a egy. The presence of a strong base of skills sometimes sufficient basis for diversification. The result- creates the possibility for internal entry instead of the ing ability to transfer skills is likely to have acquisition of a going concern.
Successful diversifiers little impact on competitive advantage. The transfer of skills involves activities impor- ever, often acquire a company in the target industry tant to competitive advantage. Transferring as a beachhead and then build on it with their internal skills in peripheral activities such as govern- expertise. By doing so, they can reduce some of the ment relations or real estate in consumer goods risks of internal entry and speed up the process.
Two units may be beneficial but is not a basis for companies that have diversified using the transfer-of- diversification. The skills transferred represent a significant source of competitive advantage for the receiv- Sharing Activities ing unit. The expertise or skills to be transferred The fourth concept of corporate strategy is based on are both advanced and proprietary enough to be sharing activities in the value chains among business beyond the capabilities of competitors.
McKes- receiving unit. The prospect for change must be spe- son, a leading distribution company, will handle such cific and identifiable. Almost guaranteeing that no diverse lines as pharmaceuticals and liquor through shareholder value will be created, too many compa- superwarehouses. The transfer of skills does not for corporate strategy because sharing often en- happen by accident or by osmosis. The company will hances competitive advantage by lowering cost or have to reassign critical personnel, even on a perma- raising differentiation.
But not all sharing leads to nent basis, and the participation and support of high- competitive advantage, and companies can encoun- level management in skills transfer is essential. These hard truths have led because they have not provided their business units many companies to reject synergy prematurely and with any incentives to participate. Because its customers often ordered takeouts tions and start-ups. Start-ups or small acquisitions are on the way to the national airport, Marriott eventually used for initial entry, depending on how close the op- entered airline catering.
From there, it jumped into portunities for sharing are. To expand its geographic food service management for institutions. Marriott then base, Marriott acquires companies and then disposes began broadening its base of family restaurants and of the parts that do not fit. In addi- its start-ups. Marriott has into cruise ships, theme parks, wholesale travel agen- largely failed in diversifying into gourmet restaurants, cies, budget motels, and retirement centers.
In the first three businesses, Marriott discovered it oped skills in food service and hospitality. Running cruise ships and theme parks was standardized and painstakingly documented in elabo- based more on entertainment and pizzazz than the rate manuals. Marriott shares a number of important carefully disciplined management of hotels and mid- activities across units. A shared procurement and distri- price restaurants.
The wholesale travel agencies were bution system for food serves all Marriott units through ill fated from the start because Marriott had to com- nine regional procurement centers. Marriott also has a fully inte- which to add value. Sharing can lower costs if it achieves economies Sharing activities inevitably involves costs that the of scale, boosts the efficiency of utilization, or helps benefits must outweigh. One cost is the greater coor- a company move more rapidly down the learning dination required to manage a shared activity.
More curve. A ances are low because they are spread over a wide salesperson handling the products of two business range of appliance products. Sharing can also enhance units, for example, must operate in a way that is the potential for differentiation.
A shared order-pro- usually not what either unit would choose were it cessing system, for instance, may allow new features independent. And if compromise greatly erodes the and services that a buyer will value. A shared service than enhance competitive advantage.
Companies also merge Often, sharing will allow an activity to be wholly activities without consideration of whether they are reconfigured in ways that can dramatically raise com- sensitive to economies of scale. When they are not, petitive advantage. Companies Sharing must involve activities that are significant compound such errors by not identifying costs of to competitive advantage, not just any activity.
Costs of compromise can frequently be diaper and paper towel business, where products are mitigated by redesigning the activity for sharing. The bulky and costly to ship. Conversely, diversification shared salesperson, for example, can be provided with based on the opportunities to share only corporate a remote computer terminal to boost productivity overhead is rarely, if ever, appropriate. The infusion of electronics vironment. The caveat is that portfolio management and information systems into many industries cre- is only sensible in limited circumstances.
If its business units are in unat- and internal development. Internal development is tractive industries, the company must start from often possible because the corporation can bring to scratch. If the company has few truly proprietary bear clear resources in launching a new unit. Start-ups skills or activities it can share in related diversifica- are less difficult to integrate than acquisitions.
Com- tion, then its initial diversification must rely on other panies using the shared-activities concept can also concepts. Yet corporate strategy should not be a once- make acquisitions as beachhead landings into a new and-for-all choice but a vision that can evolve. A industry and then integrate the units through sharing company should choose its long-term preferred con- with other units. Prime examples of companies that cept and then proceed pragmatically toward it from have diversified via using shared activities include its initial starting point.
The fields into which each Both the strategic logic and the experience of the has diversified are a cluster of tightly related units. Because they do not rely on supe- organizational context in which business unit collabo- rior insight or other questionable assumptions about ration is encouraged and reinforced.
The company must put into place a variety of creation. A company can business unit strategies, an incentive system that re- employ a restructuring strategy at the same time it wards more than just business unit results, cross-busi- transfers skills or shares activities. A strategy based ness-unittaskforces, and other methods of integrating. As the Marriott clearly meets the better-off test because business units case illustrates, a company can often pursue the two gain ongoing tangible advantages from others within strategies together and even incorporate some of the the corporation.
It also meets the cost-of-entry test by principles of restructuring with them. When it reducing the expense of surmounting the barriers to chooses industries in which to transfer skills or share internal entry.
