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Competence-based Diversification
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Competence-based Diversification
Vittorio Chiesa and Raffaella Manzini
Pergamon Long Range Planning, Vol. 30, No. 2, pp. 209 to 217, 1997
PII:SOO24-6301(96)00113-6 0 1997 Elsevier Science Ltd. All rights reserved
Printed in Great Britain
0024~6301/97 $17.00+0.00
a dynamic process. This is taken as a starting point
for interpreting the process of diversification.
This model identifies three different levels of com-
petences:
Competence-based Diversification
opportunity to exploit the core outputs of the firm Obviously, decisions concerning the why, where,
for different (new) products and services. what and how of diversification are critically inter-
related to each other. Factors stimulating the process
System View Capability of diversification are usually strictly linked to the
The relevance of managerial resources is greatly choice of the specific business to be entered. For
emphasized in diversification literature. Managerial example, most firms in the tobacco industry decided
capabilities are seen, on the one hand, as the real root to diversify their activities in order to invest available
of the diversification process (since they allow the financial resources and reduce their risks (conse-
recognition and the exploitation of diversification quently, they chose to diversify into the food industry
opportunities) and, on the other, as a resource itself which is characterized by a relatively low risk); Gil-
that new and existing businesses may share. lette and Bit, in order to deploy their distribution
The role of the ‘dominant logic’ of corporate man- channels, invested in the reciprocal core business
agement, as the engine of diversification, has been areas, exploiting the similarities existing in the dis-
dealt with by various authors.5,6 The dominant logic tribution and marketing logic of the two businesses.
is defined as “a mind set or a world view or con- As mentioned above, managerial capabilities can
ceptualization of the business and the administrative also be shared among different businesses,6~7~g~‘0 and
tools to accomplish goals”, and may be seen “as a may represent the actual source of synergies and
shared cognitive map (or set of schema)“.6 The sch- advantage. This occurs when the same dominant logic
ema characterizing the dominant logic of the firm can be deployed in different business areas. But cul-
guides top management in allocating resources among ture and management principles can affect the per-
businesses, in formulating the business units’ stra- formance of a diversification process in both ways:
tegies and co-ordinating them and, hence, in guiding there is a positive influence if real managerial syn-
the process of diversification. ergies are actually identified and exploited and if the
The management of Salomon, for example, led managerial culture and values coherently match those
diversification into new business areas which showed required by the new activities. There is a negative
similarities in terms of competitive structure and key influence if this ‘fit’ does not exist, or if the man-
success factors. Salomon diversified from ski bind- agement does not recognize the need for diversity and
ings t.o ski boots to cross-country ski equipment, does not suggest the necessary modification for the
which were comparable in terms of intensity of com- organizational routines and structure. For example,
petition, market fragmentation, geographical market in the early 1980s Ciba-Geigy acquired Reckitt &
and innovation dynamics. This allowed Salomon to Colman, a company producing healthcare consumer
apply the same managerial strategy, based on product products, thinking that the managerial logic schema
innovation, aggressive marketing and sales at a world- and culture of over-the-counter pharmaceuticals were
wide level, to all these businesses.’ also adequate for managing the new business; but this
The system view capability of the firm determines was not the case, diversification failed and Reckitt &
the rchy of diversification, i.e. the motivations that Colman was sold after few years.
stimulate firms to enter new businesses. As a matter
of fact, it provides stimuli to diversification, sug- Distinctive Capabilities
gesting the most attractive opportunities according to Diversification may relate to the exploitation of a
the envisaged evolution of the competitive arena and firm’s distinctive capabilities, i.e. to the replication
to the desired role of the firm within this context. In of its organizational routines. As stated above, organ-
this sense, managerial capabilities also influence the izational routines can be defined as patterns of inter-
where of diversification, i.e. the new business or con- actions which allow the firm to deploy its distinctive
text to be entered. Obviously, decisions concerning skills and knowledge in a co-ordinated and integrated
the direction of diversification are substantially way; in other words, they represent ways of solving
linked to the evaluation of the distinctive competenc- particular problems in order to attain a better per-
ies, resources and capabilities actually possessed (or formance with respect to competitors.4 The exploi-
still desired) by the firm. This means that the system tation of organizational routines as a source of
view also identifies the what of diversification, i.e. diversification itself has been rather neglected in the
the critical resources and capabilities that can be literature. Few authors recognize that the advantage
exploited in the new businesses. Ideas for competence that can be attained through the replication of organ-
and resource leverage, indeed, frequently come from izational routines is particularly relevant since they
the system view capability of the firm.8 Finally, the involve a strong tacit dimension, related to the associ-
system view gives also basic insights concerning the ated skills and knowledge that are not (or cannot be)
how of diversification, providing some guidelines for codified.“,” On the other hand, the exploitation of
shaping the organizational structure of the firm coher- intangible resources for diversification has been stud-
ently with the objectives, direction and scope of ied in the literature, particularly by the resource-
diversification. based, competence-based and evolutionary theorists.
