Fyffes Group Diversification Strategy
B. Business (Hon.) Management– Sem.8 Strategic Management CA 1
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Executive Summary
The objective of this report is to study Fyffes Group diversification strategy, their strategic choices, the models and methods used to calculate their portfolio make-up and the impact it had on the company performance. Within this objective there is also the intention to analyse the company diversification strategy and the Groups’ ability to become leaders in their market. In the first part of this report the company background was analysed to observe their approach to diversification and the choices the company made over the years. Having a vision and a strategy in place Fyffes Group were able to succeed and gain a competitive advantage over its competitors by continuously delivering high quality products at a reasonable price, maintain good relations with its customers, strong relations with its partners which helped them to reduce the costs and achieve economies of scope and become leaders in the market. The last part of this report it evaluates the positive and negative effects of its diversification strategy and by applying the BCG framework, we were able to identify the steps needed by companies such as Fyffes Group to create synergistic effects by diversifying into related and unrelated business. Different management tools and strategies aid mangers to take the right decisions and to understand which subsidiaries are worth investing in, to improve the overall performance of Fyffe’s Group. By diversifying into related and unrelated businesses the company was able to grow and become the €2.17 billion company that it is today.
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Table of Contents Page
Introduction 5
1. Fyffes Group background and diversification approach 6
2. International expansion 7
3. Diversification strategy 8
3.1 Diversification into related business 10
3.1.1 Upstream Vertical diversification 10
3.1.2 Downstream vertical diversification 10
3.1.3 Horizontal diversification 10
3.2 Unrelated diversification 11
3.3 Diversification into both related
and unrelated businesses 11
4. Evaluating the diversification approach 11
4.1 The BCG Matrix 13
Conclusion 15
Reference 16 Appendix 17
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Introduction
The intention of this assignment is to analyse the diversification strategy of
Fyffe’s Group, the Group’s diversification strategy, the methods used to
diversify, the rational for diversification and to evaluate the impact it had
on company performance. Boston Consulting Group matrix will be used to
examine if Fyffe’s plc. has chosen the best diversification strategy that fit
with the organisation vision and objectives.
Chandler (1963: 83) defines strategy as
the determination of the basic long-term goals and objectives of an enterprise and the adoption of courses of action and the allocation of resources necessary for carrying out these goals.
Quinn (1980: 54) presented us with another definition of strategy. He
defines it as
the pattern or play that integrates an organisation’s major goals, policies and action sequences into a cohesive whole.
Fyffes plc. story started back in 1880 when E.W. Fyffe Son & Co had their
first import of bananas from the Canary Islands. E.W. Fyffe Son & Co joined
forces through a merger with Hudson Brothers to become Fyffe Hudson &
Co. Ltd. An enduring partnership between Charles McCann & Sons Ltd. of
Ireland and Fyffe Hudson & Co. Ltd has been established since 1901. In 1913
the company was acquired by United Brands US. (fyffes.com)
The UK government intervention in 1940, placing a ban on the import of
bananas and the war had been damaging for the company. When the ban
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was lifted in 1945 it took 15 years for the company to achieve a pre-war
level of bananas imported. In 1983 the company diversifies to reduce its
dependency on the import of bananas and acquires George Jackson and
Company Limited and Thompson and Company (Parkway) Ltd. (ibid)
This horizontal concentric diversification strategy into the fresh fruit and
vegetable business intends to lessen the dependency on banana import. This
has marked the beginning of Fyffes Group diversification strategy a company
that achieved a turnover of 2.17 billion in 2012 and I will analyse the
achievement of this success in greater detail throughout my assignment.
(Ibid)
1. Fyffes Group background and diversification approach
In 1965 Neil McCann took over his father business and he formed the Banana
Importers of Ireland Limited (B.I.I) to cater for the banana needs of
Ireland’s leading ripeners. Under his leadership he strategically formed in
1968 the Fruit Importers of Ireland Ltd (F.I.I) where more leading brands
from around the world were imported and then distributed to different
companies. FII merged with Charles McCann Limited in 1981 to raise
investments and becomes a public limited company (plc.) in 1981. FII plc.
strategy to become a leader in the fruit and vegetable market continues its
vertical diversification strategy and acquires the main distributor of fresh
fruit and vegetables of Dunnes Stores the Kinsealy Farms Ltd. in 1985.
