Corporate Diversification and Shareholder Value - Assignment Example

Strategic Management Table of Contents Answer 4 a) 4 b) 5 Answer 2 6 a) 7 c) 8 d) 9 Answer 3 10 a) 10 b) 11 Answer 4 12 a) 12 b) 13 c) 14 d) 14 References 16 Answer 1 This section of the study would be presenting comparative study between the combined value of diversified organisation and the value of the individual business organisations. a) It is an obvious fact that the combined value of the businesses of a company has to be more than its individual businesses. This is because of the profitability and also due to the combined customer base and the diversified companies have compared to only one of its business. For example, L’Oreal is into cosmetics, hair care products segment, fragrance segment, and dermocosmetics. It might be the case that its fragrance segment and dermocosmetics segment might not be very popular among people, or may be targeted at only niche customers. This decreases the customer base of the company and simultaneously will reduce the profitability too. If L’Oreal only concentrated on its hair care or fragrances, then the profit would have been low, target customers would have been different, and company would have to strive really hard to generate revenue because brands of L’Oreal like Ralph Lauren, Giorgio Armani are luxury products, which would single-handedly neither be attractive for majority of the customers and nor be profitable for the company. This is where it can be said combined businesses enhance value. If L’Oreal’s La Roche-Posay and Biotherm products for skin are not doing well, then it does not matter because L’Oreal offers brands like Maybelline, Garnier, range of hair colour and hair care products, which are extensively popular among customers, and this evens out the loss or low revenue that the other niche or less popular brands generate. This strategic theory is based on an old saying- : Together we stand and divided we fall.” In the present competitive business environment, company in order to add value, profitability, and gain the support of probable investors and confidence of the shareholder look out for establishing diversified business, so as to hedge the risk of one industry by investing into the profitable ones. This concept can also be related to the concept of derivatives. Individual business of the same organisations are focusing on the same industry, and dealing with the market threats and barriers. However, all the threats are not avoidable, so it can be said that individual businesses are confined to a fixed area of operation. Hedging risk through various means is possible, but not always. Moreover, profitability or revenue generation is also fixed in terms of its volume of production and sales. In the present volatile market if once the business fails then it is really difficult to pull it up. Combined businesses function like different companies or business units, but when it comes to offering value to shareholder, the combined return is much more than individual business (Martin, and Sayrak, 2001). b) The strategy of diversification and achieving profit through a combined effort is obviously more profitable than individual business organisation. It provides the opportunity to the organisation to switch to cross- business strategies that fits in the competitive advantage of the company. The greater the company is ready to diversify towards other businesses, the bigger window the company gets for fitting its strategic moves into competitive advantage. This is usually possible through skill transfer, cross-business collaboration, and brand name, which supports the weaker businesses of the company. The diversified organisations need to consider whether the cross business prospects are for transfer of skill, for combining the activities of the value chain to achieve low cost, leverage the use of its brand name, or for the establishment of new resource or capabilities. In this section Procter & Gamble (P&G) has been chosen to explain how the combined value of businesses in diversified organisations are more than of the individual business in that organisation. The net sales of the combined businesses of P&G for the year 2012, was $83,680 million, but segment wise if each business is considered then, the net sales of beauty segment is 19 percent, grooming segment is 10 percent, fabric care and home care is 32 percent, and the rest belongs to other segment. This clearly shows that in term of profitability, an individual business of the company cannot generate revenue which equals the whole (Procter & Gamble, 2012). Individually P&G would not have become the world’s largest consumer goods company. Just by depending on Tide, Aerial, Head & Shoulders, or Pantene, P&G would not have been able to generate $10 billion sales every year. The individual businesses of these companies generate approximately $1 billion revenue due to the brand equity of P&G. Customers trust the company, and that is the reason why products sold by P&G in every segment is trusted. The trust of the customers lies in the combined strength and combined quality of the company. Multinational companies though diversify in various industries, but try to keep their business intact because of emerging in the world market as conglomerates or superpowers (Procter & Gamble, 2012). Answer 2 This