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Strategies for Diversification By H. Igor Ansoff The Red Queen said, "Now, here, it takes all the running you can do to keep in the same place. If you want to get somewhere else, you must run at least twice as fast as that!"All of this has important implications for diversification, as suggested by the Brookings study: "The majority of the companies included among the IOO largest of our day have attained their positions within the last two decades. They are companies that have started new industries or have transformed old ones to create or meet consumer preferences. The companies that have not only grown in absolute terms but have gained an imof the product missions. Each objective is designed to improve some aspect of the balance between the over-aU product-market strategy and the expected environment. The specific objectives derived for any given case can be grouped into three general categories: growth objectives, such as I, 2, and 3 above, which are designed to improve the balance under favorable trend conditions; stability objectives, such as 3 and 4, designed as protection against unfavorable trends and foreseeable contingencies; and flexibility objectives, such as 5, to strengthen the company against unforeseeable contingencies. A diversification direction which is highly desirable for one of the objectives is likely to be less desirable for others. For example: C If a company is diversifying because its sales trend shows a declining volume of demand, it would be unvdse to consider vertical diversification, since this would be at best a temporary device to stave off an eventual decline of business. EUR If a company's industry shows every sign of healthy growth, then vertical and, in particular, horizontal diversification would be a desirable device for strengthening the position of the company in a field in which its knowledge and experience are concentrated. e If the major concern is stability under a contingent forecast, chances are that both horizontal and vertical diversification could not provide a sufficient stabilizing influence and that lateral action is called for. e If management's concern is with the narrowness of the technological base in the face of what we have called unforeseeable contingencies, then lateral diversification into new areas of technology would be clearly indicated. Measured Sales Goals Management can and should state the objectives of growth and stability in quantitative terms as long-range sales objectives. This is illustrated in EXHIBIT V. The solid lines describe a hypothetical company's forecasted performance without diversification under a general trend, represented by the sales curve marked Si, and in a contingency, represented by Sa. The dashed lines show the improved performance as a result of diversification, with S3 representing the curve for continuation of normal trends and S4 representing the curve for a major reverse. Growth. Management's first aim in diversifying is to improve the growth pattern of the company. The growth objective can be stated thus: Strategies for Diversification 119 Under trend conditions the growth rate of sales after diversification should exceed the growth rate of sales of the original product line by a minimum specified margin. Or to illustrate in mathematical shorthand, the objective for the company in EXHIBIT V would be: S3 -- Si ^ jO where the value of the margin p is specified for each year after diversification. EXHIBIT V. DIVERSIFICATION OBJECTIVES SALES VOLUME T t-Ume Some companies (particularly in the growth industries) fix an annual rate of growth which they wish to attain. Every year this rate of growth is compared to the actual growth during the past year. A decision on diversification action for the coming year is then based upon the disparity between the objective and the actual rate of growth. Stability. The second effect desired of diversification is improvement in company stability under contingent conditions. Not only should diversification prevent sales from dropping as low as they might have before diversification, but the percentage drop should also be lower. The second sales objective is thus a stability objective. It can be stated as follows: Under contingent conditions the percentage decline in sales which may occur without diversification should exceed the percentage drop in sales with diversification by an adequate margin, or algebraically: Si --^ S2 S3 ^-- S4 Using this equation, it is possible to relate the sales volumes before and after diversification to a rough measure of the resulting stability. Let the ratio of the lowest sales during a slump to the sales which would have occurred in the same year under trend conditions be called the stability factor F. Thus, F = 0.3 would mean that the company sales during a contingency 120 Harvard Business Review amount to 30% of what is expected under trend conditions. In EXHIBIT VI the stability factor of the company before diversification is the value Fl = S2/S1 and the stability factor after diversification is F3 = S4/SS, both computed at the point on the curve where S2 is