During the 1980’s the FII plc. expands its portfolio and acquires D.P. McHale
(F.I.) Ltd. a wholesaler, Gillespie & Co, a dried goods distributor.
(Fyffes.com)
In May 1969 Elders & Fyffes Ltd. changed its name to become Fyffes Group
Ltd. Over the next decade the company continued to diversify horizontally
by acquiring similar companies like; George Monro Produce Ltd. in 1969,
Southern Fruit Suppliers of Waterford in 1971, Sheil and Byrne Ltd. in 1972.
In 1986 FII plc. changed their growth strategy and focused their objectives
on becoming an International leader distributor of fruit and vegetables and
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purchased Fyffes ltd. a subsidiary of United Brands. The FII plc. changed
their name to FII Fyffes plc. In pursuing their growth strategy the company
continued to diversify and acquires in 1988 Marshall & Co. a fruit importer,
Jack Dolan ltd. an Irish fruit and vegetable importer, Rowe & Co. and GM
Gerrards UK based fruit & vegetables wholesalers. The name is changed to
Fyffes plc. in 1989 to fit more with their new strategy in becoming a
distributor leader of fruit and vegetables produce. (Ibid)
2. International expansion
During the 1990 Fyffes expands internationally by acquiring Glass Glover of
Scotland, Padwa Group, J.Lindsay of Scotland, 50% of Brdr Lembcke A/s
(Denmark), 50% of Velleman & Tas BV which is one of the largest
distributors of fresh produce of Netherlands, 70% of J.A. Kahl & Co in
Germany, 33% of Sofiprim (France), 50% of Tropic International in France
and acquires Angel Rey a Madrid based Produce Company, to add to the
Spanish Group’s division establishing Eurobanan Canarias the biggest fruit
company in Spain. Fyffes plc also buys 50% of Peviani Spa of Milan a leading
Italian importer of fresh produce and acquires the Velleman & Tas BV a
Rotterdam importer and distributor of fresh produce. (Fyffes.com)
The company also divests its fruit retail chain Gerrards, sells Vangen
Services the logistic business unit and disposes of its 50% shareholding in
Banana Trading Corporation. The company also invests in their supply chain
by buying a £19m refrigerated ship, and builds a new ecological state of the
art computerised ripening center in UK. (Ibid)
In 1995, Fyffes together with Windward Islands Banana Development and
Exporting Company (WIBDECO) bought the UK distributer, Geest Bananas
Business. Four years later the company entered into a strategic alliance
with Capespan of South Africa with a stake of 50% in Capespan Europe.(ibid)
In the new millennium the economic conditions pushed Fyffes Group in some
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cost saving measure and closed some of the ripening centers in UK, sold
some of its refrigerated fleet, some of the cargo business and 50% stake in
Sofiprim SA, (France). In 2002 the company continues its diversification
strategy and acquires 70% Hortim International sro (Czech Republic) a fruit
and vegetable importer and exporter who employs 600 people. Fyffe’s also
buys 80% of International Fruchtimport Gesellschaft Weichert & Co. KG
(“INTER”) Germany an importer and exporter of fresh fruit and Everfresh of
(Sweden) a fresh produce group. In 2005 the company enter a strategic
alliance of 50/50 with a Columbian company Uniban SA and purchases
Turbana Corporation, a US corporation based in Florida and becomes the
fifth suppliers of bananas in US. (Ibid)
An unrelated diversification strategy is pursued in 2006 when Fyffes acquires
Blackrock International Land plc. and also demerge a new public company
Total Produce plc. to concentrate on tropical produce business. The global
expansion is continued and in 2008 Fyffes buys 60% of Sol Group Marketing
Company a winter melon business based in Florida.
