The company had survived up to that point because its main strategic asset was in retailing and hospitality: it excelled at managing pubs. 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 fatal 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 exploration, extraction, and management of large-scale projects. Ten years later, the companies had dropped out of the game. 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: knowledge of the wine business.
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. What if Coke had known in advance that it lacked an important strategic asset in the wine-making business? Should it have summarily abandoned its diversification plans?
Not necessarily. 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 the 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, cruise 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 machines 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 required 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 cleared 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 to ask whether their strategic assets are transportable to the industry they have targeted. 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 competitors.
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 lost if managers find that they lack a critical strategic asset. Brand damage. Imagine if KFC sold tacos, fish and sushi, as they are well known as a fast-food chicken outlet. How to have a variety of clients Do your research and then implement a well-thought-through strategy. Plan in detail how it will occur and be actioned. Ascertain if you need extra or special resources. Determine how the change will work in practicality; set and document a clear process.
Ensure all your sales team know this so that they hunt in the right areas. How to diversify in the existing situation Yes, this is substantially harder. Directors and key personnel should be involved but involved in a very confidential way. Will you need extra resources? What will need to change? Commit to the change and get everyone on board especially if the diversification is to a new region, service, product. Phase-out the existing situation.
Growing more in other areas will equate to the ratio of sales per client or industry or geographical region changing and more balance occurring. This will be gradual and over years and possibly even decades depending on the size of your business. Globally some Governments are offering industries incentives to exit China and help ease the pain of this diversification. What can you diversify? By Donna Stone May 19, Leave a comment. Author: Donna Stone Donna Stone is a business coach with three decades of experience.
Related posts. September 21, Be sure to diversify among different asset classes, too. Different assets such as bonds and stocks don't react the same way to adverse events. A combination of asset classes like stocks and bonds will reduce your portfolio's sensitivity to market swings because they move in opposite directions.
So if you diversify, unpleasant movements in one will be offset by positive results in another. And don't forget location, location, location. Look for opportunities beyond your own geographical borders. After all, volatility in the United States may not affect stocks and bonds in Europe, so investing in that part of the world may minimize and offset the risks of investing at home.
Obviously, owning five stocks is better than owning one, but there comes a point when adding more stocks to your portfolio ceases to make a difference. There is a debate over how many stocks are needed to reduce risk while maintaining a high return. The most conventional view argues that an investor can achieve optimal diversification with only 15 to 20 stocks spread across various industries.
Investors confront two main types of risk when they invest. The first is known as systematic or market risk. This type of risk is associated with every company. Common causes include inflation rates, exchange rates , political instability, war, and interest rates. This category of risk is not specific to any company or industry, and it cannot be eliminated or reduced through diversification.
It is a form of risk that all investors must accept. Systematic risk affects the market in its entirety, not just one particular investment vehicle or industry. The second type of risk is diversifiable or unsystematic.
This risk is specific to a company, industry, market, economy , or country. The most common sources of unsystematic risk are business risk and financial risk. Because it is diversifiable, investors can reduce their exposure through diversification. Thus, the aim is to invest in various assets so they will not all be affected the same way by market events. Professionals are always touting the importance of diversification but there are some downsides to this strategy.
First, it may be somewhat cumbersome managing a diverse portfolio, especially if you have multiple holdings and investments. Diversification can also be expensive. Not all investment vehicles cost the same, so buying and selling will affect your bottom line —from transaction fees to brokerage charges. And since higher risk comes with higher rewards, you may end up limiting your returns. Next, consider how complicated it can be. For instance, many synthetic investment products have been created to accommodate investors' risk tolerance levels.
These products are often complex and aren't meant for beginners or small investors. Those with limited investment experience and financial backing should consider purchasing bonds to diversify against stock market risk.
Unfortunately, even the best analysis of a company and its financial statements cannot guarantee it won't be a losing investment. Diversification won't prevent a loss, but it can reduce the impact of fraud and bad information on your portfolio.
Diversification is a strategy that aims to mitigate risk and maximize returns by allocating investment funds across different vehicles, industries, companies, and other categories. A diversified investment portfolio includes different asset classes such as stocks, bonds, and other securities. But that's not all. These vehicles are diversified by purchasing shares in different companies, asset classes, and industries.
For instance, a diversified investor's portfolio may include stocks consisting of retail, transport, and consumer staple companies, as well as bonds—both corporate- and government-issued. Further diversification may include money market accounts and cash. When you diversify your investments, you reduce the amount of risk you're exposed to in order to maximize your returns.
0コメント