minimum. Now let us suppose that management is considering the purchase of a subsidiary. How large does the subsidiary have to be if the parent is to improve the stability of the corporation as a whole by a certain amount? EXHIBIT VI shows how the question can be answered: On the horizontal axis we plot the different possible sales volumes of a smaller firm that might be secured as a proportion of the parent's volume. Obviously, the greater this proportion, the greater the impact of the purchase on the parent's stability. On the vertical axis we plot different ratios of the parent's stabihty before and after diversification (F3/F1). The assumed stability factor of the parent is 0.3. Let us say that four prospective subsidiaries have stability factors of i.o, 0.9, 0.75, and 0.6. If they were not considerably higher than 0.3, of course, there would be no point in acquiring them (at least for our purposes here). EXHIBIT VI. IMPROVEMENT IN STABILITY FACTOR AS A RESULT OF DIVERSIFICATION FOR FJ = 0.3 RATIC . , F 18 11 F ) OF STABILITY fACTORS J - STAB/J-/TY OF GBP>/i/GBP/?S/F/C4T/OA/ -ST-ABIL/TY BGBPFOR.B D/VBR.S/F/CAT/C 1 OT. *>>o .ooo<<o ^ ^ ^ ^ o ! : o ^ ^ ^ * ae O.8 ==- o M B /.o F, -1.0 f, =0.9 a=0.75 Ft-as SALES OF SUBSIDIARY AS A riSACTION OF PAREURNT SALGBPS BEFORE DIVERSIFICATION On the graph we correlate these four stability factors of the subsidiary with (i) the ratio F3/F1 and (2) different sales volumes of the subsidiary. We find, for example, that if the parent is to double its stability (point 2.0 on the vertical axis), it must obtain a subsidiary with a stability of i.o and 75% as much sales volume as the parent, or a subsidiary vdth a stability of 0.9 and 95% of the sales volume. If the parent seeks an improvement in stability of, say, only 40%, it could buy a company with a stability of 0.9 and 25% as much sales volume as it has. This particular way of expressing sales objectives has two important advantages: (i) By setting minimum, rather than maximum, limits on growth, it leaves room for the company to take advantage of unusual growth opportunities in order to exceed these goals, and thus provides definite goals without inhibiting initiative and incentive. (2) It takes account of the timephasing of diversification moves; and since these moves invariably require a transition period, the numerical values of growth objectives can be allowed to vary from year to year so as to allow for a gradual development of operations. Long-Range Objectives Diversification objectives specify directions in which a company's product-market should change. Usually there will be several objectives indicating different and sometimes conflicting directions. If a company attempts to follow all of them simultaneously, it is in danger of spreading itself too thin and of becoming a conglomeration of incompatible, although perhaps individually profitable, enterprises. There are cases of diversification which have followed this path. In a majority of cases, however, there are valid reasons why a company should seek to preserve certain basic unifying characteristics as it goes through a process of growth and change. Consequently, diversification objectives should be supplemented by a statement of long-range product-market objectives. For instance: e One consistent course of action is to adopt a product-market policy which will preserve a kind of technological coherence among the different manufactures with the focus on the products of the parent company. For instance, a company that is mainly distinguished for a type of engineering and production excellence would continue to select product-market entries which would strengthen and maintain this excellence. Perhaps the best known example of such policy is exemplified by the DuPont slogan, "Better things for better living through chemistry."Among the major manufacturers of air Vehicles, it comes closest to the "holding conipany" extreme. Its airplanes and missile manufacturing operations in Convair are paralleled by production of submarines in the Electric Boat Strategies for Diversifcation 121 Division; military, industrial, and consumer electronic products in the Stromberg-Carlson Division; electric motors in the Electro Dynamic Division. Selecting a Strategy In the preceding sections qualitative criteria for diversification have been discussed. How should management apply th<<se criteria to individual opportunities? Two steps should be taken: (i) apply the qualitative standards to narrow the field of diversification opportunities; (2) apply the numerical criteria to select the preferred strategy or strategies. Qualitative Evaluation The long-range product-market policy is used as a criterion for the first rough cut in the qualitative evaluation. It can be used to divide a large field of opportunities into classes of diversification moves consistent with the company's basic character. For example, a company whose policy is to compete on the basis of the technical excellence of its products would eliminate as inconsistent classes of consumer products which are sold on the strength of advertising appeal rather than superior quality. Next, the