To Diversify or

Not To Diversify
Constantinos C. Markides
P R E S E N T E D BY: G R O U P 1 3
P RA N AV A G G A RWA L ( 1 4 P G P 0 3 0 )
D I V YA JA I N ( 1 4 P G P 0 1 6 )
H I M A N S H U JA I N ( 1 4 P G P 0 8 1 )
A M I T KU M A R ( 1 4 P G P 0 6 7 )

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?

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

Worlds 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-tubseven lawn mowers
Few of Blue Circles diversification forays proved successful
Didnt answer the more relevant question: What are our companys strategic
assets, and how and where can we make the best use of them?

UNITED KINGDOMS 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 havethe ability to make
quality winewas 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

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

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

Disneys cross-promotional relationships with McDonalds 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 Socit Suisse de
Microelectronique et
dHorlogerie (SMH).

Finally, it combined its new strategic assets

with its existing competence in precisionmovement technologyGain better
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,
precisionmovement
technology

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-Colas

strong brand name; hence the companys 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