The phenomenon of ‘conglomerate discount’ (stock market valuing companies that have diversified into unrelated businesses at a lower rate) of the 1990s woke many companies up to the reality that they cannot continue to manage their ‘portfolio’ using a matrix, be it BCG, GE, or any other.
By now, strategy gurus like CK Prahalad and a few others have evolved models and frameworks to enable companies to grow in a synergistic way. How do you make 1+1 = 11?
The core competency framework of Prof Prahalad was a path-breaking contribution to corporate strategy. His basic hypothesis was very simple — identify what you excel in, as an organisation; it may be manufacturing, marketing, supply chain/logistics management, R&D or other functions; and seek out such opportunities that will enable you to leverage your core competency.
Value proposition
Take the example of Honda. Once it realised that its core competency lay in designing superb engines for motorcycles, it only took a logical leap to enter the four-wheeler industry, where the heart of the product is the ‘engine’. A Samsung moving from TVs to mobile phones successfully or a Micromax doing the reverse (from mobile phones to TVs) are some of the recent examples — both products require a great skill in terms of audio-visuals.
Synergy can come in many ways, from sharing customers and channels to logistics, manufacturing and procurement. It can happen in marketing, sales or even branding and advertising. While many of these synergies help optimise costs, they can also enhance value proposition, if creatively managed.
Action plan
It is not easy to estimate potential synergy between two businesses. Many of the diversification efforts, particularly through the mergers and acquisition route, end up destroying value rather than creating it, not because they did a poor job of estimating synergy but because they could not come up with the right action plan to exploit the same. It requires special skills on the part of management to achieve the potential synergy that exists.
The biggest transatlantic marriage between Daimler and Chrysler, which ended in a bitter divorce after a few years, is a classic example of failure to identify and tap into the potential each company offered.
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