Diversification Strategies

Diversification Strategies

The question of whether a business should diversify or not sounds fairly simple. Businesses are always looking for ways to reduce risk in the marketplace as well as ways to improve performance and diversification is often a way to achieve those goals (“Business Diversification,” n.d.). Upon further examination though, the question is more complicated and could have a tremendous impact on whether a business succeeds or fails (Heller, R. 2006). This paper examines two companies that implemented diversification strategies with very different results: one successful and one that wasn’t. It will conclude with possible reasons why their outcomes were different and suggested actions the unsuccessful company could have taken that would have resulted in a successful outcome. Hallmark Cards, Inc. Hallmark Cards was first incorporated in 1923 and is now the world’s largest greeting card company. They distribute their cards and other products in more than 30 languages to more than 100 countries and in 2006 had $4.1 billion in sales. In the US alone, their products are sold in over 40,000 retail outlets, they have over 20,000 employees, and they continue to be privately held (“Hallmark Cards, Inc.,” 2007). Even in the early years of the company’s history, Hallmark saw a need to diversify and it continues that strategy today. Early diversification efforts were related to products like wrapping paper and stationary. These were products that were logically connected to their core greeting card business. As early as 1951, they began to demonstrate more creative diversification efforts by sponsoring their first Hallmark Hall of Fame television production. In 1966 the company began plans to expand into the international market, acquired a manufacturer of jigsaw puzzles and the following year moved into real estate development by building the Crown Center. The Crown Center was a $500 million retail, commercial and residential complex designed to revitalize an area near downtown Kansas City where the company headquarters is located. That resulted in the creation of Crown Center Redevelopment Corporation, a subsidiary that would oversee the project (“Hallmark Cards, Inc.,” 2007). Diversification efforts greatly expanded beginning in 1979 through the acquisition of different companies. From 1979 to 1989 Hallmark acquired lithographer Litho-Krome Corporation, Binney & Smith, the makers of Crayola crayons and Liquitex art materials. They even acquired a group of Spanish-language television stations as well as Univision, a Spanish-language network. With increasing competition in the greeting card industry during the 1990’s, diversification away from that business continued to be the strategy that Hallmark would take in order to answer that challenge. They eventually sold their venture into Spanish-language television in 1992 at a loss of $10 million. They also attempted to get into cable television by forming Crown Media, Inc. and purchasing a controlling interest in Cenom Cable, but also sold that in 1994. While Hallmark’s efforts in media weren’t as successful as they planned, they continued to expand into the areas of television production and cable television. The Hallmark Entertainment Network launched in Ireland and the United Kingdom and focused on family oriented entertainment. The Hallmark Channel eventually became one of the most watched cable networks, but wasn’t very profitable. In 2000 they also acquired Gift Certificate Center, an online provider of gift certificates for business and personal use. Moving into the online world wasn’t new to Hallmark since it had launched their initial online efforts as early as the mid-1980s. By 2001, their diversification efforts resulted in their non-greeting card revenue growing from one half to more than two-thirds of their total revenue (“Hallmark Cards, Inc.,” 2007). In 2005 and under new leadership, the company began to pull back from some of their diversification efforts in the area of television and media. Considering that their non-greeting card revenue was already half of their total revenue prior to their aggressive expansion efforts, it is safe to say that Hallmark is an example of successfully implementing a diversification strategy. McDonalds Switzerland Chances are, you have eaten at McDonald’s. According to their corporate website (“Getting to Know Us,” n.d.), there are more than 33,000 restaurants world-wide in 119 countries that employ 1.7 million people who serve more than 64 million people every day. Those are incredible numbers and it’s amazing that it all started with one hamburger restaurant in Southern California back in 1948. It’s no wonder that with this type of company presence around the world that McDonald’s would one day decide to diversify. After all, a diversification strategy is often in response to a company believing they have saturated the market and there isn’t much room for growth. That is exactly how the analysts saw it back in 1999 when McDonald’s stock declined from $48 to $32 per share. In fact, it was believed that each new restaurant actually hurt the business of existing restaurants. That analysis resulted in McDonald’s Switzerland to pursue a diversification strategy by entering into the hotel business after getting approval from the corporate headquarters (Michel, S. 2008). The decision was made by the CEO of McDonald’s Switzerland who had a background in the hotel industry and he hoped it would tie into the company’s hospitality philosophy. He was also a frequent traveler and he believed he knew what the public wanted. Because of the saturation that the company experienced, this idea was determined that it would be a way to achieve future growth. In 2001, two hotels were opened. The first one was a 211 bed 4-star hotel near the airport that was called the Golden Arch Hotel. It sat next to a McDonald’s restaurant that was open all night, which is rare in Switzerland. The hotel had two types of rooms that ranged from $120 to $160 per night that offered beds normally found in 5 star hotels. It also included standard hotel accommodations, but they did implement some creative operational ideas. The staffing structure was based on their restaurant standards, which was different than the way hotels traditionally operate. Guests could also check in at the airport in order to eliminate the rush that can happen at the hotel front desk. Even though there was plenty of competition in the area, the hotels were experiencing high occupancy rates at the time and the public was quite