The Human Capital Telescope: Is the TN Bank demerger premature?

Brett Chulu

WE have read that TN Holdings, the diversified Zimbabwe Stock Exchange listed entity, is demerging TN Bank from the holdings’ structure. Following the demerger, TN Bank will be separately listed on the local bourse in July. TN Holdings will subsequently be renamed Lifestyle Holdings. This article seeks to evaluate the decision to demerge the bank from the holdings structure, based on the modular versus integrated business structuring arguments. The choice of TN

Holdings as an object of study is based entirely on the desire to exploit a current business phenomenon so as to help readers get a handle on business ideas rarely discussed in business fora.

As a starting point, we shall look at the arguments put forward by the critics of the existing TN business model.
According to information available on TN Holdings, TN Bank is the focal point of what is called the TN model. As such the rest of the business units in the holdings structure were strategically placed to support the bank. This model has its critics. One group of critics has advanced the argument that in theory, underperformance in individual business units can weigh down the overall business performance of the entire holdings structure.

To underpin their point of contention, they cite the businesses making up the holdings structure as ‘unrelated’. These critics belong to the school of strategic thinking that believes related diversification confers a strategic edge to a holdings structure by way of potential synergies, such as controlling parts of the value chain. In their frame of thinking they do not see meaningful synergies existing among the furniture, retail, fast food, medical insurance and banking businesses.


Another group of critics of the TN model believe that non-banking entities in the holding structure can potentially transmit their downside risks to the banking unit. With the sensitivities attached to Zimbabwe’s fragile banking sector, critics suggest that decoupling the bank from the holdings structure is an imperative.
Are the objections to the existing TN model built on solid business thinking?
Modularity versus integration
When a product or entity is made up of independently-controlled units or independently-produced components, the units or components are said to be modular. Conversely, where there is dependence between and among components or units, the term integrality is ascribed. Key to this discussion is identifying the circumstances under which modularity or integrality is appropriate so as to optimise business and market performance.
According to the integrality argument as advanced by Clayton Christensen, when a product is still developing to meet the performance expectations of a particular tier of customers, integrality will confer a huge competitive advantage margin. It is argued that none of the individual components or sub-entities on their own can provide the performance expectations required by a specific market segment.
The evolution of IBM over the past half century illustrates the point. In the 1960s, IBM performed nine processes in its value chain in-house. IBM developed its own materials, did its own manufacturing, developed components, developed software, did product design, assembled components, handled sales and distribution and provided field service. This was due to the fact that the mainframe computer was in its formative phase. In this budding phase, there are numerous interdependencies and uncertainties between and among components and subsystems.

In this period, it is virtually impossible for, say, an independent developer of software or operating system, to profitably exist. As improvements towards meeting customer demand occur, standardisation becomes possible to enable independent development and existence to occur. At present, profitable independent businesses have taken a slice of the value chain that IBM used to dominate. For instance, the operating system is now dominated by stand-alone companies such as Microsoft, assembly by firms such as Compaq, product design by such entities such as Compaq and Dell, and components by companies such as Intel.
The trend is that when the performance expectations of a specific market tier are matched or exceeded, profitability migrates to firms with modular structures. When the performance expectations of a specific market segment exceed the current levels of performance offered by providers, profitability shifts to firms that integrate to try and improve performance.
In what ways are these concepts relevant to the demerger of TN Bank? Objectively assessed, the existing TN model is an innovative business model in that it seeks to optimise revenue generated and operational costs incurred per square metre by allowing its different business units to share occupancy costs through integrating them under one roof. More importantly, bringing convenience to its target customers by offering them a bouquet of services under the same roof supports integration.

With reference to the banking unit, extending credit to customers supported by the bank is a strategy that is designed to build customer loyalty while shaving  off costs of service delivery.

It would appear that the bank’s strategy to grow its deposit base has been built on a realistic assessment that it would take time for the bank to attract ‘old money’ and hence the focus of the TN model on the networks of growing businesses. An integrated business model built on seemingly unrelated business units points to existence of considerable scope to permute new combinations of value in ways not yet known. That’s the hallmark of integrality.
Given the foregoing assessment that integrality is an appropriate model for TN, is the demerger of the bank a signal that TN is abandoning integrality for modularity?
Section 2.1 of the Abridged Circular published on June 12 gives a clue when it states: “A perception has been created that TN Bank has strayed from its core business and has ventured into furniture manufacturing and retailing, and various ventures.”  The rationale for the demerger, according to the circular, is that, “…in an environment that is largely influenced by perception, the Boards of TN Holdings Limited and TN Bank Limited have decided to emphasise the separation of TN Bank  Limited from the non-banking  subsidiaries of TN Holdings Limited by demerging TN Bank Limited  from TN Holdings Limited.” It is clear that the demerger is largely a perception management exercise as the circular goes on to state that, “ TN Bank will still be able to exploit synergies with the subsidiaries of TN Holdings Limited, although this will be done strictly on an arm’s length basis.’’
It would appear the strategists at TN have resisted the pressure from critics to abandon integrality for modularity. Statutorily, the bank and the holdings will be separate following the demerger. However, from a business strategy viewpoint, the bank and the holdings are still defined by integrality.
In conclusion, whether to shift towards modularity or integrality should be driven by performance expectations of the target market rather than by sectoral interests.
Let’s discuss at