Competence-based Diversification
2. Deploying existing resources and developing new
organizational routines is the case of resource-
based diversification: the exploitation of existing
assets in new businesses forces firms to change
their routines. In the 198Os, for example, J & M
Airframes reacted to the decline in demand for its
Tempest (the successful low-level heavy bomber
launched in the late 1950s) by taking sub-
contracted work from other major aerospace manu-
facturers. The technological resources and
capabilities required by the new activities were
the same used for the Tempest. But the shift from
selling a single product to a restricted set of cus-
tomers to managing a variety of products and cli-
ents put a strain on the workforce and the
organizational structure. In particular, it required
new and more flexible organizational routines, e.g.
for the planning and control system, for managing
incentives for employees (which were motivated
before by the product they were working on), for
managing relations with customers. The diver-
Diversification Trajectories sification process in J & M thus forced the firm to
modify certain organizational routines, even
Diversification Patterns though the resources used were almost unchanged.
In this section, a classification is proposed to identify
Other common examples relate to the creation of
different patterns of diversification where organ-
new products through the deployment of the core
izational routines and resources can either be rep-
products of the firm: if these new end products
licated or need to be developed. A matrix can be built
enter markets or industries or geographical areas
considering two critical dimensions: the use of exist-
with substantially different characteristics from
ing resources and the use of existing organizational
those traditionally served, their organization and
routines. We can thus map diversification patterns
management could require some change.
within such a matrix (see Figure 2).
3. Entering new businesses can require firms to inno-
Four main categories can be identified which are
vate both their resources, complementing existing
conceptually relevant:
with new ones, and their distinctive organizational
1. Firms can diversify into new activities in which routines (unrelated diversification). This is prob-
they replicate existing organizational routines, but ably the most common way to diversification.
which require the development/acquisition of new Rarely, does entering a new business allow exact
complementing resources (routine-based diver- replications of routines or resources: usually, there
sification). The new activities require some new is a gap in both resources and routines between
resources and complementary assets to be added what the firm already possesses and what it needs
to the existing ones, but the routines through for diversification. For example, when Benetton,
which they were managed keep their effectiveness. at the end of the 198Os, decided to enter the US
Sony provides an interesting example of routine- clothing market, it was forced to develop a US-
based diversification. Its strategy is focused on style for shops (innovating resources) and also for
some diversified groups of products, of which the managing sub-contractors (innovating organ-
technologies are quite different: TVs, VCRs, elec- izational routines), whose philosophy was com-
tronic cameras, miniaturized audio products etc. pletely different from European ones. An extreme
Sony’s ability relies on its ‘agility’ in moving case of unrelated diversification is where only fin-
quickly into different technologies for large con- ancial resources are transferred (or shared).
sumer products. Sony’s distinctive competence is 4. Entering new businesses through deploying both
related to the organizational routines and the spec- existing resources and organizational routines, is
ific procedures it has developed to manage new a replication-based process of diversification. This
technologies and the mass market for technological is probably the safest way to diversify. In order
products successfully. The process of diver- to ensure the success of diversification, it is only
sification within Sony is guided by a product orien- necessary to check the applicability of the
tation strategy and is based upon its ability to resources and organizational routines in the new
acquire or master whatever technology is needed competitive context. But the process of perfect rep-
to attain the product objectives. lication, without any enhancement or expansion,
Trends in Diversification
Managerial Implications
The four cases help define the different categories of The framework proposed is a first attempt for an
diversification. In the long run, indeed, the overall internal-oriented analysis of the diversification
process of diversification followed by firms is not con- process. In our view, it helps to conceptualize and
fined within a single category. In a dynamic view, real interpret the process of diversification and, secondly,
patterns of diversification probably follow complex it provides a managerial tool.
