by: Issues: November / December 2002. Tags: Strategy. Categories: Strategy.

Successful business mergers demand successful brand mergers. If they are to succeed, managers need to be aware that there are different types of mergers and strategies and to identify the one that will work best.

The scenario is one that has been played out many times: The bosses have agreed to merge, the deal has been announced, and managers are lining up for the new jobs. Hot rumours are floating around, about where the headquarters will be, who’ll have the top slot, and which shops will have to go. Who’s thinking about customers, the trade and supply partners, and critically – the brands? At the moment, no one, but…

Seem familiar? Indeed! Welcome to the nightmarish challenge of merging brands once the organizations have decided to merge.

Despite the obvious and much-heralded potential of both the merged organization and its brands, it is very reasonable to ask if tomorrow’s merged brands will be as powerful and enduring as the pre-merger ones. Trends and recent history seem to signal otherwise. Consolidations are risky, often resulting in a lower market share than those of the pre-merger brands together. A McKinsey report (1997) claimed that only one in five attempts succeeds.

Just what differentiates a success from a failure? Unfortunately, brand mergers tend not to be driven by strategic thinking. Nor are they all of the same variety. It is important to identify clearly the type of brand merger being attempted, and its unstated assumptions. Critical still, is the necessity to determine if the manner in which the brands are merging is consistent with the new firm’s branding strategy, that is, the end game that the merged business wishes to pursue with regard to its customers. Experience shows that, in the absence of such foresight, brand mergers are frequently haphazard, likely to be driven by short-term goals or personal agendas, and lead to mistrust and failure. Further, in the absence of a deliberate attempt to align brand mergers with the branding strategy, the final portfolio of brands lacks the power to capture the potential created by the merger itself. Mismatches, in fact, do more than spoil a re-branding opportunity, thus wrecking havoc on customer expectations and employee morale.

Successful business mergers demand successful brand mergers that create the basis for superior customer value and competitive differentiation for strategic advantage. In fact, there are four distinct approaches to merging brands. Below, I will describe the advantages and disadvantages of each one, and point out how misunderstanding the task at hand can lead to organizational crisis and market failure.

Ways of merging

Following a merger, managers usually employ four apparently similar verbs to describe what they will do to their brands and brand portfolios: streamline, rationalize, consolidate, reconfigure. But these verbs reflect not one, but four considerably different approaches to brand mergers.

1. Streamline implies choosing a form that presents little resistance to flow, increasing speed and ease of movement. Efficiency is enhanced by removing obstacles that create turbulence. If firms are seen as managing flows – of ideas and resources – streamlining brands following a merger essentially warrants selecting a business model and aligning all brands to meet its needs. The selected business model might correspond to that of the dominant firm (common during acquisitions), or one that is different from that of both merging firms. Brands, here, are seen as ways of fulfilling expanded potential, usually in operations and marketing. Brand elimination or movement decisions are guided by desired synergies at the supply-end, such as, contributing to economies of scale in production, sourcing efficiency, added distribution power, and advertising related advantages. Brands that require deviation from the model, e.g., design adaptations, or specialized channels, are dropped for reasons of efficiency. Over the long term, the objective is to develop the most efficient flow, using the combined resources of the merged firm. Key advantages of streamlining are speed in arriving at the desired portfolio and cost savings within a reasonable time. Among its potential downsides are loss of customer franchise for brands that have been seriously repositioned or eliminated from the merged portfolio, and a short-term impact on revenue following brand divestments.

Unilever’s purchase of Helen Curtis and subsequent merger with two other U.S.-based subsidiaries, Cheesebrough-Ponds and Lever Brothers, left the Anglo-Dutch multinational with a considerable stable of brands in the foods and beauty care markets. Rather than leaving the three to operate separately, Unilever’s streamlining approach defined the business model of the future to include the most profitable and fastest growing customer segments. Supply-end efficiencies resulted from divesting marginal and non-strategic brands in favour of potential brand leaders. Brand elimination led to disbanding the sales force, centralizing back-office functions, moving the headquarters, focusing new product development projects and reorganizing the brand management effort. As one of the executives who lived through the merger exercise noted – “Just by eliminating duplicated overheads, a lot of cost was taken out of the business and invested in marketing.” Within just two years of the merger, the alignment of brands with the chosen business model contributed hugely to the success of a new brand of hair care products.

2. Rationalizing is an extreme form of streamlining. It suggests not simply collapsing multiple flows into just one, but collapsing brands within the chosen flow as well. A mixture of reasons – supply as well as demand-driven – prevails. In addition to operating and marketing economies, the 20/80 rule – 20 per cent of brands contribute 80 percent of profit – prompts managers to severely cull portfolios, swinging all their resources behind only a few winning brands. A different logic – one in favour of creating a single global brand – also drives the drastic reduction in brands. Such global or mega brands are claimed to embody the values of global segments, ones that rise above cultural or regional preferences. These brands require little or no adaptation, travel far and wide, and hold forth the prospect of satisfying the most at the least cost.

