SM2_group13

To Diversify or Not To DiversifyConstantinos C. Markides

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SIX CRITICAL QUESTIONS FOR DIVERSIFICATION SUCCESS

What can the company do better than any of its competitors in its current market?

What strategic assets does the company need in order to succeed in the new market?

Can the company catch up or leapfrog competitors at their own game?

Will diversification break up strategic assets that need to be kept together?

Will the company be simply a player in the new market or will it emerge as a winner?

What can the company learn by diversifying and is it sufficiently organized to learn it??

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DIVERSIFICATION

What can the company do better than any of its competitors in its current market?• The company needs to determine its strategic assets (its unique and

unassailable competitive strengths) before attempting to apply them elsewhere

• Strategic assets (what does the company do better?) are different from the current business of the company (what does it do?)

• By using its strategic assets, the company might add value to an acquired company or a new market

BLUE CIRCLE INDUSTRIES

•World’s leading cement producers

•Blue Circle decided to diversify on the basis of an unclear definition of its business

•Blue Circle expanded into real estate, bricks, waste management, gas stoves, bath-tubs—even lawn mowers

•Few of Blue Circle’s diversification forays proved successful

•Didn’t answer the more relevant question: What are our company’s strategic assets, and how and where can we make the best use of them?

UNITED KINGDOM’S BODDINGTON GROUP

•In 1989, Boddington was a vertically integrated beer producer that owned a brewery, wholesalers, and pubs throughout the country

•Its main strategic asset was in retailing and hospitality: it excelled at managing pubs

•Quickly, the company sold off the brewery and acquired resort hotels, restaurants, nursing homes, and health clubs while keeping its large portfolio of pubs

•Resulted in the creation of enormous shareholder value

What strategic assets does the company need in order to succeed in the new market?• The company needs to determine whether it has all the strategic assets

necessary to establish a competitive advantage in the new market As in poker, the lesson for companies considering diversification is the same: you have to know when to hold them and when to fold them

•Long heralded for its intimate knowledge of consumers, its marketing and branding expertise, and its superior distribution capabilities

•Decided in the early 1980s to acquire its way into the wine business

•However, lacked a critical competence: knowledge of the wine business

Having 90% of what it took to succeed in the new industry was not enough for Coke, because the 10% it did not have—the ability to make quality wine—was the most critical component of success.

Can the company catch up or leapfrog competitors at their own game?• In case necessary strategic assets are missing, the company might be able to

purchase them, develop them in-house or make them unnecessary by changing the competitive rules of the game

• The costs of doing so have to be reasonable

•Company decided to leverage its existing strengths in the manufacturing and retailing of radios by moving first into televisions and then into microwave ovens

•Licensed the television technology from RCA and acquired the microwave oven technology by working with Litton

•Further Diversified into electronic calculator business in the 1960s by buying the necessary technology from Rockwell

•Expanded from its core animation business into theme parks, live entertainment, cruise lines, resorts, planned residential communities, TV broadcasting, and retailing by buying or developing the strategic assets

•Disney’s cross-promotional relationships with McDonald’s and Mattel gave it an edge in retailing

Will diversification break up strategic assets that need to be kept together?• Individual strategic assets might not be transferable to the new environment

because they are part of an interrelated cluster of competencies or skills that work only because they support and reinforce one another in a particular competitive context

Popular mass-market watch made by the Société Suisse de Microelectronique et d’Horlogerie (SMH).

Finally, it combined its new strategic assets with its existing competence in precision-

movement technology

Inadequate for competing in the mass market, which required large-scale distribution, cutting-edge

designs, and additional purchasing skills

Primarily in the business of selling expensive watches to wealthy individuals through

jewelers and specialist distributors

Knowledge of process

automation, and a

reputation for Swiss quality

Patented knowledge of

ultrathin, precision-movement technology

Gain better distribution,

by joint venture

with another

company, Bhamco

Acquired design skills

by establishing the Swatch

Design Lab in Milan

Will the company be simply a player in the new market or will it emerge as a winner?• To achieve a sustainable advantage, diversifying companies need to create

something unique• Therefore, and in order for the diversification to be successful, the strategic

assets to be deployed in the new market need to be rare (not available on the open market), hard to imitate and not easily substitutable

A three-part acid test can help!1. If the strategic assets they intend to introduce into a new market are rare?

• Laker Airways (diversify into the transatlantic scheduled-airline business) Vs British Airways (used its reservations systems and skills in predicting the volume of passengers on flights to offer similar bargains)

• Low-cost competencies were not unique• Laker went bankrupt in 1982

2. Can the strategic asset be imitated?• 3M, for example, continues to diversify profitably on the strength of a

competence that is very hard to copy

3. Whether the strategic asset they plan to export can be substituted• Pepsi and other soft-drink makers cannot replicate or substitute Coca-Cola’s strong

brand name; hence the company’s apparently unassailable competitive edge

What can the company learn by diversifying and is it sufficiently organized to learn it?• A diversification move might have the additional advantage of allowing the

company to learn competencies that can be reapplied in its exiting businesses or of serving as a strategic stepping stone to help enter yet another business

• Processes that facilitate and promote learning and transfer competencies across functions and divisions need to be installed to reap those advantages of diversification

Thank You