Summary: As Steven Covey says, “When you have synergy, 1 + 1 equals 3, 5, 10, or 50.”
I just finished an interesting book by Kenichi Ohmae – The Mind of the Strategist. This was written in the early ‘80’s at the heyday of US infatuation (and fear) of Japanese business. While he pulled a lot of examples from Japanese companies and had a digression into the cultural formation of Japanese business post WWII, it really wasn’t a book about Japanese business. There were some really interesting global business concepts tucked inside.
One of these threads surrounded different types of business structures. He defined three different types of companies – conglomerates, diversified businesses, and single product companies. I wasn’t too keen on his naming of the last one so I’m going to put my own spin on it and just call it value-based individual businesses. To me, a value based company is one that has an overt set of values that do not relate to financial metrics. These companies will sacrifice financial performance to uphold their values.
At the other extreme, a conglomerate is a collection of individual businesses. The individual businesses may have values but the conglomerate is hard pressed to define its objectives in other than financial terms – “We will achieve 15% annual EPS growth.” You could view a conglomerate as a portfolio manager, dedicated to maximizing return over the long term. At one end of the conglomerate spectrum are holding companies that are very explicit about their purpose being strictly financial (e.g. Corvus Capital). At the other end of this gray spectrum are collections of businesses in similar markets (e.g. Fortune Brands) but these still don’t have any other purpose other than maximizing value.
In between the value-based individual companies and conglomerates are diversified companies. These focus on maximizing profit by promoting synergies at the portfolio company level. They feel that their portfolio companies have an edge over their competitors expressly because of the synergies – and these synergies are not solely financial in nature. I latched onto this portion of Ohmae’s book since I believe VentureNiche is a diversified company. We promote synergies between our companies and we have core values that we try to instill in the companies at their inception. We don’t fully define the core values of each since we believe that the CEO and the management team need to develop their own set in order to “own” them.
The dark side of the diversified company is that it can be less competitive than individual companies if it winds up muting the values of the portfolio companies or forces a sharing of resources that are not as focused as their individual company competitors. For example, if two companies share a distribution network for cost or coverage reasons, one of the companies might lose out if the other company has a product that is much easier to sell. The distribution network will obviously take the path of least resistance and the company with the more complex sale will miss out.