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NAVIGATING BRAND DIVERSIFICATION

The challenges of diversification in the defense industry.

We are a no-growth strategy business”

How many companies do you know who would claim that statement? Probably none. Everyone agrees that growth is a crucial ingredient to success. There are several theories and opinions on how growth can be achieved. Every company, and every industry, has their own formula. The defense and aerospace industry has traditionally relied on mergers and acquisitions to expand, evolve and diversify.

In the defense and aerospace industry the race for competitive advantage increasingly relies on initiatives to reshape the scale, scope and vertical depth of a company’s structure.”¹

 

Defense Mergers and Acquisitions

In 2017 there were over 450 mergers or acquisitions in the defense and aerospace industry globally². United Technologies Corporation acquired Rockwell Collins, a $30 billion deal, the second largest in industry history. Northrop Grumman acquired Orbital ATK ($9 Billion) and Safran acquired Zodiac Aerospace ($8 Billion) to lead the pack of mega-deals. The outlook for 2018 is likely to see smaller and midsize targeted deals.

Acquisition is being used to gain new capabilities, access emerging technologies, and geographic expansion.”³

Mergers and acquisitions are generally considered one of the most effective ways to quickly achieve economies of scale, improve operational efficiency, and expand markets. They are the fast-track to diversification. Companies too reliant on any one market or customer segment risk their business performance. Diversification, through organic growth or mergers and acquisitions, helps mitigate that risk.

Beyond Over-reliance

The defense industry, by virtue of the products it sells, is more singular focused than many other industry segments. According to a study of the top 100 Defense Companies of 2017, nearly one quarter of these companies were 90% reliant on defense-related work. Over half were 60% reliant. Growth proponents in the industry project that diversification, through mergers and acquisitions, will be the principal means to reach broader markets.

Brand Diversification Risk

Brand diversification is not the same as a company or business diversification. Brand equity, credibility, and portfolio synergy are some of the many branding considerations that factor into the success of bringing two or more brands together.

 

 

Northrop Grumman Acquires Safeway is not a headline we are likely to see anytime soon. While both are reputable brands in their own right, putting them together doesn’t make much sense. This would, most assuredly, risk brand equity of both Northrop Grumman and Safeway.

Brand incompatibility is one of the many considerations that should go into a diversification strategy that makes both brand and business sense.”

Brand Diversification Considerations

  1. Brand Affinity. Compatibility between prospective merger and acquisition candidates is more than just how the businesses connect together. How their respective brands fit is as equally important as how compatible they are operationally. They should either amplify or compliment each other’s brand attributes. This will ensure that the end result will be more than the sum of their parts.
  2. Brand Shift. Diversification implies that the company has undertaken some kind of shift from its core business. It may be a small organic move into an adjacent industry. Alternatively, it might be an extension well beyond its core business. The greater the shift the more important it is to align the brand strategy to reflect and reinforce the reality of that shift. Too much of a diversification stretch will risk brand credibility.
  3. Brand Dilution. One sure way to mitigate the over reliance on a particular market segment is through diversification. This can introduce new customers to a more diversified business. Current customers, however, may feel that the company is diluting its core offer at the sacrifice of versatility. The challenge is to manage brand diversification with a strategy that will retain the equity of the core brand while leveraging the value that diversification brings.
  4. Brand Equity. Brand equity is the value of the brand over and above the tangible assets of the company. It is the value in reputation, heritage, and the perceptions created over time. If diversification is achieved through a merger or acquisition, it is the brand equity of the brands involved that is at stake. Balancing and leveraging the equity of these brands is crucial to protecting or loosing brand value.
  5. Brand Culture. The internal brand culture will be impacted as much as its market presence and engagement as a result of diversification. All stakeholders in the companies need to understand how the diversification strategy reflects or changes the corporate vision and mission, value proposition, and brand promise. It is this new unified perspective of the brand that will help bring together different company cultures that share a new common goal.

Signaling Change

Entering a new market, targeting different customer segments, repurposing capability into new product lines, or building value through other means, is an opportunity to signal positive change. Signaling change is  imperative to a successful transformation. It is a unique one-time opportunity to promote a newly evolved business and brand positioning change.

Protecting and Leveraging Brand Equity

Mergers and acquisitions are great avenues to accelerate and expand a business in ways that organic growth cannot do. A comprehensive brand strategy is a crucial part of the transformation process. Protecting and leveraging the brand equity of the companies and products involved is imperative. Don’t risk the loss of brand equity whose value is nearly impossible recover.

Every brand has a reputation with valuable meaning and relevance especially important to the BrandLife™ of a newly emerged diversified brand.” 

1A Map of Aerospace Mergers and Acquisitions. Aviation Week. 22017 Surpasses Aerospace, Defense Deal Record by $5 billion. Defense News. 3Trends in Aerospace and Defense Mergers and Acquisitions - Evolving Focus Areas and Keys to Value Creation. Deloitte. 4Top 100 for 2017 Companies Ranked According to Defense Related Revenue. Defense News.