section would be specifically discussing the effectiveness of combined businesses of diversified organisations in comparison to individual businesses of those organisations, in context to Woolworths Limited. a) Woolworths Limited is an Australian Company which is into retailing. There are various divisions of Woolworths Limited such as supermarkets, liquor, petrol, Safeway, liquor, merchandise, smith electronics, consumer electronics, and home improvement. This section would be analysing the concepts discussed in the previous section, in context of Woolworths Limited. The group profit of Woolworths in 2012 was $56,700 million, while as can be seen from the financial statement of the company, the sales of Woolworths in its Australian Liquor and food division is the highest, which was $37,579.2 million in 2012. This it is the proof of the fact that the combined value of businesses in diversified organisations is always greater than its individual businesses. Woolworths Limited is in its maturity stage and a high level of rivalry exists between Coles and Woolworths, but Woolworth alone capture more than 40 percent of the market (Woolworths Limited, 2012). The strategies that the company undertake and recommendations that they consider are all streamlined with the future objectives of the organisation. Based on Potter’s Five force model if the business environment is analysed, then it can be said that the threat of new entrant is low for established firms like Woolworths. Woolworths low cost structure, technological framework, and good customer service is its strength. Further, all the divisions of Woolworths have focused strongly on the supply chain for the efficient administration of its value chain. Woolworth is considered the major player in the supermarket retail industry of Australia and New Zealand. This is because of the equally outstanding performance of its diverse business segments or divisions. A single business unit does not represent the company and its performance in the global marketplace (St Anne, 2012). Woolworth Limited has encompassed major popular brands in Australia by diversifying into different arenas by acquiring various companies. The company’s motive behind such decision is to continuously improve and continue its growth and development through all the divisions of the organisation. Woolworth has identified business process management to be the important driver for achieving the organisational goals. In order to compete at international level, it is not possible for companies to depend on only one source of revenue generation. Most of the public corporation and multinational organisations seek for new business concerns and opportunities to diversify. The increasing rate of mergers and acquisition is also an example of this concept. Not only profitability, but the image of the company, strategic motive, advantages, strength to remain in the market also depends on the combined effort of companies like Woolworth Limited, and not on their singular businesses (Ferguson, 2011). c) Woolworth Limited’s diversification strategies by Grant O’Brien were supported by people. Strategies of diversification were focused mainly on profit margin rather than on market share. It included development strategies for the home-improvement segment, venturing into the financial services and getting into joint venture with banks. Diversification can be related or unrelated, as can be seen in Figure 1. Figure 1: Diversification Source: (Cunningham, and Harney, 2012.). Related diversification signifies divesting in similar business, which unrelated diversification signifies investing in businesses which do not belong to the same industry. In case of Woolworth Limited, as can be seen they have diversified into the same industry because all the businesses of Woolworths belong to supermarket retailing which includes food and non-food items, as well as liquor. As discussed Woolworths is in it maturity stage, so in order to avoid going to the decline stage, it has to divest. The related diversification as can be seen is usually undertaken for strategic fit. The risks and extent of the global strategies are also considered in this case. There are drivers in case of related diversification which led to profitability and growth (Leonardo Consulting, n. d.). d) The company has gone through turbulent times due to recession and turbulent economic situation. The economic environment was unpredictable. However, the company was successful in offering decent return of 6.1 percent to its shareholders. Woolworth appreciates the concept of diversification and diversity. They believe that it is important for success and growth of the company as a whole. As can be seen from the financial statements that the sales in the New Zealand supermarkets of Woolworths is the lowest in 2012, which is $4,301.8 million. However, this did not affect the overall profitability because the sales in the food and liquor segment were so high. This signifies the success of effective diversification. The level of success can be estimated from the fact that Woolworths Limited is considered to be not only the major player in the supermarket retail industry but also the largest liquor takeaway in the country, and one of the largest poker and gaming machine operator in Australia. Answer 3 In this section, the discussion