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This paper deals with companies with multiple businesses under a single umbrella (hereafter
referred to as multi-businesses). It seeks to explore:
1.c Some common reasonings behind diversifications both organic and via acquisitions
2.c How diversification can often help create Competitive Advantage
3.c How to assess if the parent and the subsidiary are a good fit and
4.c How different elements of corporate strategy can be used to create competitive advantage.

The paper explores the case of Newell, which has had an extremely successful acquisition
strategy, in particular. It also examines cases from other industries to identify a common thread.

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Xiversification, most often, has had one of these 3 motives:

V c

 Specialized firms have to deal with the vagaries of the industry they are in. For
declining industries, this is often a daunting prospect. But @       

    @. Because of the ?
 

, managers may undertake
unprofitable diversification. Exxon for example moved into copper and coal mining, electric
motors and office equipment. Exxon¶s attempt to build Exxon Office Systems as a rival to
Xerox and IBM proved to be a very expensive mistake.

ü c @ @ The desire to spread risk is another reason why diversification
might seem to make sense. But this doesn¶t necessarily create shareholder value. Though the
Capital Asset Pricing Model suggests that diversification reduces unsystematic risk, this is
only in the case of related and ³perfect´ diversification. But in such cases, the  @
@
  

@      
 
  @    @. If
bankruptcy risk is considered, it has been proved that risk reduction is more beneficial to
debt-holders (coinsurance effect) rather than equity holders.

 c Ô   Michael Porter suggests 3 essential tests that should be applied in deciding
whether diversification will truly create value
a.c r ?


 The industries chosen should be attractive or capable of being made
attractive.
b.c _ 
  The cost of entry should not capitalize future profits
c.c v


 : Either the new unit must gain competitive advantage from its linkage
with the corporation or vice-versa.

We later examine the better off test in greater detail and see how one can ensure that the
corporation can add value to the new unit.
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V c     These can be either in tangible resources (distribution networks, IT
systems, sales forces or R&X labs), intangible resources (brands, reputation or technology)
or organizational capabilities. Newell¶s acquisition strategy often focused on acquiring
companies that manufactured staple products with a strong brand that ranked 1 or 2 in market
share. It also acquired small businesses in order to round out existing product lines and
consolidate capacity. Both of these are examples of how intangible resources, in this case
brand and access to new segments, when added to Newell¶s existing product mix helped it
acquire economies of scope.

ü c       : Though economies of scope provide cost
savings and often, competitive advantage, it is not always necessary to diversify in order to
acquire economies of scope. Walt Xisney, for example, would rather license out a character
to a juice company than diversify into the juice business. It is necessary to determine relative
efficiency by comparing transaction costs of signing and enforcing a market contract with
administration and management costs of establishing and coordinating a diversified business.

 c     Xiversified corporations have internal capital and labor markets that can
be mobilized to the company¶s advantage. For example, the yearly transfer rate among
Newell¶s top 250 managers was 10%, with many moving across 5 or more divisions in their
career. This ability to move employees across divisions to roles they are best suited in, rather
than relying on hiring and firing, gives rise to significant efficiencies.c

  

Rntil recently, it was felt that the most appropriate acquisition targets were those in similar
businesses. For example, oil companies were often seen delving into the minerals business.
However, recent studies on the subject have disproved this. The most significant works and in
this regard is ³Creating Corporate Advantage´ by Xavid Collins & Cynthia Montgomery, HBR
1998´ and ³Corporate Strategy: The quest for Parenting Advantage´ by Campbell, Goold and
Alexander. Both works stress that similarity in the end products is not important; what matters is
whether there is an alignment of resources.

Campbell, Goold and Alexander have outlined a five point mechanism for understanding if there
is a fit between the parent and the businesses in the portfolio.

V c Ô     : The values, aspirations, biases, rules of thumb that guide parent
managers as they deal with the businesses.
ü c Ô    @  The mechanisms through which the parent
creates value. At Newell, the newly acquired firms went through a process of Newellisation,
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in which companies were put through a process of streamlining with focus on operational
efficiency and profitability.
 c     @  @   : These should support line
managements¶ efforts to create value. The extent of resource sharing and transferring
depends on the actual business. For instance, Newell managers were transferred deliberately
to build a skilled in house resource pool.
h c —          
      At Newell, since the
managers were transferred across various businesses, they could fill the vacancies that arose
using in house talent itself.
ð c X        @ : Xefines the issues where the
parent normally interferes and which it delegates to the business managers. Newell
transferred critical resources throughout the firm without undermining the independence of
business units.

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? 
suggest that great corporate strategies are the result of three factors that
form a continuum as shown below.

Let¶s take three companies, Newell, Sharp and

Tyco for example and see how this continuum
worked in their favor.

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   The
core competency of a firm is formed through a
mix of the resources at its disposal and how
these resources are leveraged across their
businesses to create value.
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, Xan Ferguson¶s first step was to

identify, that their core competency lay in
making a high volume, low cost product and
selling it to the mass retailer. All acquisitions at
Newell therefore, had to have the above in
common.
? competency on the other hand lay in developing technologies that could be used across
multiple product lines. Rnlike competitors such as Sony and Matsushita therefore, they never
ventured into the movie business for example since it was outside their technology base.
At  on the other hand, the resources employed are general: financial controls, good
incentive programs, strong manufacturing and skilled operating managers. These general
resources lend themselves to businesses that are mature, stable and low technology.
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ü.  
  @ @  
 
    Once the Core
Competency of the firm has been identified the next step is to look at the kind of organizational
structure that needs to be created in order to effectively deploy the resources it has.



 for example realizes that sharing of all resources for e.g. the Sales-force is not the most
prudent strategy. It therefore works on the idea of transferring resources instead. Managers are
rotated across the different businesses and periodic meetings are held. Also the managers are
measured more on 30 operating variables that management believes is critical to the success of
the businesses, like restricting SG&A expenses to 15%, bracketing the variances with too many
variances leading to bracket meeting.
? on the other hand is organized into functional units and not product units. Since the
company is so technology dependent, it is important that developments if any are shared across
functional units. As such, it has a large corporate office, which co-ordinates between the
different functional units. Also, the incentive structures are designed to promote a sense of
teamwork between the different units. The company culture is such that employees treat the
company as if it were a family working towards a common good. This results in lesser turnover,
lesser backbiting and more co-operation.
 works on a radically different model. Each unit at Tyco is considered to be a separate
business. The managers are given a budget and responsible for meeting it and controlling all
aspects of the business. The incentive structure is highly variable and encourages performance
over everything else. Also, since there is not much co-ordination required between businesses, it
maintains a smaller corporate office.

— 
 

As is evident from the examples above, there seems to be no one clear strategy that works. A
company can position itself at any point on the continuum. What is required though is that all
three elements ± competitive advantage, co-ordination and control are consistent across the
organization and complement one another. Not doing so will at best get average results and at
worst is a recipe for disaster.