Seminar 6: Grand Metropolitan plc Diversification involves increasing the range of products or markets served by an organization, while related

diversification involves diversifying into products or services with relationships to the existing business. Using the Ansoff product / market growth matrix could provide a simple way of generating four basic directions for corporate strategy the organization basically has a choice between penetrating still further within its existing sphere or increasing its diversity along the two axes of increasing novelty of markets or increasing novelty of products. Therefore there are two related diversification strategies available within an organization: moving rightwards by developing new products for its existing markets or moving downwards by bringing its existing products into new markets. The more diversified the strategy, the further along the two axes. Furthermore, the organization can move in both directions at once, following a conglomerate diversification strategy with altogether new markets and new products therefore conglomerate (unrelated) diversification involves diversifying into products or services with no relationships to the existing businesses. With Grand Metropolitan, even with good profitability in its core businesses, the groups growth in earnings per share steadily declined between 1982 and 1986, where the growth drops from around 24 million to 0 million. The challenge then was to throw off the image of a loose conglomerate lacking strategic direction, and replace it with a conviction that the group represented a powerful combination of skills, more valuable than its independent parts, which could be relied upon for consistent profitability and above average earnings growth. Seeking the next source of growth, Grand Metropolitan have decided to add a new element to the communication of the group to its many and varied audiences. It is the value of the scope and scale of the group adds to its constituent companies: scope is concerned with how far an organization should be diversified in terms of products and markets. As any corporate parents needs to demonstrate that they create more value than they cost which applies to both commercial and public sector organizations. Especially companies whose shares are traded freely on the stock markets face a further challenge, as they must demonstrate they create more value than any other rival corporate parent could create. Failure to do so is likely to lead to a hostile takeover or break-up, rival companies that think they can create more value out of the business units can bid for the companys shares. Therefore, competition takes place between different corporate parents can promise, shareholders will back them at the expense of incumbent management.

While Grand Metropolitans acquisition deals is in line, they have process the activity of envisioning where the corporate parents can provide a clear overall vision or strategic intent for its business units. This vision should guide and motivate the business unit managers in order to maximize corporationwide performance through commitment to a common purpose. The vision should also provide stakeholders with a clear external image about what the organization as a whole is about: this can reassure shareholders about the rationale for having a diversified strategy in the first place. A clear vision provides a discipline on the corporate parent to stop it wandering into inappropriate activities or taking on unnecessary costs. The emergence of this strategy can be traced through UK brewing and retailing, the turnaround of Express Foods, replacement of management and disposal of much of the Liggett businesses, and the development of IDVs portfolio. They have also strengthened the strategy by providing central services and resources with the focus on the management team, with the key figures included Clive Strowger, a former colleague from the motor industry recruited in 1977, Ian Martin, recruited from ITT in 1979, and David Tagg in 1980, who would become responsible for the organizations management development this term set about tackling problems, now intensified by declining demand. Centralized can have sufficient scale to be efficient and to build up relevant expertise. The services often have greater leverage: for example combining the purchases of separate business units increases their bargaining power for shared inputs such as energy. Leverage can be helpful in brokering with external bodies, such as government regulators, or other companies in negotiating alliances. Moreover centre can have an important role in managing expertise within the corporate whole, like transferring managers across the business units or by creating shared knowledge management systems via corporate intranets. The notion of corporate strategy assumes that corporations should own and control businesses in a range of markets or products. However Williamson believes that diversified corporations should only exist in the presence of market failures. If markets worked well, there would be no need for business units to be coordinated through managerial structures. Business units could be independent, coordinating where necessary by simple transactions in the market place. Usually market failures favoring the diversified corporation occur for two reasons: Opportunism independent businesses trading between each other may behave opportunistically, or bounded rationality where people cannot know everything that is going on in the market. Corporations are not just about minimizing the costs of information and cheating but maximizing the value of the combined resources. Bringing creative people together in a collective enterprise enhances knowledge exchange, innovation and motivation.