diverse which would provide more potential customers. Even more exciting was the planned expansion of the airport that would bring in even more potential business (Michel, S. 2008). Even though there was a lot of media attention paid to the new hotels, activity was limited. Occupancy rates never met expectations the first year, so management negotiated to get some of the bus tourism in the area. This helped, but the rate paid to the hotels was much lower than the hotel needed to be profitable. There was also a lot of turnover among the staff. Many left to seek higher pay. Consumers also expected the rates that the hotel would charge to be in line with the restaurant pricing. They didn’t think that McDonald’s could provide service and amenities that would justify a 4-star hotel price. External factors also impacted the entire area. The outbreak of SARS, the attacks on September 11, 2001 and the bankruptcy of Swissair caused a drop in tourism. Increased competition also had a negative impact. In the end, the hotels were sold in August 2003 to another hotel operator (Michel, S. 2008). Outcome Analysis Both Hallmark and McDonald’s had justifiable reasons to diversify. Hallmark was in a business impacted by a fluctuating demand cycle and McDonald’s had saturated the market to such a point that they would have to look at expanding outside it’s core business. While even Hallmark has had various degrees of success, the fact that it grew it’s non-greeting card revenue to over half of its overall revenue leads me to conclude that they succeeded in their diversification efforts while McDonald’s never seemed to have a chance when they entered the hotel business. The first reason for the differing results has to do with the commitment made to the diversification effort. Hallmark has always been involved in diversification and grew that business by acquiring other companies over a longer period of time. Not only does it demonstrate a commitment to the plan, but it would also help the leaders of the company to gain confidence in their ability to be successful. That would lead to additional diversification. McDonalds Switzerland decided to enter into the hotel business, built and opened two hotels, and then sold them in only 4 years. That doesn’t appear that they had any true commitment to the project. If they did, I believe they would have tried additional ideas to make the hotels a success and given those ideas more time to work. A second reason I believe that accounts for these outcomes has to do with the types of business each company originally tried to launch. Hallmark first started small and got into products outside of greeting cards, but somewhat related like stationery and wrapping paper. They also established their own retail network to sell and support their core products. When they made the jump into real-estate development, it was a project that also benefited the core business by improving their corporate facilities. McDonald’s on the other hand tried something completely unrelated to their restaurant business partly because the CEO had a background in the hotel industry. Yet, McDonald’s as a corporation didn’t have a background in hotel management and even tried to bring ideas from the restaurant business into their hotel venture instead of using ideas that had already been proven in the hotel industry. One last primary reason for these different results is that Hallmark acquired existing businesses that were already established. McDonald’s tried to start a business from the ground up which is much more likely to fail. Had they tried to enter into the hotel industry by purchasing an established chain, they would have had a greater likelihood of success by benefiting from that company’s history and expertise. It would have also avoided the direct identification with the restaurants that did not seem to benefit this venture like they hoped it would. Recommendations Based on this analysis, I would make the following recommendations that could have made McDonald’s efforts successful. First, find an industry that is related to the core business. It could be a different type of restaurant or food service business. It could be a food supplier that provides some of the products they use each day like hamburger buns. Maybe even an industry that is related to the equipment their core restaurants need to operate. Working with that equipment daily would provide them with extensive knowledge of that equipment that would help them be better prepared to enter that industry. My second recommendation would be to purchase an existing business within their chosen industry. I would not recommend trying to start the business from the ground up. They should take advantage of their resources to purchase a business that needs those resources to reach its full potential. McDonald’s could then take advantage of an existing base of customers along with the expertise that the existing leadership would bring to the table. It would be a great opportunity for the struggling business as well as for McDonald’s. Conclusion In the end, there are many reasons a company would want to diversify. The companies examined here demonstrate that it’s a strategy that must still be researched and planned carefully. Just because a business is successful in one area doesn’t automatically mean it will be successful in another. Business is complex and even when there is careful research done that points a business in a specific direction, there are still elements that must be planned for that cannot be controlled for. While that adds to the uncertainty of the outcome, it also provides an element of risk that makes the business world exciting to follow and study.
References
“Business Diversification” (n.d.). Retrieved October 29, 2011 from www.growingbusiness.co.uk: http://www.growingbusiness.co.uk/business-diversification.html

“Getting to Know Us” (n.d.). Retrieved October 29, 2011 from www.aboutmcdonalds.com: http://www.aboutmcdonalds.com/mcd/our_company.html

"Hallmark Cards, Inc." International Directory of Company Histories. (2007). Retrieved October 27, 2011 from www.encyclopedia.com: http://www.encyclopedia.com/doc/1G2-2690300052.html

Heller, R. (July 8, 2006). Diversification: Taking the Risk and Making it Work. Retrieved from http://www.thinkingmanagers.com: http://www.thinkingmanagers.com/management/diversification.php

Michel, S. (July 11, 2008). McDonald’s Failed Venture in Hotels. Retrieved from www.thunderbird.edu: http://knowledgenetwork.thunderbird.edu/research/2008/07/11/anatomy-of-mcdonald%E2%80%99s-failed-venture-in-hotels/