Other bids for acquisitions that do not activities, the company can also investigate the pos- share opportunities will have lower reservation prices. When Even widespread opportunities for sharing activities a company bases its strategy on interrelationships, it do not allow a company to suspend the attractiveness has a broader basis on which to create shareholder test, however. Many diversifiers have made the criti- value than if it rests its entire strategy on transform- cal mistake of equating the close fit of a target industry ing companies in unfamiliar industries.
Target industries must My study supports the soundness of basing a pass the strict requirement test of having an attractive corporate strategy on the transfer of skills or shared structure as well as a close fit in opportunities if diver- activities.
Even successful diversifiers sified company to create shareholder value in a dif- such as 3M, IBM, and TRW have terrible records ferent way. Companies can succeed with any of the when they have strayed into unrelated acquisitions.
Selecting the core businesses that will be the lated fields respectively and so enjoy numerous op- foundation of the corporate strategy. Success- portunities to transfer skills and share activities. Core businesses are those joint ventures. Most companies shy away from that are in an attractive industry, have the po- modes of entry besides acquisition. My results cast tential to achieve sustainable competitive ad- dount on the conventional wisdom regarding start- vantage, have important interrelationships ups.
Exhibit 3 demonstrates that while joint ventures with other business units, and provide skills or are about as risky as acquisitions, start-ups are not.
The study shows that company than to rely solely on an acquisition and geographic extensions of existing units, then have to deal with the problem of integration. My data also illustrate that none of the concepts of The company must then patiently dispose of corporate strategy works when industry structure is the units that are not core businesses.
Selling poor or implementation is bad, no matter how related them will free resources that could be better the industries are. Xerox acquired companies in re- deployed elsewhere. In some cases disposal im- lated industries, but the businesses had poor struc- plies immediate liquidation, while in others the tures and its skills were insufficient to provide company should dress up the units and wait for enough competitive advantage to offset implementa- a propitious market or a particularly eager tion problems.
Creating horizontal organizational mecha- nisms to facilitate interrelationships among An Action Program the core businesses and lay the groundwork for To translate the principles of corporate strategy into future related diversification.
Top manage- successful diversification, a company must first take ment can facilitate interrelationships by em- an objective look at its existing businesses and the phasizing cross-unit collaboration, grouping value added by the corporation. Only through such units organizationally and modifying incen- an assessment can an understanding of good corpo- tives, and taking steps to build a strong sense of rate strategy grow.
That understanding should guide corporate identity. Pursuing diversification opportunities that al- skills and activities with which to select further new low shared activities. This concept of corporate businesses. The following action program provides a strategy is the most compelling, provided a concrete approach to conducting such a review.
A company can choose a corporate strategy by: company should inventory activities in existing business units that represent the strongest 1. Identifying the interrelationships among al- foundation for sharing, such as strong distribu- ready existing business units. A company tion channels or world-class technical facilities. A company can use acquisitions as activities or transfer skills in its existing port- a beachhead or employ start-ups to exploit in- folio of business units.
The company will not ternal capabilities and minimize integrating only find ways to enhance the competitive ad- problems. Pursuing diversification through the transfer several possible diversification avenues. The of skills if opportunities for sharing activities lack of meaningful interrelationships in the are limited or exhausted. Such diversification is often riskier because It is all too easy to create a shallow corporate of the tough conditions necessary for it to work.
It entered such industries as alone. Rather it should also be viewed as a toys, crafts, musical instruments, sports teams, and stepping-stone to subsequent diversification us- hi-fi retailing. While this corporate theme sounded ing shared activities. New industries should be good, close listening revealed its hollow ring.
None chosen that will lead naturally to other busi- of these businesses had any significant opportunity nesses. The goal is to build a cluster of related to share activities or transfer skills among them- and mutually reinforcing business units. Saddled with the worst acquisition 6. Pursuing a strategy of restructuring if this fits record in my study, CBS has eroded the shareholder the skills of management or no good opportu- value created through its strong performance in nities exist for forging corporate interrelation- broadcasting and records.
When a company uncovers underman- Moving from competitive strategy to corporate aged companies and can deploy adequate strategy is the business equivalent of passing through management talent and resources to the ac- the Bermuda Triangle.
The failure of corporate strat- quired units, then it can use a restructuring egy reflects the fact that most diversified companies strategy. The more developed the capital mar- have failed to think in terms of how they really add kets and the more active the market for compa- value. A corporate strategy that truly enhances the nies, the more restructuring will require a pa- competitive advantage of each business unit is the tient search for that special opportunity rather best defense against the corporate raider.
With a than a headlong race to acquire as many bad sharper focus on the tests of diversification and the apples as possible. Paying dividends so that the shareholders can 1. The studies also show that sellers of companies capture a large be the portfolio managers. Paying dividends is fraction of the gains from merger. See Michael C. Jensen and Richard S. Tax considerations, which some com- vard Business Review November—December : Some recent evidence also supports the conclusion that mate reasons to diversify if a company cannot acquired companies often suffer eroding performance after acqui- sition.
Portfolio management, restructuring, transferring skills, and sharing activities are four concepts of corporate strategy that companies most commonly use. Portfolio management no longer works very well in the United States because of its highly developed capital market.
Restructuring is merely a stopgap measure that will not build shareholder value over the long term because it usually produces an unwieldy conglomerate. Companies have the best chance of being successful at diversification if they capitalize on the existing relationships between business units by having them transfer skills and share activities.
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