company can compare each individual diversification opportunity with the individual diversification objectives. This process tends to eliminate opportunities which, while still consistent with the desired product-market make-up, are nevertheless likely to lead to an imbalance between the company product line and the probable environment. For example, a company which wishes to preserve and expand its technical exellence in design of large, highly stressed machines controlled by feedback techniques may find consistent product opportunities both inside and outside the industry to which it caters, but if one of its major diversification objectives is to correct cyclic variations in demand that are characteristic of the industry, it would choose an opportunity that lies outside. Each diversification opportunity which has gone through the two screening steps satisfies at least one diversification objective, but probably it will not satisfy all of them. Therefore, before subjecting them to the quantitative evaluation, it is necessary to group them into several alternative over-all company product-market strategies, composed of the original strategy and one or more of the remaining diversification strategies. These alternative over-all strategies should be 122 Harvard Business Review roughly equivalent in meeting all of the diversification objectives. At this stage it is particularly important to allow for the unforeseeable contingencies. Since the techniques of numerical evaluation are applicable only to trends and foreseeable contingencies, it is important to make sure that the different alternatives chosen give the company a broad enough technological base. In practice this process is less formidable than it may appear. For example, a company in the aircraft industry has to consider the areas of technology in which major discoveries are likely to aflEect the future of the industry. This would include atomic propulsion, certain areas of electronics, automation of complex processes, and so forth. In designing alternative over-all strategies the company would then make sure that each contains product entries which will give the firm a desirable and comparable degree of participation in these future growth areas. Quantitative Evaluation Will the company's product-market strategies make money? Will the profit structure improve as a result of their adoption? The purpose of quantitative evaluation is to compare the profit potential of the alternatives. Unfortunately, there is no single yardstick among those commonly used in business that gives an accurate measurement of performance. The techniques currently used for measurement of business performance constitute, at best, an imprecise art. It is common to measure different aspects of performance by applying different tests. Thus, tests of income adequacy measure the earning ability of the business; tests of debt coverage and liquidity measure preparedness for contingencies; the shareholders' position measures attractiveness to investors; tests of sales efficiency and personnel productivity meas-. ure efficiency in the use of money, physical assets, and personnel. These tests employ a variety of different performance ratios, such as return on sales, return on net worth, return on assets, turnover of net worth, and ratio of assets to liabilities. The total number of ratios may run as high as 20 in a single case. In the final evaluation, which immediately precedes a diversification decision, management would normally apply all of these tests, tempered with business judgment. However, for the purpose of preliminary elimination of alternatives, a single test is frequently used -- return on investment, a ratio between earnings and the capital invested in producing these earnings. While the usefulness of return on investment is commonly accepted, there is considerable room for argument regarding its limitations and its practical application.^ Fundamentally, the difficulty with the concept is that it fails to provide an absolute measure of business performance applicable to a range of very different industries; also, the term "investment" is subject to a variety of interpretations.For our purposes, the concept of a mission is more useful in describing market alternatives than would be the concept of a "customer," since a customer usually has many different missions, each requiring a different product. The Air Defense Command, for example, needs different kinds of warning systems. Also, the product mission concept helps management to set up the problems in such a way that it can better evaluate the performance of competing products. EUR A product-market strategy, accordingly, is a joint statement of a product line and the corresponding set of missions which the products are designed to fulfill. In shorthand form (see EXHIBIT i), if we let n represent the product line and fi the corresponding set of missions, then the pair of IT and ^ is a product-market strategy. With these concepts in mind let us turn now to the four different t5^es of product-market strategy shown in EXHIBIT I: C Market penetration is an effort to increase company sales