to diversify

8/8/2019 To Diversify

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Byanswering six questions, managers can reduce the gamble

in this high-stakes game.

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BY CONSTANTINOS C. MARKIDES

/"""""_"E OF THE MOST CHALLENGIl'G DECISIONS A COMPANY

,.~

,...~/ can confront is whether to diversify: the rewards and Iisks

can be extraordinary. Success stories abound - think of General

Electric, Disney, and 3M - but so do ~tories of such infamous and

costly failures as Quaker Oats' entry into (and exit from) the fruit

juice business with Snapple, and RCA's forays into computers, car-

pets, and rental cars.

What makes diversification such an unpredictable, high-stakes

game? First, companies usually face the decision in an atmosphere

not conducive to thoughtful deliberation. For example, an attrac-

tive company comes into play, and a competitor is interested in

Constantinos c. Markides is an associate professor of sUategic and international man.

agement Q[ London Business School. He also is the author ofDiversification, Rclocus-ing, and Economic Performance (The MIT Press, 1995).

ARTWORK BY HAL MAYFORTH

Copyright @2000. All Rights Reserved.

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TO DI VERSIFY OR NOT TO DIVERSifY

buying it. Or the board of directors strongly urges

expanding into new markets. Suddenly, senior

managers must synthesize mountains of data-in.

eluding internal.ratc.of.return calculations, mar-

ket forecasts, and competitive assessments-under

intense tinle pressure. To complicate matters, di.

versification as a corporate strategy goes in and out

oi vogue on a regular basis. In other words, there is

little conventional wisdom to guide managers as

the)' consider a move that could greatly increase

t shareholder value or seriously damage it.

But diversification doesn't need to be quite such a

roll of the dice. Yes, it always will involve uncer-

tainty; all major business decisions do. And indeed,

there is a wealth of good advice about how to ap-

proach diversification.' But my research suggests

that if manallers consider the following six ques-

tions, they can push their thinking still further to

reduce the gamble of diversification. Answering the

questions will not lead to an easy go-no-go decision,

but the exercise can help managers assess the likeli-

hood of success.

The issues the questions raise, and the discussion

they provoke, are meant to be coupled with the de-

tailed financial analysis typical of the diversifica-

tion decision-making process, Together, these tools

can turn 3. complex and often pressured decision iOM

to a more structured and well-reasoned one.

Thus, when managers consider whether or not

to diversify, they should ask themselves the follow-

ing questions:

What can our company do better than any of its

competitors in its current market1

Just as it is important to take stock of the pantrybefore going shopping, so is it crucial for a company

to identify its unique and unassailable competitive

strengths before attempting to apply them else-

'\'I."here,The first step, then, is to deternline the ex-

act nature of those strengths-which I refer to in

general tenns as strategic assets.

How is such an assessment usually dond Incom-

pletely, I'm afraid. The problem is that most com-

panies confuse identifying strategic assets with

94

defining t11l:11 huslllc..:ss. A business is gcncrall" .. 1t

fined hy llsillJ~lIlIe of three fratncworks: prodnt\

custolller (unctioll, or core cOIupetcncies.: Tim,

dcptndin,: on its approach, Sony could decide 1I1~

it is III thc' husiness of electronics, entenainlllc'lI\

or "I'clt:kl'hlhility."

Witt'n facin,: the decision to diversify, how('vr,.

man:lgcrs IH ...'c d to think not about what their CllIII'

pany does but about what it rlmt

vetter than its competitors In Oil.

sense, pinpointing strategic :lssel.ItI t

a marketMdriven approach .to hl1\lCt he !Inhaled! 3M, fur example, continues to dl

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Will we be simply a player in the new market or

\,,'ill we clIlerge a winner?

Even if companies Storm into new markets with

all thc required competencies-put together in the

right combination - thcy still can fail

to gain a foothold. Why? To achieve

a sustainable advantage, diversifying

cOlupanies need to create something

unique, A company's competitive

advantage will be shurt-lived, and

diversification will fail, if competi-

tors in the new industry can imitate

the company's moves quickly and

chcaply, purchase the necessary strategic assets in

the open market, or find an effective substitute for

them. In other words, there is nDpoint rushing into

a new market unless you have a way to heat the ex-

isting players at their own game,

Take the expe~iencc of Japanese consumer-goods

giant Kao. Kao's chemical division had developed

a rechnology that enabled the company to alter or

smooth the surfaces of products such as clothes and

magnetic tapes. In the late 1980s, Kao introduced

the technology into its detergent division, where it

quickly was a major success, allowing the company

to create a ncw kind of laundry dctergent. (The de-

tcrgent, callcd Attack, was protected by 91 patents.J

Within two years, Kao's market share in the laun-

dry detergent business increased from 30% to 56%,Hoping to build on that success, Kao then trans-

ierred the same technology to its floppy-disk divi-

sion. The effort was not as successful. Simply put,

the technology changed and improved the laun-

dry detergent business, but it was old news in the

floppy-disk business: competitors either had some-

thing similar to it already or had another tech-

nology that did the job. Kao had tried to enter

a market with a strategic asset that didn't buy it

a competitive advantage. The company could play

in the floppy-disk industry, but it couldn't win.