Despite a roaring debate over their efficacy, a great many firms – the likes of Unilever, Proctor & Gamble, Nestle, and Diageo – have taken decisive strides towards rationalizing their portfolios in favour of global brands. But, going forward requires more than slash and burn – rather, a careful balancing act of the requirements for success in different markets. This strategy of saving all the eggs in the global brand’s basket may be risky, especially as competitors often counter by waving customized offers at consumers.

3. Compared to the above two approaches, Consolidation takes a more demand, or customer-driven, view of brand mergers. If watchwords for streamlining and rationalizing are efficiency and profitability, for Consolidation they are market coverage and coherence. Faced with multiple business flows, the merged firm attempts to lend coherence through the elimination of overlaps, and add strength by leveraging the whole portfolio. Redefinition of the business is sought not by focussing narrowly – i.e., on a specific competency or product-class expertise – but by considering the entire range of customers hitherto served by the merging firms, with expanded opportunity for market coverage, and in satisfying complimentary needs, both within and across segments.

Kidde Plc, a U.K.-headquartered firm involved in fire protection devices and services around the world, has grown considerably in the past decade through acquisitions. Interestingly, such a strategy has deliberately avoided looking for production or service efficiencies, and focused instead on covering diverse segments in a region (e.g., government offices, private home buyers, warehouse-style retail  stores), and a variety of regions around the world. Barring selective brand divestments to remove irritations at the dealer/distributor level, the philosophy driving brand mergers has been very much of a Consolidating variety, leaving Kidde as a ‘nation of small tribes.’

Ford’s acquisition of Volvo, Jaguar and Aston Martin and their cohabitation within the Luxury Car Division is yet another example of the Consolidating approach. So too is the joint portfolio which includes Volkwagen, Audi and Rolls Royce, covering diverse markets with different offers. Key advantages of Consolidating are customer retention and the continuation of harmonious relationships with trade channels that existed prior to the merger. The merged firm acts as a large holding company with the added advantage of diversifying its risks across brands and geographies. Among its key disadvantages are the risk of diluting the overall corporate purpose, the conundrum of chasing market-share growth over profitability, inadequate sharing of knowledge across the firm, and the wastage of precious resources, such as multiple new products teams charged, more or less, with similar mandates.

4. Reconfiguring involves abandoning previous flows and discovering a new way of thinking about the business of the merged firm – in terms of its competencies and vision for the future. It may lead to radical changes in organizational structure, movement towards new technologies, and segmenting customers differently than in the past. Brands, in this scenario, often end up intact in terms of their basic features, but transformed in every other way. New groupings, following the merger, impart markedly different value propositions, segment positionings, and competitive sets – even requiring the development or acquisition of additional brands to complement existing ones.

Coca Cola’s purchase of Cadbury Schweppes has allowed the number- one soft drink marketer in the world to substantially expand its portfolio of brands into several non-alcoholic beverage categories including mixers and juices. From Coke’s point of view, a significant Reconfiguring opportunity is in the offing – one capable of presenting a whole basket of brands that compliments specific customer lifestyles, in effect foreclosing competition from targeting the same segment/s with a specific brand in a specific drink category.

If successful, Reconfiguring can go a long way in building competitive advantage by re-defining markets and quality standards that competitors would struggle to imitate. In Coke’s case, for example, if successful, a customer may begin to view all non-alcoholic beverages that he/she consumes as being part of a set, perhaps with serious joint purchase benefits. Caution, however, is warranted in terms of the long-range sustainability of the newly conceived flows as well as in addressing the specific challenges that lie within them. Such as, the risk of contamination, i.e., failure or under performance of one brand within a set spoiling the fortunes of all the others, as Coca Cola Company may have to watch out for in the future.

Much of the disagreement over brands after a merger arises from misunderstanding the intended or even adopted approach. For someone interested in Streamlining, calls to support or strengthen brands outside the flow may appear wasteful. Imagine the confusion among managers from the two recently merged firms, as Rationalizing comes into conflict with Reconfiguring. Champions of the former might have viewed the whole merger exercise as one that would lead to a single dominant brand fit for rolling out everywhere, marshalling the entire management effort. Proponents of the later may have conjured up a back-to-the-drawing board scenario, with everything up for grabs.

Reconciling views about brand mergers may be difficult as long as assumptions underlying the four approaches remain hidden. Streamlining, for example, assumes a potential for synergy within the new organization – both in locating an opportunity and in actualizing the promise. Rationalizing, on the other hand, assumes a potential for differentiation, which is critical to positioning the firm’s lead brand in every served market. A potential for responsiveness characterises Consolidating – an expectation that the merged firm has the wherewithal to compete effectively in varied markets. For Reconfiguring, it is the potential for transformation within the firm, as well as the ability to convince customers and trade partners about a very different view of the world.

For merging managers, then, the challenge is to discover which approach has the most support, and to bring its assumptions as well as strengths and weaknesses to light.