Why Spin-offs? How Diversifications destroy the company, brand and profit?

I’ve been raising my voice in the favor of spin-offs and multi-brandings, and getting through the concept that how diversification destroy the company, brand and profit. That applies to corporate, products, services and persons.

I’ve found amazing facts for it from Al Ries, the world’s top marketing guru, author and consultant. So thought to share it up with readers:

Decades of mergers, acquisitions, hostile takeovers, and alliances have created scores of hydra-headed corporate monsters. How do you focus one of these mastodons?

In concept, it’s easy. You just spin off some of the heads. Divide and conquer. Easier said then done.

The problem is what’s in the head of company’s top officers. To most corporate managers, size equals importance, power, and psychic satisfaction.

In theory, spin-offs are just another management tool, useful in some situations and not in others. But in practice, there is a strong resistance to their use. How many CEOs will voluntarily give up half of their job, half of their power, half of their psychic satisfaction? Not too many. In spite of all the talk about profits, most of the financial measurements, most of the list, revolve around sales.

In truth, most of the companies are run by their inside managers, not by their outside board of directors. Until the CEO becomes are hired gun under the direction of an independent board, management is going to go for size, not for profit. Management knows which side its bread is buttered on.

Bu the resistance to spin-offs changing, “Corporate spin-offs are gathering momentum” reported the Wall Street Journal in its June 15,1995 issue, “fueled by investor pressure to unlock hidden values, compelling tax advantages , and evidence that’s stocks of both the parents and the new companies outperform the overall market ”

The ITT spin-off is just one deal in a year that saw a record $30 billion on corporate spin-offs. As a matter of fact, each of the last three years has been seen record number of corporate spin-offs. (In 1993, there were $17 billion. In 1994, $27 billion)

AT&T would divide into three separate companies: one focused on communications, one on communications hardware, and one on computers. “AT&T’s restructuring is not about size said the company,” it’s about focus, speed and enormous profit”

In commenting on the AT&T announcement, Michael Porter (known for Porter’s Five Forces): “What we keep learning over and over is that focus is better than diversity and complexity”

Four months later came the Dun & Bradstreet deal. The $5 billion information giants would divide itself into three publicly traded companies. “We believe the winning paradigm as we head into next century is focus and speed” said CEO Robert Weissman.

With conglomerates rushing to the spin off their incompatible divisions, the question naturally arises: Can a conglomerate ever work?

Sure, even a flawed strategy will work if combined with superb execution and the expenditure of prodigious energy. Even ITT was successful in its early years. But as conglomerate grows it falls victim to the flywheel effect. The larger the wheel, the faster the speed at the periphery and the greater the chances of problems developing.

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