In 2009 Fyffes Group integrates backward in to the supply chain and
purchases a pineapple plantation from Agroindustries Golden West SA
(“GOPA”) in Panama. In the same year the Fyffes invests in its Fyffes
Banana Ripening & Distribution Centre by doubling its capacity boosting its
market position as a leader in the UK market. (Ibid)
The Fyffes Group has grown and developed since its inception from a small
green grocer’s shop in Dundalk to become market leader’s distributors in
Europe for bananas and melons and in US distributor leader for melons and
occupies the fourth position for banana’s.
3. Diversification strategy
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Companies engage in diversification strategies to reduce the risk of failure
and the overdependence on one market with the intent to limit the
volatility of their assets to decline.
Fyffes plc decided to diversify to reduce the overreliance on the banana
import and to increase the profitable growth opportunities in the emerging
market of exotic fruit and vegetable.
According to Teece (1980: 224):
‘Diversification can represent a mechanism for capturing integration economies associated with the simultaneous supply of inputs common to a number of production processes geared to distinct final product markets.’
Teece goes on to say that in order for a diversification strategy to be
successful the two companies must be able to leverage their visible and
invisible resources to reduce the cost and create economies of scope. For
example, visible inputs such as machinery, products, and raw materials, are
easier to share between the companies, but the invisible resources such as
expert knowledge and know-how of the staff are the invisible inputs that a
company has nurtured and developed over the years are very difficult to
share between the companies. That is why synergistic effects and
competitive advantage are not easy to be achieved when companies
diversify through merger or acquisition.
Michael Porter (1987) suggests that each diversification attempt of a
company should pass three tests:
1. The attractiveness test. When selecting an industry for diversification it
must be attractive or able to become attractive.
2. The cost of entry test. The cost of entry in new markets should not
surpass all future profits
3. The better off test. A competitive advantage must be achieved through
this new diversification so the time and the resources invested in the
new business will achieve the desired results.
Porter states that the senior management must have a clear vision where
the company wants to be in the future and how to get there. Based on that
strategy the company should apply the three tests so that the diversification
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strategy will achieve economies of scale by sharing resources between the
firms, create a synergistic effect and achieve economies of scope, and
ultimately gain a competitive advantage.
Thompson, Strickland and Gamble (2010:7) state that,
a company achieves a competitive advantage when an attractive number of buyers prefer its products or services over the offering of competitor and when the basis for
this preference is durable.
Fyffes plc views competitive advantage as having a strong relationship with
diversified customers, have a state of the infrastructure network, a strong
brand recognition in the market that they operate, a strong-long
relationship with bets-in-class suppliers, the scale of the business, and a
strong balance sheet with valuable assets.
Companies can diversify in:
Related business
Unrelated business
Or diversify into both related and unrelated business
3.1 Diversification into related business
Diversification in to related business involves building a business around the
value chain to benefit both companies and together performance is
enhanced and the value chain activities are greatly reduced. Thompson et
al (2010) states that
strategic fit exist when the value chain of different business present opportunities for cross business resource transfer, lower costs through combining the performance of related value chain activities, cross business use of a potent brand name, and cross business collaboration to build new or stronger competitive capabilities.
3.1.1 Upstream Vertical diversification
Related diversification can be further divided into vertical diversification
and horizontal diversification. In order to reduce their cost the company has
continuously invested in Banana Ripening & Distribution Centre to integrate
itself into upstream diversification through different acquisitions being able
to greatly reduce the production costs.
3.1.2 Downstream vertical diversification
When FII plc. bought the supplier of Dunnes Stores Kinsealy Farms Ltd. in
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1985 it was upstream supply chain integration. By acquiring Fyffes Ltd., FII
plc. integrated itself in the downstream side of the supply chain and gained
access to the banana caring ships.
3.1.3 Horizontal diversification
When two companies operating in the same industry and at the same level
are merging or buying one another is known as horizontal diversification.
Fyffes plc. strategy to growth and profitability it has been through
horizontal acquisitions and mergers with different companies over the
years. Since the beginning of the company Neil McCann pursued a growth
strategy by acquiring similar companies that provided a strategic fit with
the company as we could see from the background of the company.
