• Intel acquiring a wireless computing chip company (Infineon) and a security-software maker (McAfee)?
• Proctor and Gamble creating two new businesses – Tide™ Dry Cleaners and Mr. Clean™ Car Washes, adopting a franchise business model?
• Starting in 2011, BestBuy offering a Best Buy branded mobile broadband service as a reseller of Clearwire’s 4G network?
All three examples deal with synergies. Strong business models are jam packed with synergies and smart leaders focus growth strategies on synergistic moves.
If you don’t understand the concept of synergies, here’s a simple explanation.
Synergies arise when the whole of a business is worth more than the sum of the value of its parts standing independently. McDonalds grew profitably into a global giant because its different locations are highly synergistic. Expenses are leveraged across locations (marketing, construction, food-prep, etc.) to create cost synergies. Revenue synergies also exist – customers chose the McDonald’s brand over independent fast-food competitors because of familiarity with McDonald’s offerings. Most acquisitions, by the way, are also based on synergies – combined costs are lower and/or combined revenue is higher than the two companies standing alone. The greater the synergies, the more a company can afford to pay to acquire another company.
P&G’s move into franchises relies on revenue synergies – P&G leaders hope their brand names will attract customers enabling franchise owners to be more successful with a P&G franchise than alternative franchise options. With margins on packaged goods being pounded by store-brand competition, franchising is a P&G strategy to preserve P&G’s historical growth rates.
Intel’s core business is maturing, so it’s broadening the definition of its core. Adding wireless and security solutions to its offerings will likely create cost synergies in sales and manufacturing and revenue and cost synergies in product development.
Best Buy is offering a store brand in a category most people need after buying Best Buy’s computing devices. The move is akin to grocery stores having their own brand of milk. The products are synergistic.
P&G wins my “worst move” vote, for three reasons.
1. The company knows nothing about dry cleaning, car washes or franchising, although it hired a franchising expert. Licensing its brand names would be a less risky move that still captures revenue synergy from the brand name.
2. I am not sure Tide stretches into dry cleaning or Mr. Clean into protecting the fine finishes on cars.
3. If the synergies are weak, P&G may be better off paying an extra dividend so that its shareholders can invest in dry cleaners and car washes. My guess is very few would, yet another reason why some shareholders will bolt.
Best Buy’s move looks smart, and it’s certainly smart for Clearwire. People trust the Best Buy brand. As long as Clearwire has a high quality product, Best Buy will bank some extra bucks. It’s risky, however. If wireless connections are unreliable, will consumers blame Best Buy or the electronic device manufacturer? IPhone was smart to keep the name AT&T on its broadband connection.
Intel’s move is really smart. Bain, Inc. in Beyond the Core shows that companies with strong core businesses perform well when they move beyond the core, while those with a weak core fail during such an expansion. Intel’s core business is very strong. With computing increasingly wireless and customers wanting built-in security (versus acquiring add-on security software), broadening the core makes strategic sense.
Think about the different parts of your business. Are they synergistic? If some were not, would you be better exiting that part of your business? Which growth moves would be most synergistic? Thinking about synergies can often lead to attractive business model innovations.
CORRECTION TO LAST BLOG POST: Second Harvest Food Bank of Southern Wisconsin has not become a food pantry. Its mobile truck pantries work collaboratively with existing partners (food pantries, shelters, etc.) boosting their capacity to address local needs for emergency food. For example, the Beaver Dam Food Pantry is only open a couple days/hours during the week. Second Harvest launched a Saturday mobile pantry in partnership with the food pantry to serve the working poor and to allow the community an additional day during the week to obtain food. Also, Feeding America and other generous donors funded the trucks. Thanks to the dedicated staff at Second Harvest Food Bank of Southern Wisconsin for the corrections.
For insight on business model strategy, read my recently released book, Beyond Price.