Sara Lee Case Study This paper will discuss the Sara Lee Case Study. It will identify how diversification is used by Sara Lee in its business strategy. It will evaluate how effectively it is being implemented in general and as it impacts shareholder wealth and risk management. Finally, it will provide recommendations for improvement of diversification based on your evaluation. Sara Lee Established in 1942, Sara Lee has had a history of acquisitions. ("Sara Lee," 2012).
Before their decision to bring Brenda Barnes on board as CEO, Sara Lee was a company that “bought anything they thought they could make money in” (Warner, 2005). When Barnes joined the company in 2005 she led the company in their biggest reorganization to date. How Diversification is Used by Sara Lee Brenda Barnes announced that she would lead the company in a new direction when she came on board. This bold new plan was to better align Sara Lee’s multiple business and to sell off any business that did not fit into their new corporate structure.
From this point forward, officials decided that they would focus on foods, beverages and household goods. This plan was risky because Sara Lee determined that they would get rid of their businesses that showed a weak performance or that did not fit into one of the new focus groups. (Thompson, Strickland, & Gamble, 2010). This type of diversification is called related diversification. Related diversification is “A process that takes place when a business expands its activities into product lines that are similar to those it currently offers. ("Business Dictionary," 2012) This is related diversification because the businesses are all concerned with foods and beverages. There is also a similar type of value chain for these products. The methods of producing, marketing and distributing these products are very similar. Evaluation of Strategy It would be difficult to say that the efforts of Sara Lee to use this diversification strategy have been a successful venture. Looking at the financial performance of Sara Lee from 2005-2010 shows that Sara Lee has not chieved much, if any, financial success. In fact, they have not been able to exceed the profit margins that they showed in 2004, before they implemented their new structure. In fact, in 2008, their profit margins showed a loss. Sara Lee made a good decision to spin-off the Hanesbrands division. Their products did not fit with their new structure. Because of their financial strength, this spin-off gave the company a large cash payment that was desperately needed. The reorganization did show a more strategic alignment of the company offerings.
It allowed the company to become more focused. The businesses that Sara Lee decided to remove were not companies that aligned with their new structure and they were companies that were weak performers for the company. Ridding itself of these companies that were losing money was a good decision for the company in the long run. All in all, it would be difficult to determine that Sara Lee’s new business strategy has benefitted their shareholders. Recommendations There are several changes that could be made to help improve the financial performance of Sara Lee.
First, Sara Lee executives need to look at their strategy and understand why they have been unable to execute their plans successfully. On paper this reorganization should have worked. They need to ask themselves why it has not worked. They need to realize that execution is “the ability to mesh strategy with reality, align people with goals, and achieve the promised results. ” (Bossidy & Charan, 2002). To do this, Sara Lee executives may want to look into some type of merger or acquisition with companies of similar size and offerings.
They have showed continued success acquire new brands. This know how could benefit them by merging with a brand that would help them have a better position to negotiate with grocery stores. Their economies of scale and scope would be right in line with this type of company because of the similarities in value chain activities that they would share. Another idea would be to continue to look at their offerings to find additional products that may be nearing the end of their life cycle and go ahead and discontinue their production.
If they offer products that have little room for growth, they should be eliminated. It would be in the best interest of Sara Lee to continue to invest, and possibly increase their investment in their food service division. The reality of today’s culture is that more people eat away from home. This type of business has plenty of room for growth, has shown a good success and growth pattern for the company already and promises to be a profit generator in the future. Another place that Sara Lee should continue to invest their resources is their international beverage business.
Like the food service division, this division seems to have potential to grow profits. Like their spin-off of the Hanesbrands division, there may be divisions within the Sara Lee companies that could profit the company by finding a buyer for the company and selling it off. Executives should take a hard look at their businesses to determine if this is an option for any of their current offerings. Conclusion Sara Lee made a bold step with their reorganization strategy in 2005. It seems that their lack of profits is more of a problem of execution.
Relative diversity should have allowed the company to tighten up their belts, rid themselves of faltering companies and maximize their profits. There is still the potential for this to happen. They need to continue to invest in strong business and divest faltering companies. They need to keep their eye on potential companies that could strengthen their corporate offerings and sell business that would enrich profits. If the leadership can focus on execution they will be a successful company.
References Bossidy, L. , & Charan, R. (2002). Execution: The Discipline of Getting Things Done. New York: Crown Business. Business Dictionary. (2012). Related Diversification. Retrieved from http://www. businessdictionary. com/definition/related-diversification. html Our Timeline. (2012). Retrieved from http://www. saralee. com/en/OurCompany/OurHistory/OurTimeline. aspx Thompson, A. , Strickland, A. , & Gamble, G. (2010). Crafting and Executing Strategy: Concepts and Cases (18th ed. ). New York: McGraw-Hill. Warner, M. (2005, February 11). Reorganizing at Sara Lee Includes a New Chief. New York Times. Retrieved from http://www. nytimes. com/2005/02/11/business/11sara. html? ref=brendacbarnes&_r=0