How can managers assess whether their com-

pany's strategic -assets have a strong likelihood ofcatapulting it to market leadership? A three-part

acid test can help.

First, managers should ask if the strategic as-

sets they intend to introduce into a new market

are rarc. For example, Laker Airways soared in the

packaged-vacation business irom 1966 to 1976 on

the basis of its low-cost, low-price strategy. But

in thc mid-1970s, when Laker tried to diversify

into the transatlantic scheduled-airline business,

the mass-market watch business, then, stands as

an unusual case of corc competencies hcin~ recom-

hined for success in a new market.

, /

98IIARVARO IlIlSINI.SS ItI'.VIEW November-December 19:;17 , "

Copyright@2000. All Righls Rese,v"d.


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-

=

tion, certain people in the Company are COntinuaJl

transferred from one area to another to act.as "inte:

grators" and "messengers" of new information. B'

moving knOWledge around inside the company i;

this Way, Lan &Spar has taken full advanta!:e of di

versific~tion. Indeed, even though the compan}ranks fortieth in Denmark in terms of the size of

deposits, it has ranked number one in industry proi-itability in fivc of the last seven years.

The leSsons that can be leamed from a cumpany's

diversification moves can be sil:nificant .but, as We

have seen, therc are nvc other import3[lt questionsfor managers to ask before taking thc leap into a

new market. Those questions should help man-agers walk the finc line between being so inwardly

focused that they miss excellcnt grOWth 0PPOrtuni.ties and so OUtwardly focused that they Spend

shareholders' capital on hopeless ventures.Diversification will never be an easy g~me, and

managers must study their cards carefully. It takessmart players to know when it's best to raise theirbets and when it's best to fold.-.. _. . "-"-"- -_ .. . --I. &c: Miclue1 B. funcr, "'Prom Competitive Ad"aet.l:C: to Corporz:te

Strategy, NMaR MAy-June 1987, D.avid ]. Colli, and Cynth.i..t A. MO!lt.

gomery, "'Corn~ on ~uurc~; Srr.;tegy in the J99O,;," HRR J!JJy_

AU~t 1995, ~d Andrew CampbelL Michael Goold,. .and M..u-cusAkJ:.anda, "Corporate: Strategy: The Quest (0: P~rent'ing Adv.l.DU,g:e. . HBR"=b.A?,;ll99S.

2. See Theodore Levin. "'M.uketing Myopi.a," MBR lu1y .-\L:g'.JS: 1960;C.X. Pnh.l.d and Gary Hamel, ""1C: Core Cnmpetc:~ uf the Cotp.Jra.lien." HBR L\b,-Junc 19YO.

.1.The orig:inaJ~znent Wa!l conductca bl Duid Aaiter and iCc'':!nWe KclJer,~d theirraults are pres('ntcd in "Consume .V~Jt.:4tiOI:! of

Brand Cten!lions," fourDQIQiN'.ar1ceting.la:u.ary J99O, p. :27.The resulu;K"CScntedbere.rc buedo::1'; sala cl ~"iruent& th2t I carried filawith110 el:r-eutives .auendin,; the AcceJer.a:ed DevelOpment Pro.ua ..n~c. a'I.ondon Bu.sine:u ScltooJ between 1993 and J 996.

& Priot 97608 " T h ; ; ; ; k ; '; , ; ; ; ; ; ; ; : -ke,~; P"~i~,~.~

-.TO DIVERSIFY OR NOT TO Dr"ERS!F'-"'-"-"- .-_ _ _ -

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Use what they have learned from One diversifica_ Ition move to enter a third market more quickly and Icheaply. For example, by diversifying into the COPi-

I

'Cr business, Canon leamed how to build a market.ing orga.nization targeted to business CUstomers

lind how to develop and manufacture a reliable elec-trostatic-printing engine. As a result, when Canon Idiversified into the laser printer business-which

required the saIne competencies _ it was able tomove w!th speed and ease.

Managers also should examine whethcr a diver-.'ific2tion move will aiJow them to learn compe.

tencies that can he reapplicd in their existing busi-

ncsses. For ex"mple, when Canon entered the lascr .

printer business, it developcd the capabilities re- Iquired to suPPOrt the design, manufacture, and ser-

vice of sophisticated eleCtronics. The company Itilcn took this knowiedge and applied it to its pho-tocopic!' business, vastly improving the electrOnic

Controls that allow its machines to count copiesand sense paper jams:

Last, lllan"gcrs should ask themselves if their or-.llanization is doing all it can to transfer relevant in- fformation and competencies from One line of busi-

ness to anothcr. For such a flow to take place, IcOmpanies necd to have processes that facilitate.nd promote learning across different functions and

divisions. An exccllent example of this d}'namic at, Iwork is Denmark's.Lan & Spar Bank. CEO Peter

Schou explains that the bank's key diversification I 'mov~s -Such as its recent entry into the direct.

banking business - have been supported and fully ,harvested because 17 employce working groups

hom throughout the organization meet rcgularly toabare new business ideas and information. ln addi-

A/fat any time the merger is heading

toward a takeover, this alarm will sound .

"~TOON BY SIDNEY HAI/:RIS

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cember 19.,)7

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