Page 3: Focusing on the core business
Companies may add value to their business in any number of different ways. A conglomerate, for example, may acquire other businesses that are not connected with any of its other activities, providing a widely diversified range of operations. An example of this might be a company like the Virgin Group, which operates an airline, a railway, a radio station, a chain of cinemas, a retail chain, and even a soft drinks division.
Alternatively, a business may pursue a strategy of concentration on its core activities. This is the approach favoured by the Smurfit Group. The core competence of the Jefferson Smurfit Group is paper-based packaging. This represents 89% of the Group’s production capacity, and the Group is committed to maintaining and sharpening that focus.
The benefits of this strategy for the Smurfit Group have been obvious. By concentrating on its core competency, the Smurfit Group has been able to add value to its acquisitions of other companies by employing its unique industry experience to improve the utilisation and profitability of these assets. In many cases, the Smurfit Group has acquired paper industry assets from diversified conglomerates who have been unable to realise the full potential of these assets because of their lack of experience in the paper and packaging industry.
The Boston Consultancy Group developed the experience curve. It shows that the unit costs of adding value fall as cumulative production increases. According to the experience curve, the unit cost of adding value falls by as much as 20-30% with each doubling of experience. This is because greater experience leads to:
- economies of scale
- elimination of inefficiencies in production
- increased productivity
- improvements in product design.
Experience, therefore, is a key asset and concentration on core business is a key strategy for the Smurfit Group.
Experience, of course, is not enough. New ideas are also needed. New and more efficient ways of manufacturing paper, corrugated packaging and cartons are constantly being sought – to serve the customer and the consumer better, as well as to add value to Smurfit products. For this purpose, the Jefferson Smurfit Group operates two dedicated research and development centres in Talence, France and Carol Stream in Chicago. These centres are responsible for continual improvements in the processes used and products produced by Smurfit companies around the world.
Another centre, at Epernay, France, is responsible for performance testing of all Smurfit packaging products, subjecting them to simulated conditions of stress and environment which they will encounter when in use, and sharing the lessons learned with all the Smurfit companies around the world.