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Businesses must
diversify to survive!
By: Prof. Enrique
Soriano
IS
IT about profitability? Yes, but there are other reasons why a company must
diversify.
Compellingly,
diversification mitigates any danger in the event of an economic downturn.
It
also spreads the risks when the industry where you operate is in a slump. Or
perhaps competition has started to erode your market share.
Over
a long period of time, the literature on corporate diversification has focused
almost exclusively on large, publicly held firms.
However,
within the last few years, there have been some works published, dealing with
diversification issues in small and medium sized firms but also in family
businesses (Iacobucci & Rosa, 2005).
Whereas
some authors hold the view that family businesses engage in significantly less
diversification than non-family firms, others describe diversification as a
prevalent long-term strategy among family businesses.
Examples
of big family business groups in the Philippines are the Ayala, Aboitiz and the
Gokongwei Group.
Some
of the most enduring family businesses started in one industry (trading) before
growing into diversified companies with many lines of businesses.
Diversification is
entering new markets with new products. Sometimes you just need to bust out and
try something new like if you’re a pharmaceutical firm buying into a condiments
company (UNILAB), an alcohol firm entering the water business (Asia Brewery);
or a canned tuna company going into the food business (Century Tuna).
Many
companies appreciate the need to diversify but few use it as a way of relating
to their markets.
Fundamentally,
this strategy is about creating new products with new product life cycles and
making the existing ones obsolete.
By
doing so, firms launch new products that are developed not just for current
customers but for new ones. To execute this strategy, you usually manage a
merger, an acquisition, or a completely new business venture.
Global
and highly innovative companies like Facebook, Amazon and all the
pharmaceutical companies are into diversification.
A
company’s diversification strategy can be either related or unrelated to its
original business.
Related
diversification makes more sense than unrelated because the company shares
assets, skills and capabilities.
It
means entering in multiple industries that are able to share a common pool of
corporate resources and capabilities.
These
are businesses where sales force, advertising, and distribution activities can
be shared, exploiting closely related technologies.
In
Asia however, many successful companies are opportunistic. We are referring to
conglomerates such as San Miguel Corp of the Philippines, Salim Group of
Indonesia and the CP Group of Thailand where they continue to buy unrelated
businesses from Telecoms to infrastructure.
To
a family business, diversification is a way to extend their capabilities into
new lines of business.
The
diversification will turn out profitable if the capabilities become a renewed
capability in the new segment. Diversification may have two main costs for
family business groups:
The
need of adding capabilities outside those of the family, be it through the
hiring of professional managers, or through partnerships with other shareholders
that incorporate the needed new abilities.
An
increase in complexity in the family group that may affect negatively its
organization. In any case, the incorporation of outsiders to the group reduces
the firm’s control by the family and may require an increase in monitoring
effort.
Why
Diversification Matters for Family Businesses
Anyone
who has invested money has heard about the importance of diversification in a
portfolio to hedge against losing too much money when markets retreat.
Diversification
can be equally important to businesses that may face serious threats during
turbulent economic times or when disruptive technologies enter the
marketplace and big competitors move in.
Although
family businesses are known for their nimbleness and ability to react quickly
to changing times, diversifying lines of business and expanding products and
services can offer additional security when times get tough.
Prof Enrique Soriano is a World Bank/IFC Governance Consultant, Senior
Advisor of Post and Powell Singapore and the Executive Director of Wong +
Bernstein, a research and consulting firm in Asia that serves family
businesses, family offices and family foundations.
He is an associate member of
the Singapore Institute of Directors (SID) and an advisor to business families
worldwide, a sought after governance speakers, and the author of many articles
and publications, including two best-selling Family Business books (Ensuring
Your Family Business Legacy). To know more about his books, you can email esoriano@wongadvisory.com
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