Disneyland and Citigroup Vanshika Vanshika. [email protected] edu. in (0-8098530866) “For a company that has taken its original or main business as far as it can go, diversification as a means of channeling surplus resources should certainly be considered. For a company that has not yet developed its main business to the full potential, however, diversification is probably one of the riskiest strategic choices that can be made. – Kenichi Ohmae, Former Head of McKinsey & Co’s Tokyo Corporate diversification refers to companies pursuing several unrelated lines of businesses as a strategy for reducing business risk without (hopefully) affecting returns. Diversification has its own benefit for the companies some of which can be strategic while others may be purely financial in nature. There are a few reasons why companies choose to diversify – 1. Synergy – When companies merge, they can best utilize their resources to reduce operating costs. Better management practices from a high end to low end can be shared in business for overall growth.
Through pooled financial resources and risks, efficiencies can be enhanced. 2. Market Power – There is high chance of an increase in market share with two companies coming together but it may not result to increased profits. 3. Profit Stability – With core business being seasonal, it ensures that other business could lead to better stability in terms of corporate profits. 4. Financial Performance – It improves as the core business sustains itself on its money making ventures and utilizes that cash flow to form new ventures that cause additional profits. 5.
Growth – It is a principle reason for diversification which is quick due to pooled in technology and experience. It definitely makes more sense to diversify when the core product line has an uncertain future. Also, it indicates that the market risks get spread with diversification. History has shown success is not guaranteed with diversification. While companies like GE successfully diversified, making turbojet engines to healthcare products, many others like Citigroup failed miserably at their attempt. This article takes a couple of examples from the corporate history for better understanding of the issue.
Walt Disney Company Disney means much more to its customers than just the amusement parks, movies, TV shows or books. Disney is the seamless synergies of its crazily diverse businesses. Their thoughtful diversification strategies have built them loyal customers, even the smallest ones, for whom there is no substitute to Disney products. They began diversifying very early from 1930s. They diversified from movies and cartoons into music. Their synergistic diversification of utilizing the best of technology in market to their benefit created a tremendous impact on the world of entertainment and motion pictures.
They came up with the theme park concept which is the synergy between diverse businesses. Disneyland was far ahead on Porter’s philosophy of the attributes present in successful diversification efforts. What they did not lose while diversification and ultimately helped them being successful in diversification were their features. First, ‘Control‘over their characters that they retained. ‘Leadership’, which was quite innovative helped them focus on synergies. Hence, Disney understands diversification properly.
Their creative use of diversification holds the potential of building a huge amount of shareholder value. Citigroup The combination of Citicorp and Travelers Group to form Citigroup had its set of downfall of the merger. Loss of synergies due to restructuring of Citigroup led to competitors of each individual group not participating with them. There was also lack of guarantee that the new relationship would work better and in their favor. Due to ethical dilemma to share the database of each other’s customers’ history, it perceived high risk.
It was important to not misuse the customers’ profile and asset information to avoid diseconomies of scale. Another pitfall came from the conflicts in the interests of the two individual companies where they incurred huge losses on big money making deals due to less profitable customers. A significant loss in efficiency due to product bundling makes us rethink about it. Each company may have had better pre-merger prices of their business which could have attracted more customers rather than post merger price which would be high due to additional switching costs.
Lastly, the Chiefs from different branches may have different goals and opinions to make it big. The discomfort in case of Citigroup during the formation of new co-CEOs likely led to an advantage to their competitors. Thus, we have seen two cases above illustrating benefits and downfalls of getting into the idea of diversification. It may not be right to say that diversification will always guarantee a success or a failure but it is restrained to a lot of factors which if suitably analyzed, can help a company decide whether to diversify or not.
It seems that cross selling can be a nice idea to see success, where one of them possesses high capital & customers and another has more products to offer
References – Grant Robert M. – Strategic Management 6th Edition Pg 393 http://www. mgmtguru. com/mgt499/TN8. htm http://faculty. haas. berkeley. edu/meghan/299/Case_analysis_Disney2. pdf Biles Lee, Julian Isaac, Tristan Sergio – Citigroup – A paper submitted in partial fulfillment of the requirements for the course of Managerial Economics (Fall 2002)