3.2 Unrelated diversification
Unrelated diversification refers to the acquisition or merger of a company
that operated in a market that is totally different than your industry.
Companies diversify into unrelated market to grow their revenue and
earnings. The acquisition of Blackrock International Land plc, in 2006 it was
a move towards the property sector undertaking financed through a share
buyout. Fyffes plc. had very little in common with the property market and
the move in to unrelated market was not the best decision, as the property
market collapsed in 2008, due to the global recession and the shareholders
earning per share took a plunged from €4.42 to €3.95 as we can see in the
Figure 2 attached in the appendix.
3.3 Diversification into both related and unrelated businesses
Companies that engage in both related and unrelated diversification are
also known as conglomerates due to the diversity between the industries.
Fyffes has attempted to diversify, but due to the global economic downturn
and the global financial crises the company attempted was not as successful
as they have predicted to be.
4. Evaluating the diversification approach
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Evaluating a company strategy to its diversification approach involves
analysing the negative and positive effects that it has on the company
strategy and deciding what could it be done differently to improve the
company performance to increase shareholders wealth.
Thompsons et al (2010) states that are six steps a company could take to
evaluate its performance. These are:
Step 1: Evaluating Industry Attractiveness. This step involves
analysing the industry attractiveness. For Fyffes Group this means
analysing factors that could affect their strategy and its objectives.
PESTEL (Political, Environmental, Social, Technological, Economical
and Legal) factors, the industry uncertainty and business risk, the
seasonal factors, the resource requirements, the strategic fit
between the companies, the intensity of the competition are all
measured before the company engages in an international or
domestic acquisition. Strategic Group Mapping is one of the tools the
management of an organisation could use when diversifying
internationally to see where in the market they will be able to fit in,
based on their product offering and the intensity of competitors.
Step 2: Evaluating business unit competitive strength. For every
additional acquisition the management executives evaluate the
impact the new subsidiary has on the company image, the ability to
benefit from the strategic fits and the ability to match or beat rivals
prices and quality. As we can see in Figure 1 attached in the
appendix, Fyffes Group were able to maintain their market position
in US and even become number one for the distribution of melons in
US and market leaders for the distribution of bananas in Europe.
Step 3: Checking the competitive advantage potential of cross-
business strategic fit. Fyffes Group has been able to benefit from the
strategic fit between different companies that they have acquired
over the years and gained a competitive advantage through increase
in the market share, strong long-term relationship with suppliers and
customers, brand recognition and a strong balance sheet with
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valuable assets.
Step 4: Checking for resource fit. Over the years Fyffes Group has
been able to accumulate resources to support the business strategy of
its entire group of business and has continuously reinvested in new
acquisitions, pay its dividends and at the same time maintain a
healthy bottom line as we can see in the Figure 2 which I have
outsource it from the company investor relations report. During 2012
the company has bought 10% of its shares back to strengthen its
earnings per share for its shareholders. To evaluate the company
resource fit different models can be used such as Ansoff matrix which
points out that pursuing a diversification strategy to grow the
business is faster and better than market development, new product
development and market penetration.
Step 5: Ranking the performance prospects of units and assigning a
priority for resource allocation. Fyffes Group strategy to become
leaders in the market for bananas, melons and pineapples has clearly
set the standards of expectation for each of their subsidiary and the
group offered support and resources to help them rise to the Group
standards.
Step 6: Crafting new strategic moves to improve the overall corporate
performance. In order to improve their overall corporate
performance Fyffes Group has decided to stick closely with the
existing business lineup and continue to diversify in the same industry
to become the worldwide distributor of bananas, melons and
pineapples.
4.1 The BCG Matrix
To evaluate the diversifications strategy of Fyffes I will use the Boston
Consultant Group (BCG) Matrix, a matrix which is around since 1970’s
and is widely used to measure a company business units or product line.
a) The question mark sign represents companies that have a high
growth but a low market share. Blackrock International Land plc.