without departing from an original product-market strategy. The company seeks to improve business performance either by increasing the volume of sales to its present customers or by finding new customers for present products. C Market development is a strategy in which the company attempts to adapt its present product line (generally with some modification in the product characteristics) to new missions. An airplane EXHIBIT I. PRODUCT-MARKET STRATEGIES FOR BUSINESS GROWTH ALTERNATIVES V.MARK.ETS LINE ^ Wo TT, IT. MARKET fenetraUon O z 2 2 U J MARKET DIVE DEVELO RSIFIC 'MENT NATION1 company which adapts and sells its passenger transport for the mission of cargo transportation is an example of this strategy. e A produet development strategy, on the other hand, retains the present mission and develops products that have new and different characteristics such as will improve the performance of the mission. C Diversification is the final alternative. It calls for a simultaneous departure from the present product line and the present market structure. Each of the above strategies describes a distinct path which a business can take toward future growth. However, it must be emphasized that in most actual situations a business would follow several of these paths at the same time. As a matter of fact, a simultaneous pursuit of market penetration, market development, and product development is usually a sign of a progressive, well-run business and may be essential to survival in the face of economic competition. The diversification strategy stands apart from the other three. WhUe the latter are usually followed with the same technical, financial, and merchandising resources which are used for the original product line, diversification generally requires new skills, new techniques, and new facilities. As a result, it almost invariably leads to physical and organizational changes in the structure of the business which represent a distinct break with past business experience. Forecasting Growth A study of business literature and of company histories reyeals many different reasons for diversification. Companies diversify to compensate for technological obsolescence, to distribute risk, to utilize excess productive capacity, to reinvest earnings, to obtain top management, and so forth. In deciding whether to diversify, management should carefully analyze its future growth prospects. It should think of market penetration, market development, and product development as parts of its over-all product strategy and ask whether this strategy should be broadened to include diversification. Long-Term Trends A standard method of analyzing future company growth prospects is to use long-range sales forecasts. Preparation of such forecasts involves simultaneous consideration of a number of major factors: o General economic trends. o Political and international trends. o Trends peculiar to the industry. (For example, forecasts prepared in the airplane industry must take account of such possibilities as a changeover from manned aircraft to missiles, changes irt the government "mobilization base" concept with all that would mean for the aircraft industry, and rising expenditures required for research and development.) o Estimates of the firm's competitive strength relative to other members of the industry.To paraphrase DuPont, some slogan like "Better transportation for better living through advanced engineering," would be descriptive of such a longrange policy. C A gready different policy is to emphasize primarily the financial characteristics of the corporation. This method of diversification generaQy places no limits on engineering and manufacturing characteristics of new products, although in practice the competence and interests of management will usually provide some orientation for diversification moves. The company makes the decisions regarding the distribution of new acquisitions exclusively on the basis of financial considerations. Rather than a manufacturing entity, the corporate character is now one of a "holding company."Successful Alternatives These alternative long-range policies demonstrate the extremes.2.3.4.5.
Strategies
for Diversification
By H. Igor Ansoff
The Red Queen said, "Now, here, it takes all
the running you can do to keep in the same place.
If you want to get somewhere else, you must run
at least twice as fast as that!" ^
So it is in the American economy. Just to retain
its relative position, a business firm must
go through continuous growth and change. To
improve its position, it must grow and change at
least "twice as fast as that."
According to a recent survey of the ioo largest
United States corporations from 1909 to
1948, few companies that have stuck to their
traditional products and methods have grown in
stature. The report concludes: "There is no
reason to believe that those now at the top will
stay there except as they keep abreast in the
race of innovation and competition." ^
There are four basic growth alternatives open
to a business. It can grow through increased
market penetration, through market development,
through product development, or through
diversification.
