The first step in the divestiture decision is finding synergies.
Here, we can apply everything we already learnt about synergies.
Last week, we looked at what synergies are and how we can find them.
If you want a refresher,
I encourage you to go back to some of those videos.
In this step, we're interested in finding out if there are synergies between
the business that we may want to divest and the other businesses in our portfolio.
If we find no synergies,
then that could be a reason for divestiture.
Here are the three steps in the divestiture decision.
We're at the first step, finding synergies.
To help us understand the divestiture decision,
let's walk through an example.
Tesco is a supermarket chain and this particular store is in London.
You see that there are two logos, one of Tesco,
and one of Harris + Hoole,
which is a coffeehouse chain owned by Tesco.
Some of its coffeehouses are within at Tesco store,
and others are not.
If you were Tesco,
would you divest Harris + Hoole?
The first question to answer is, what synergies,
if any, does a supermarket have with a coffeehouse?
Because we're looking at operational synergies,
we'll start with the value chains.
Here, you see two value chains,
one for the supermarket,
and another for the coffeehouse.
You may notice that these are fairly basic value chains,
but that's often a good starting point for gaining insights.
There's really two big chunks in each value chain,
opening a store and running a store.
Opening a store includes identifying the best site for the store,
real estate negotiations and the design of the store itself.
Does Tesco have any skills that would help Harris + Hoole?
Yes. I can imagine in identifying a site and real estate negotiations,
Tesco has something to offer to Harris + Hoole.
Probably not so much in the design of the actual store.
Let's say, we get synergies here, a plus.
What about the next step, procurement?
Can Harris + Hoole benefit from the skill of Tesco when buying coffee?
Perhaps, if they would use the same suppliers.
Again, I'm going to put one plus here.
Next is logistics.
We could deliver products to Harris + Hoole at
the same time as delivering products to a Tesco store.
The benefit depends on how many of the stores are in or near a Tesco store.
I'm going to be a bit conservative here,
and I'm going to add between a zero and a plus. Over to branding.
The brand positioning of Harris + Hoole and Tesco is quite different.
Harris + Hoole describes himself as a chain of
artisan coffee shops made up of experienced, passionate coffee lovers.
In contrast, Tesco aims more for lower prices rather than higher quality.
Indeed, their slogan is Every Little Helps.
Thus, if anything, there might be negative synergies from combining these brands.
For now, however, I'm just adding a zero here.
Finally, sales. To me,
it would seem that the in-store sales is quite different.
Selling a cup of coffee,
personally made for a customer in a nice environment,
versus selling standardized groceries.
But I'm no expert in the supermarket or coffeehouse business,
so I could be wrong here.
I'm going to add between a zero and a plus.
Thus, we can identify some synergies across the value chain.
To me, the strongest synergies would be in the first part,
store opening, but we don't know how big this would be in absolute numbers.
Thus, based on a quick analysis,
we can say that synergies exist between a supermarket and a coffeehouse business.
Based on this information,
there's no need to divest the coffeehouse business.
Now, because this is a quick analysis,
it's also fairly subjective.
That is, you could come up with different synergies or you
could question some of the synergies that they just come up with.
That's okay for two reasons.
First, a quick analysis can already generate some useful insight,
and second, at this stage of the process,
you want to start a discussion with your team.
You don't want to finish or close off the discussion.
Probably, a discussion or an analysis, joint between you and me will
yield a better outcome than either your analysis or my analysis done on its own.