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represented a high growth opportunity for Fyffes Group was the
shareholders have invested a considerable amount in the new market
opportunity and in the end it failed to materialise due to world
recession in 2008.
b) The stars sign for Fyffes Group is represented by companies like
Velleman & Tas of Netherland, a large distributor for the European
market and Angel Rey, a Spanish marketing and distribution company
that helped the Fyffes group to establish the largest company in the
Iberian region. Both of these companies helped to increase the
market share and profits for the group.
c) The cash cow sign is the company that achieves high market share
and a low growth. Everfresh a leading company of fresh produce
from Sweden and Turbana Corporation a US based enterprise are the
cash cow of Fyffes Group as they have a high market share and they
have maintained their market position over the years due to the
strategic fit between their own distributers and resources.
d) The dogs are the companies that require large investments before
they can become profitable and have a low market share and a low
growth potential. Fyffes Group has divested its subsidiaries like
Sofiprim SA a French distributor and Gerrards, Fruit Retail chain
because the companies were losing market shares and it would have
required the Fyffes Group to invest heavily in both companies in
order to make them profitable.
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Figure 3: BCG Matrix sourced from: https//:valuebasedmanagement.net
The BCG matrix it helped us understand that one strategy does not fit with
all the subsidiaries of Fyffes Group and that some companies might need
and use more resources than others and if they fail to materialise the
company should sell them or liquidate them.
Conclusion
The Fyffes Group has started in 1880 from a small importer and distributer
had become in 2013 a leader in the European Market of fruit produce and
fresh fruit. A clear vision has helped the leaders of Fyffes Group to diversify
in the domestic and international market and to take advantage of the
synergistic effects of related mergers and acquisitions to achieve a
handsome return for its shareholders. In pursuit of their strategy Fyffes
management team has diversified to benefit the Group and to increase
shareholders value. Strategic diversification choices have helped the
company to grow to become the €2.17 billion company that it is today.
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Reference:
BCG Matrix. Value based management.net [Online] Available from:
https://www.valuebasedmanagement.net/methods_bcgmatrix.html
[Accessed on 9th March 2013]
Chandler, AD. (1963) Strategy and Structure: Chapters in the History of the
Industrial Enterprise, Cambridge, MA: MIT Press.
Fyffes.com. [Online] Available from: http://www.fyffes.com [Accessed on
10h March 2013]
Porter, M.E. (1987), “From Competitive Advantage to Corporate Strategy,”
Harvard Business Review, May/June, pp. 43-59
Quinn, J.B. (1980) Strategies for Change: Logical Incrementalism, Illinois:
Irwin Homewood.
Thompson A. Arthur, Strickland A. J., Gamble E. John. (2010) Crafting and
Executing Strategy, The Quest for Competitive Advantage, 17th Edition
Teece D. 1980. Economies of scope and the scope of the enterprise. Journal
of Economic Behavior and Organization 1(3): 223–247.
Other:
Tansey C. (2013) Lecture Notes
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Appendix
Figure: 1. Fyffes Market position
Products 2006 2012 Banana
Europe US
2 4
1 4
Melon US 2 1
Pineapple
Europe US
3 3
3 3
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Figure: 2 Fyffes Group, Five year Summary
2011
€'000
2010
€'000
2009
€'000
2008
€'000
2007
€'000
Continuing Operations
Total revenue (incl
share of joint ventures)
850,0 742,1 726,7 758,2 708,9
Group revenue 659,0 623,1 598,1 606,7 553,3
Adjusted profit before
taxation*
22,2 21,3 21,2 15,9 18,4
Profit/(loss) before
taxation
12,5 8,8 (11,21) 128 13,2
Profit/(loss) after
taxation
11,2 7,3 (9,9) 380 10,1
Adjusted earnings per
share (cent)**
6.0 5.5 5.2 3.95 4.4
Dividend per share
(cent)
1.9 1.8 1.6 1.5 1.5
Shareholders' equity 135,8 148,1 151,7 202,4 224,5