Product diversification strategy

One of the most challenging decisions a company can confront is whether to diversify: 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 attractive company comes into play, and a competitor is interested in buying it.

Or the board of directors strongly urges expanding into new markets. Suddenly, senior managers must synthesize mountains of data—including internal-rate-of-return calculations, market forecasts, and competitive diversification intense time pressure. To complicate matters, diversification as a corporate strategy goes in and out of vogue on a regular basis.

In other words, there is little product wisdom to guide managers as they consider a move that could greatly increase shareholder value or seriously damage it. Yes, it always diversification involve uncertainty; all major business decisions do. And indeed, there is a wealth of good advice about how to approach diversification. Answering the questions will not lead to an easy go-no-go decision, but the exercise can help managers assess the likelihood strategy success.

The issues the questions raise, and the discussion they provoke, are meant to be coupled with the detailed financial analysis typical of the diversification decision-making process. Together, these tools can turn a complex and often pressured decision into a more structured and well-reasoned one. Thus, when managers consider whether or not to diversify, they should ask themselves the following questions:.

What can our company do better product any of its competitors in its current market? Just as it is important to take stock of the pantry before going shopping, so is it crucial for a company to identify its unique and unassailable competitive strengths before attempting to apply them elsewhere. The first step, then, is to determine the exact nature of those strengths—which I refer to in general terms as strategic assets.

How is such an assessment usually done? The problem is that most companies confuse identifying strategic assets with defining their business. A business is generally defined by using one of three frameworks: When facing the decision to diversify, however, managers need to think not about what their company does but about what it does better than its competitors.

In one sense, pinpointing strategic assets is a market-driven approach to business definition. It forces an organization to identify how it might add value to an acquired company or in a new market—be it with excellent distribution, creative employees, or superior knowledge about information transfer.

Before strategy, managers must think not about what their company does but about what it does better than its competitors. In the s, Blue Circle decided to diversify on the basis of an unclear definition strategy its strategy. So Blue Circle expanded into real estate, bricks, waste management, gas stoves, bath-tubs—even lawn mowers.

At the time, Boddington was a vertically integrated beer producer that owned a brewery, wholesalers, and pubs throughout the country. But consolidation was changing the beer industry, making it hard for small players like Boddington to make a profit. The company had survived up to that point because its main strategic asset was in retailing and hospitality: So Cassidy decided to diversify in that direction.

Quickly, the company sold off the brewery and acquired resort hotels, restaurants, nursing homes, and health clubs while keeping its large portfolio of pubs. We decided to build on our excellent skills in retailing, hospitality, and property management to start a new game.

It also illustrates what happens when a company moves beyond a business-definition approach and instead launches a diversification effort based on its strategic assets. Once a company has identified its strategic assets, it can consider this second question.

Although the question seems straightforward enough, my research suggests that many companies make a product error. They assume that having some of the necessary strategic assets is sufficient to move forward with diversification.

In reality, a company usually must have all of them. The diversification misadventures of a number of oil companies in the late s highlight how dangerous it is to go up against a royal flush when all you have is a pair of jacks. Companies such as British Petroleum and Exxon broke into the mineral business they could exploit their competencies in strategy, extraction, and management of large-scale projects. Ten years later, the companies had dropped out of the product. Consider as well the experience of the Coca-Cola Company, long heralded for its intimate knowledge of consumers, its marketing and branding expertise, and its superior distribution capabilities.

Based on those strategic assets, Coca-Cola decided in the early s to acquire its way into the wine business, in which such strengths were imperative. The company quickly learned, however, that it lacked a critical competence: As in poker, the lesson for companies diversification diversification is the same: What if Coke had known in advance that it lacked an important strategic asset in the wine-making business?

Should strategy have summarily abandoned its diversification plans? Companies considering diversification need to answer another pair of questions: If we are missing one or more critical factors for success in the new market, can we purchase them, develop them, or make them unnecessary by changing the competitive rules of the industry?

Can we do that at a reasonable cost? Consider the diversification history of Sharp Corporation. In the early s, the company decided to leverage its existing strengths in the manufacturing and retailing of radios by moving first into televisions and then into microwave ovens.

Sharp licensed the television technology from RCA and acquired the microwave oven technology by working with Litton, the U. Similarly, Sharp diversified into the electronic calculator business in the s by buying product necessary technology from Rockwell. The Walt Disney Company has diversified following a similar strategy, expanding from its core animation business into theme parks, live entertainment, diversification lines, resorts, planned residential communities, TV broadcasting, and retailing by buying or developing the strategic assets it needed along the way.

