Tuesday, November 17, 2009

Sara Lee: Unwinding a Conglomerate

Slowly but surely, the break-up of Sara Lee continues. Today, we learned that S.C. Johnson is bidding for Sara Lee's air freshener business, a unit that Proctor and Gamble had already expressed interest in acquiring.

Interestingly, the break-up of Sara Lee stretches back a full decade. Back in 2000, the company begin this transformation from an unrelated diversified firm to a more focused company. In 2000, Sara Lee divested units such as Coach, Champion Europe, PYA/Monarch, and its international bakery businesses in France, India, China and the U.K. This transformation accelerated when Brenda Barnes became CEO in 2005. Since that time, the firm has divested many businesses including the spin-off of its branded apparel business into a separate, publicly traded company called Hanesbrands.

Of course, I've noted before that the logic of unrelated diversification should be called into question in industrialized nations today. What's amazing is how long it has taken for Sara Lee to make this transformation, though the company is certainly not unique in this regard. It proves how difficult it can be for a conglomerate to leave behind its diversification strategy. At the heart of this challenge lies the fact that it can be so contentious to decide what businesses are truly related and which are not. No precise way exists to determine "relatedness" in corporate strategy; the term elicits much debate. Moreover, it can be especially contentious inside of a company, where executives have ties to a historical strategy and to particular business units in which they may have worked for many years (and which they may have even been responsible for acquiring many years earlier).

What's the lesson for executives in other firms? Contentiousness on the question of "relatedness" actually is a good thing. Top management teams ought to have a vigorous debate about what constitutes a related business. Perhaps such candid debates can prevent firms from making unwise acquisitions that have few synergies to exploit.

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