would be on one of the most popular bank of Australia called the Commonwealth Bank (CBA). a) The first part would be consisting of the strategic advantages of Commonwealth Bank that assist in serving to their customers better. CBA is one of the leading providers of financial services such as premium banking, institutional banking, retail banking, investment, share broking, etc. CBA has four major strategic advantages based on which they have become one of the finest providers of financial services. They are admirable operational and technological framework, outstanding customer services, quality return to the shareholders, and corporate social responsibility for the society. However, among all the strategic advantages, the turning point for the organisation has been its IT infrastructure, which not only changes the outlook of CBA to deal with its customers, but also transformed the banking sector of Australia. CBA was the first bank in Australia to initiate internet banking, and offer full range of insurance, banking, derivatives, and equity services and products online. CBA captures more than 40 percent of the customer base in Australia and after the inception of CBA online services and website; it became the second busiest website in the country. The next strategic advantage of CBA was its decision to form alliance with companies to generate revenue, which was still beyond the reach of other banks in Australia. CBA formed joint venture with Microsoft and also with Ninemsn. As around 70 percent of the internet users in the country, log in these websites, CBA increased its frequency and reach through this strategy. The CBA customers spend more time on the bank website rather than in the bank. It also plans to offer its non-banking services to the small companies in Australia through this framework (Commonwealth Bank of Australia, 2013a). b) CBA is among the top banks in Australia because of its excellent and innovative services. It is the major market share in the banking industry in Australia. If the internal operations of the bank are considered, then it strategically formulates the risk management tools to avoid risks like liquidity risk. CBA utilizes specific management tools which are similar to cash flow ladder and liquidity gap analysis. This assists the bank to forecast the liquidity needs of the institution on a daily basis. An additional model for assessment of liquidity risk is implemented by CBA to measure the liquidity risks in worst cases. In case of home loans also the interest rate varies a lot compared to other banks, so as to provide loans to the customers at competitive rates. CBA is considered as the most flexible lender in the market. However, there are certain disadvantages, such as the borrower has low power in case of loans. The lending rates of the bank in 2012 have remained comparatively higher than the other banks. Moreover, most of CBA customers have become highly dependent on online transactions, which increase the probability of fraud and cyber thefts (Commonwealth Bank of Australia, 2013b). Answer 4 a) Cameron Clyne became the CEO of National Australia Bank (NAB) in 2009. He has excellent experience and knowledge in the financial and banking sector. The first step that he took after joining NAB was to remove the partitions that separated the workers. He has the view that if his employees have to cross five doors and three security checks before going visiting him for a problem, then why they will bring any problem to him. This shows that he has democratic leadership style or qualities. He welcomes criticism like any democratic leader and considers them while in a positive manner. On the other hand he is strong-willed and determined about the decisions that he make. He was the driving power behind the break-up strategy of NAB, which was quality aggressive. The advertising campaigns were launched to lure the customers towards the retail services of NAB. He was successful in shifting the loyalty of around 225,000 customers towards the bank. It was under his leadership, NAB could book 22 percent increase in profits. This reveals the transactional leadership qualities in Clyne (Financial Review, 2011). The aggressive decision-making of Clyne such as to chase the market share in the year 2011 and 2012, when the margin of home loan was under huge pressure turned out to be absolutely wrong because this exposed NAB to the soaring funding costs. Rate of job cuts under Clyne’s management increased considerably. In 2012, he announced that further 12 percent downsizing would be done in NAB. Reduction of payroll to reduce the cost was not considered to be a good decision by Clyne. This also led to reduction of customer loyalty by 14 percent. The aggressive marketing campaign for grabbing customers was considered as a fluff devoid of any substance by the analyst. However, as far as the uniqueness of his leadership skills are concerned, it can be said that being a CEO at such a young age and that too in such turbulent economic condition was indeed an indication of strong will power, determination and courage. There are democratic leaders with various other leadership qualities, but during economic situations as the present times, they too look out ways for survival, but it seem Clyne never looked for survival, rather he looked for profit, when other CEO’s