We can return to Sharp to illustrate how companies lacking crucial strategic assets can build them in-house. In the s, it has made even bigger investments in order to bring the company up to speed in the liquid-crystal-display industry.

One case in point is Canon, which wanted to diversify from its core business of cameras into photocopiers in the early s. Canon boasted strong competencies in photographic technology and dealer management. But it faced formidable competition from Xerox, which dominated the high-speed-copier market, targeting large businesses through its well-connected direct sales force. In addition, Xerox leased rather than sold its machines—a strategic choice that had worked well for the company in its earlier battles with IBM, Kodak, and 3M.

After studying the industry, Canon decided to play the game differently: The company targeted small and midsize businesses, as well as the consumer market. Then it sold its diversification outright through a network of dealers rather than through a direct sales force, and it further differentiated its products from those of Xerox by focusing on quality and price rather than speed.

As a result, whereas IBM and Kodak failed to make any significant inroads into photocopiers, Canon emerged as the market leader in unit sales within 20 years of entering the business. It was, however, a radically different business because of the way Canon had transformed it. Not all companies have the skill, financial strength, and managerial foresight to pull off what Canon did. But, together with Sharp and Disney, Canon provides an excellent example for companies considering diversification without all the product strategic assets in hand.

Those assets must be obtained one way or another; otherwise, moving forward into new markets is likely to backfire. If managers have diversification the hurdles that the preceding questions raise, they then need to ask whether the strategic assets they intend to export are indeed transportable to the new industry.

Too many companies mistakenly assume that they can break up clusters of competencies or skills that, in fact, work only because they are together, reinforcing one another in a particular competitive context. Such a misjudgment can doom a diversification move. Managers need product ask whether their strategic assets diversification transportable to the industry they have diversification. Most managers tackle the decision to diversify by using financial analysis. The six questions explored in this article are designed to help managers identify the strategic risks—and opportunities—that diversification presents.

Managers often diversify on the basis of vague definitions of their business rather than on a systematic analysis of what sets their company apart from its product. By determining what they can do better than their existing competitors, companies will have a better chance of succeeding in new markets. Excelling in one market does not guarantee success in a new and related one. Managers considering diversification must ask whether their company has every strategic asset necessary to establish a competitive advantage in the territory it hopes to conquer.

All is not necessarily strategy if managers find that they lack a critical strategic asset. There is always the potential to buy what is missing, develop it in-house, or render it unnecessary by changing the competitive rules of the game. Many companies introduce their time-tested strategic strategy in a new market and still fail.

That is because they have separated strategic assets that rely on one another for their effectiveness and hence are not able to function alone. Diversifying companies are often quickly outmaneuvered by their new competitors. In many cases, they have failed to consider whether their strategic assets can be easily imitated, purchased on the open market, or replaced.

What can our company learn by diversifying, and are we sufficiently organized to learn it? Savvy companies know how to make diversification a learning experience. They see how new businesses can help improve existing ones, act as stepping-stones to industries previously out of reach, or improve organizational efficiency. Interestingly, few executives voiced concern about the risks of unbundling competencies and applying them in different combinations in new markets.

Indeed, I find it useful to think of interrelated competencies as organisms living in a symbiotic relationship within a particular environment. You cannot separate them and move them elsewhere and expect them to flourish as usual, just as you cannot take the engine out of an airplane and expect it to fly.

To put it in more practical terms, if a company plans to break apart, recombine, and relocate its strategic assets, it also must be prepared to create a hospitable new environment for them.

Until the s, SMH was primarily in the business of selling expensive watches to wealthy individuals through jewelers and specialist distributors. Its primary strategic assets were patented knowledge of ultrathin, precision-movement technology, knowledge of process automation, and a reputation for Swiss quality.

That cluster, however, was inadequate for competing in the mass market, which required large-scale distribution, cutting-edge designs, and additional purchasing skills. To overcome that problem, SMH acquired design skills from scratch by establishing the Swatch Design Lab in Milan, which employs artists, designers, and architects from all over the world.

At the same time, it developed the required purchasing skills in-house. To gain better distribution, SMH entered into a joint venture with another company, Bhamco.

Finally, it combined its new strategic assets with its existing competence in precision-movement technology. Even if companies storm into new markets with all the required competencies—put together in the right combination—they still can fail to gain a foothold.