Fyffes Group Diversification Strategy - Undergraduate …undergraduatelibrary.org/system/files/2130.pdf · The objective of this report is to study Fyffes Group diversification strategy,

Fyffes Group Diversification Strategy

B. Business (Hon.) Management– Sem.8 Strategic Management CA 1

2

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.


3


4

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


5

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


6

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


7

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


8

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


9

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


10

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


11

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


12

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


13

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.


14

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.


15

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.


16

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


17

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


18

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

Documents

Fyffes Group Diversification Strategy - Undergraduate …undergraduatelibrary.org/system/files/2130.pdf · The objective of this report is to study Fyffes Group diversification strategy,