were looking out to save their companies from insolvency (Financial Review, 2011). b) Under the leadership of Cameron Clyne, many projects have been successfully undertaken in line with the strategic objectives of NAB. This includes managing costs, investing in reputation, culture, and people, and attracting potential customers. In the coming years the strategy of Clyne will include focus on the profitability of the shareholders and increasing the shareholders and customers. When the pressure of improving the return on equity to the shareholders increased on NAB, Cameron Clyne took the responsibilities of CEO at NAB. He pulled up the taskforce and initiated some cost cutting strategies for eliminating the decades of underperformances. Clyne infused courage and boldness in his management team which gave them the nerve to act according to the stated strategies framework laid down by their CEO. In order to transform from a particular system towards sustainability or profitability, criticism has to be faced, which Clyne welcomes rather than being baffled by it. He is aggressive in his outlook towards business and this gets reflected in his decision-making for NAB. Though he has attracted the criticism of analysts and investors, yet he was able to grab a major portion of the customers from NAB’s competitors through its advertisement campaign. The performance of NAB has been much better in the past four years than before. Clyne has tried to cover three major areas of reform in such a short period of time. The first includes drawing product expansion management, second was centralising the operations with the help of technology, and third is to implement the aim of getting most of the customers towards online transaction (Financial Review, 2011). c) A discussed in the previous sections regarding Cameron Clyne’s strategies to pull up NAB towards profitability, it can be said that Clyne’s leadership style has shown glimpse of an autocratic leader whose aggressive moves has been for the betterment of the bank, but it also earned several criticism from the analysts, economist, and investors. The most talked about decision was the aggressive break-up plan of Clyne for advertising campaign of NAB, which was floated to lure more customers. The campaign lifted the market share of NAB, but analysts say that this was just an eye wash for the investors, and the share price of NAB was still behind the Commonwealth bank or other big banks of Australia. This ad-campaign also stripped around $93 million as expenditure, and it increased to $120 million in 2011. Belligerent job-cuts were already going on in NAB due to purpose of cost reduction, but the decision of Clyne to downsize 12 percent further was not welcomed by its workforce or by customers (Financial Review, 2011). d) The time during which Cameron Clyne took control of NAB was not a good phase for global financial environment. Every decision taken by CEO or the management of any company was in favour of someone, while it affected negatively to some other people. It was a precarious situation when Clyne through his insistent policies wanted to increase the profitability of NAB, attract investors, and promise higher returns to shareholders. However, such activities in the prevailing situation was next to impossible, so analyst found the promises made by Clyne to be just fluffy dreams which he is showing to the customers without any basis (Financial Review, 2011). References Commonwealth Bank of Australia, 2013a. Strategy. [online] Available at: < http://www.commbank.com.au/about-us/our-company/strategy.html> [Accessed on 11 March 2013]. Commonwealth Bank of Australia, 2013b. Commonwealth Bank overview. [online] Available at: [Accessed on 11 March 2013]. Cunningham, J., and Harney, B., 2012. Strategy and strategist. Oxford: Oxford University Press. Ferguson, A., 2011. Woolies choice of CEO uncovers the boards dedication to diversification. [online] Available at: < http://www.smh.com.au/business/woolies-choice-of-ceo-uncovers-the-boards-dedication-to-diversification-20110404-1cym1.html> [Accessed on 11 March 2013]. Financial Review, 2011. The banker the others love to hate. [online] Available at: < http://www.afr.com/p/the_banker_the_others_love_to_hate_34wn1CetrTK7p0lmSHVlFO> [Accessed on 11 March 2013]. Leonardo Consulting, no date. Enabling business process management at Woolworths Limited. [online] Available at: < http://www.leonardo.com.au/downloads/Case%20Studies/Leonardo-Woolworths-casestudy.pdf> [Accessed on 11 March 2013]. Martin, J. D., and Sayrak, A., 2001. Corporate diversification and shareholder value: A survey of recent literature. Journal of corporate finance [e-journal] Available through: Elsevier < http://www.elsevier.com/social-sciences/economics-and-finance> [Accessed on 11 March 2013]. Procter & Gamble, 2012. Financial reporting. [online] Available at: < http://www.pg.com/en_US/investors/financial_reporting/index.shtml> [Accessed on 11 March 2013]. St Anne, C., 2012. Wesfarmers versus Woolworths. [online] Available at: < http://www.morningstar.com.au/stocks/article/wesfarmers-woolworths/4878?q=printme> [Accessed on 11 March 2013]. Woolworths Limited, 2012. Financial performance. [online] Available at: < http://www.woolworthslimited.com.au/page/Invest_In_Us/Financial_Performance> [Accessed on 11 March 2013]. Read More