trajectories, consisting of a combination of various From a conceptual point of view, the framework
single processes of diversification, each one belong- puts in relation the path of diversification with the
ing to a specific category. The global trajectory of a internal ‘forces’ which stimulate, guide and constrain
firm’s diversification is shown in Figure 3. the process of diversification. The internal per-
The dynamic view of the diversification’s trajectory spective approach taken helps to give a coherent
clearly qualifies the continuity and the coherence of meaning to the concept of ‘related diversification’.
the firm’s behaviour. Some critical trajectories can be Most authors describe related diversification referring
identified in which the creation of the new resources to its output, precisely to product/service/ market
and routines required for diversification is con- similarities;’ in our framework, related diversification
tinuous and coherent over time (see Figure 3). Each means the opportunity to replicate the resources
branch represents a peculiar direction of diver- and/or the organizational routines already possessed
sification taken by the firm. It is possible to identify by the firm.
to what extent the new resources/routines acquired According to competence-based theory, the frame-
for a new activity have been re-used for other (new) work proposed gives relevance not only to the final
applications. A branch which is outside of a critical desired state of the diversified firm (the position of its
trajectory represents a non-coherent accumulation of activities and businesses), but also to the trajectory
resources and competencies, i.e. a process which followed to realize this objective, pointing into evi-
did not make a contribution to the creation of dence that each step has concrete and relevant impli-
new competencies and capabilities. An example cations for the firm’s organization and resources. The
of a firm’s trajectory of diversification is analysed in literature on competence-based competition emphas-
Box 1. izes that firms’ success, in very dynamic competitive
Competence-based Diversification
1990s
Office automation
New
Laser printers,
,.......,,.....,.,....,,,....
colour printers
Resources 1960s
/ Cameras, video ’
cameras, TV lenses, * .
.: :, ’
micrographic : :
.................. equipment j *
L . . b
:
.. Existing i i i ; j New
.. : .:
..
..
0
.. : Routines i ;
New products ..
.. . : #
introduced .. , :.
.. : :
..
..
New skills/
technologies
Main replicated
organizational
routines
Main abandoned
organizational
routines
contexts depends upon the continuity and coherence ing on the VCR in the late 195Os, when the mass
of their behaviour over time. This continuity relates market was still unthinkable. In spite of the early
to the process of accumulation of knowledge and unprofitable entry into the mass market for VCRs and
capabilities, which in a dynamic context represent the subsequent lost battle for the distribution of the
a more stable source of competitive advantage than Betamax system, Sony’s management still promoted
products and technologies. The entry of Sony into the and promotes investment in this business. This was
VCR business represents a good example of successful explained by the relevance attributed to the skills and
coherence and continuity. According to its mission knowledge that Sony was developing in this area,
(oriented towards a ‘mix of electronic and mechanic which actually allow Sony to keep pace with the most
engineering for the mass market’) Sony started work- relevant innovations in audio and video systems.
References
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Strategic Management Journal 10,523-551 (1989).
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Competence-based Diversification
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Executive Summaries
stresses that the skills base can be reinforced through continuous application.
Brand, image, goodwill are also sources of diversification.
The exploitation of core outputs is a way to leverage a firm's competencies as
companies realize a range of new products through the use of their core
products/processes/services. However, a deeper understanding of how
diversification relates to the use of change of a firm's organizational routines is also
needed. When Canon entered the US market for personal copiers it exploited
existing technological resources but changed the organizational routines.
A matrix can be built using two dimensions--the use of existing resources and
the use of existing organizational routines. Firms can diversify into new activities
in which they replicate existing organizational routines but which need new
complementing resources. Or in resource-based diversification, they can deploy
existing resources and develop new organizational routines. Entering new
businesses can require firms to innovate both their resources and organizational
routines or they can replicate both. The pathways can be identified. By using such
a matrix, the process of diversification can be conceptualized and interpreted while
at the same time providing a management tool. The framework proposed may be
used for an initial analysis of the decisions related to diversification or it can allow
a retrospective analysis aimed at understanding the reasons for success or failure
of diversification. A further use is the indication it gives of what corrective actions
should be taken in the future in changes in resources and organizational routines.