 IN SEARCH OF EXCELLENCE - PART 2 Stick to what you are good at! Bucharest (2005) – One of the most important attributes of excellent companies as found by Peters and Waterman in their famous best seller "In search of excellence. Lessons from America's best-run companies", is their ability to stay relatively close to businesses they know. In the last decade or so we have seen the rise of the so-called diversified conglomerates in Romania. These are companies that are active in a wide range of fields, that usually seem to have little in common, other than that the owner perceived them as a business opportunity. Well-known examples of this type of companies are the Ion Tiriac Group, the Ana Group, the MediaPro Group, the Tender Group or the European Drinks Group. These companies usually started with a core business the owner was familiar with and which had some central strength or skill. Theses core competences can be anything, from logistics or market knowledge to a specific technology. For example, an excellent company as 3M has its main competence in basic coating and bonding technology, which is applied to thousands of different products. Once the company adopts a diversification strategy and starts to branch out into other areas, trouble usually starts. First of all, it is a simple fact that most mergers and acquisitions are not successful. Not only are the operating or strategic synergies - usually mentioned as the main reason for the acquisition - seldom realized; more often than not the result is catastrophic. The typical diversification strategy reduces the core competence or central skill - in part because the acquired company undoubtedly has different competences and shared values. Management loses its feel and usually leaves the running of the new business up to people they know and trust ("cronies"), not necessarily the right people for the job. Also acquisitions, even little ones, use up a lot of top management time, time taken away from the main-line businesses. As a result, these companies will over time, as competition further increases, start to lose the battle on all fronts, even in their core business area. The crucial question then is: how have excellent companies avoided these traps? The answer is simple. As a general rule, the top performers moved out mainly through internally generated diversification, one manageable step at a time. They never leave their base. The principal finding is clear and simple. Organizations that do diversify (whether by acquisition or internal diversification) but stick very close to their base outperform the others. The most successful of all are those diversified around a single competence. A good example in Romania is the European Drinks Group (EDG). Although their value system is mainly horizontally integrated (from downstream - basic ingredients like water or flour - to upstream - production and distribution of soft drinks and beer), their core competence is logistics. This allows them to manage the whole value chain from beginning to end. The start of National TV, on the other hand, does not fit into this strategy and can only be qualified as a vanity acquisition. The second group, in descending order, compromises companies that diversify into related fields - the leap from household appliances to computers from Flanco, for example. Another example in this category is Media Pro Group. Started out as an audiovisual (television and radio) production and broadcasting company, it also branched out into other media, mainly print-related. Interestingly enough, the more the new activities deviated from the original core competences (e.g. printing and print distribution), the less successful they seemed to be. Least successful, as a general rule, are those companies that diversify into a wide variety of fields. Acquisitions especially, among this group, tend to render little return in the mid-to-long term. An example of such a company is for instance the Ana Group, whose activities range from electric engines to tourism and bakeries. Also the Tender Group fits into this category with activities ranging from construction and industrial production to agriculture and protection services. In short, the best diversification strategies are based upon the concept of controlled diversity. These companies have strategies of only entering those businesses that build on, draw strength from, and enlarge some central strength or competence. While such firms frequently develop new products and enter new businesses, they avoid to invest in areas that are unfamiliar to management. In other words, excellent companies do acquire; but they acquire and diversify in an experimental fashion. They buy a small company or start a new business. They do it in manageable steps... and clearly contain the risks by sticking to what they know. And are willing to get out if it doesn't work! There is still a way out for the over-diversified conglomerates in Romania: divestiture. Especially in this pre-EU accession period chances are still good to sell non-core activities for a premium price to strategic investors. Once competition further intensifies after 2007, chances for survival will quickly swindle. *** Author: Peter Jansen, Managing Partner of "Bucharest Consulting Group" Bucharest Consulting Group offers consultancy services in the field of strategy and general management to local and international medium-sized and large companies in Romania. For more information contact: |
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