In today’s corporate world, well-diversified companies with interests in several businesses abound. It is part and parcel of most companies’ growth strategies. Yet, we also find cases of companies shedding non-core assets every decade or so, in order to improve their financial performance, but equally to focus on their core competencies. In fact, both sets of decisions – diversifying and selling non-core businesses – usually get shareholder approval and stocks tend to move higher. I don’t have data to corroborate this observation, nor have I carefully studied this phenomenon over any length of time, but I think it is often a deliberate move by companies to engage in this diversify-pare back tactic to increase the stock’s value ever higher.
Why do companies need to integrate products, divisions, companies and brands at all, if we are going to engage in this two-step dance every few years? And when companies do sell non-core assets, how do they decide what is core? I would imagine that a company’s’ senior and top management decide on core businesses, based on their contribution to the company’s top and bottom lines as well as their leadership position in that industry. A company that has achieved leadership position in a particular industry is hardly likely to consider it non-core, right?
Which brings us to the subject of diversification, then. How do companies decide which businesses to diversify into? Do they consider what their core competencies are at the time? Looking at the diversification of several companies in the past, I think not. Besides, even with all the businesses and companies or divisions that they already have, how do companies increase or improve their competitive advantage? As I mentioned in my last post on brands and competitive advantage, Michael E Porter suggests in his book, Competitive Advantage, that companies ought to also consider linkages and inter-connections – both vertical and lateral – between their companies, products and divisions to find common areas of strength that the company can leverage to gain and maintain their edge over competition.
That’s great, but we have another problem. In addition to the diversify-pare back two-step, we also have the phenomenon of companies hiving off their divisions or subsidiaries as separately listed entities, in order to “unlock greater value”. This seems to be a favourite tactic of activist investors and stockmarket enthusiasts. How does that sit with the theory of combining strengths and leveraging linkages? Are they fundamentally opposed to each other, or can they work together depending on the circumstances of the case?
It is in untangling these various knots and bringing greater clarity to strategy discussions, that I think brands can help. I say this because brands are fundamentally built around core values and core strengths. And when brands are considered at the corporate level, they help a company or even diversified conglomerate arrive at what their core values and competencies are. In another recent blog post of mine on how brands can help move companies’ business strategies forward, I mentioned GE and Sony. If GE had realized that its core strengths are in powering the world around them, they would never have entered the media business. If Sony had seen that its imaging and audio technologies are at the heart of the media and entertainment business, they would not have focused only on making and selling TVs.
Through a process of accretion in a company’s growth journey, it gathers knowledge, skills, expertise in certain areas. If they belong to a core value or strength of the company, it will obviously tell in the success of their ventures, taking the company to a new growth trajectory. When GE says that it is splitting itself up into three listed companies, but there’s no decision on the brand yet, it is cause for concern. Because I think the brand is what can help them find a solution. I don’t know if this decision was prompted by the “unlocking value” reasoning of activist investors and GE clearly said on media that it wasn’t, but perhaps this can turn out to be a case of unlocking value working along with the integrate theory. If GE can at least decide on retaining the GE corporate brand name and everything else that goes with it, we might still have an integrated corporate brand even with three separate companies.
I had also said in my last post on brands and competitive advantage that two well-integrated global corporate brands that come to mind are American Express and Apple. I say this even though I am not an Apple person and have never used an Apple product. I have had years of experience working on American Express in India at Ogilvy Delhi. And even though Ogilvy worked only on the Travel Related Services business of American Express, it was clear to me that the team on the client side was well-integrated with their colleagues at the bank. And even if the American Express Credit Card is their best-known product, what makes it unique is that it is issued by American Express, because they are also a bank. If you ask me, that in itself, is their source of competitive advantage.
First, let us see how well integrated American Express is vertically. Since American Express themselves issue the cards and payment systems, they control the entire process of customer acquisition, conversion, increase of usage and acceptance. Then, look at the lateral connections: American Express customers typically tend to be affluent, high net-worth individuals (in company parlance) who are also frequent business and leisure travellers. Therefore, American Express Travel Related Services has a suite of products to meet the needs of such people: credit cards, charge cards, corporate cards, travellers cheques, gift cards, travel-related services, etc. The world of American Express is geared to meet the specific needs of that particular customer segment and it all revolves around managing global travel and entertainment expenses. Through all the years of globalization and massive international travel as well as greater dining out and entertainment across most markets, American Express would have benefitted hugely.
In India, their operations were quite limited and conservative – not least due to RBI guidelines and the regulatory framework – growing only in small deliberate steps. I have also had the privilege of being a member of the American Express Charge Card, as a perquisite offered by Ogilvy for its senior employees, which I continued with for many years after. Their cards are not accepted easily at many establishments, the way Visa and Mastercard are, but that’s largely due to the higher fee that American Express charges. However, I have found their customer care in India to be excellent.
In terms of building their brand and where the opportunities lie, I would suggest first and foremost that they up the corporate quotient of their brand. Having advertised for too long under the celebrity “cardmember since… campaign”, American Express had developed a slightly frothy image to my mind. They would do well to focus on the business travel and entertainment needs of their corporate clientele (which is not to say that celebrities would be alienated) and position themselves as the corporate way to manage global travel and entertainment expenses.
To that end, I had put down my thoughts and ideas on a corporate brand strategy and campaign years ago, which I finally decided to execute and share on my blog. You can read all about it and see the campaign by clicking the link below.
Raising the corporate quotient of American Express
In terms of future growth, there is not only a great opportunity for American Express to cross-sell its products to their clients in India and overseas, there are future growth opportunities to be explored in the areas of technology. This is where they might have plenty of catch-up to do with Visa and Mastercard. That said, American Express ought to explore only those tech innovations that will add value to their clients’ needs.
In the age of digital technology and mobile payments, perhaps the next big idea from American Express could be a new mobile payment system developed exclusively only for their customers having understood their travel and entertainment patterns and requirements. Another idea could be in the area of private banking and wealth management, since their clients are mostly high net-worth individuals. Could there be a way that American Express customers can make investments or even manage their portfolios using the American Express payment system?
As you can see, further integration is in store for an already well-integrated corporate brand. Even more reason for people to never leave home without it.
Peripatetic Perch 