A company which accepts diversification as
a part of its planned approach to growth undertakes
the task of continually weighing and comparing
the advantages of these four alternatives,
selecting first one combination and then another,
depending on the particular circumstances in
long-range development planning.
While they are an integral part of the over-
^ Lewis J. Carroll, Through the Looking-Glass (New
York, The Heritage Press, 1941), p. 41.
" A. D. H. Kaplan, Big Enterprise in a Competitive
System (Washington, The Brookings Institution, 1954),
p. 142.
aU growth pattern, diversification decisions present
certain unique problems. Much more thaii
other growth alternatives, they require a break
with past patterns and traditions of a company
and an entry onto new and uncharted paths.
Accordingly, one of the aims of this article
is to relate diversification to the over-all growth
perspectives of management, establish reasons
which may lead a company to prefer diversification
to other growth alternatives, and trace a relationship
between over-all growth objectives and
special diversification objectives. This will provide
us with a partly qualitative, partly quantitative
method for selecting diversificatiian strategies
which are best suited to long-term growth of
a company. We can use qualitative criteria to
reduce the total number of possible strategies to
the most promising few, and then apply a return
on investment measure to narrow the choice of
plans still further.
Product-Market Alternatives
The term "diversification" is usually associated
with a change in the characteristics of the
company's product line and/or market, in contrast
to niarket penetration, market development,
and product development, which represent other
types of change in product-market structure.
Since these terms are frequently used interchangeably,
we can avoid later confusion by defining
each as a special kind of product-market
strategy. To begin with the basic concepts:
e The product line of a manufacturing company
refers both to (a) the physical characteristics of
the individual products (for example, size, weight materials, tolerances) and to (b) the performance
characteristics of the products (for example, an airplane's
speed, range, altitude, payload).
C In thinking of the market for a product we
can borrow a concept commonly used by the military
— the concept of a mission. A product
mission is a description of the job which the
product is intended to perform. For instance, one
of the missions of the Lockheed Aircraft Corporation
is commercial air transportation of passengers;
another is provision of airborne early warning for
the Air Defense Command; a third is performance
of air-to-air combat.
For our purposes, the concept of a mission is
more useful in describing market alternatives than
would be the concept of a "customer," since a
customer usually has many different missions, each
requiring a different product. The Air Defense
Command, for example, needs different kinds of
warning systems. Also, the product mission concept
helps management to set up the problems in
such a way that it can better evaluate the performance
of competing products.
€ A product-market strategy, accordingly, is a
joint statement of a product line and the corresponding
set of missions which the products are
designed to fulfill. In shorthand form (see EXHIBIT
i), if we let n represent the product line and fi
the corresponding set of missions, then the pair
of IT and ^ is a product-market strategy.
With these concepts in mind let us turn now
to the four different t5^es of product-market
strategy shown in EXHIBIT I:
C Market penetration is an effort to increase
company sales without departing from an original
product-market strategy. The company seeks to
improve business performance either by increasing
the volume of sales to its present customers or by
finding new customers for present products.
C Market development is a strategy in which
the company attempts to adapt its present product
line (generally with some modification in the product
characteristics) to new missions. An airplane
EXHIBIT I. PRODUCT-MARKET STRATEGIES FOR
BUSINESS GROWTH ALTERNATIVES
V.MARK.ETS
LINE ^
Wo
TT,
IT.
MARKET
fenetraUon
O z
2 2
U J
MARKET
DIVE
DEVELO
RSIFIC
'MENT
NATION1
company which adapts and sells its passenger transport
for the mission of cargo transportation is an
example of this strategy.
e A produet development strategy, on the other
hand, retains the present mission and develops
products that have new and different characteristics
such as will improve the performance of the
mission.
C Diversification is the final alternative. It calls
for a simultaneous departure from the present
product line and the present market structure.
Each of the above strategies describes a distinct
path which a business can take toward
future growth. However, it must be emphasized
that in most actual situations a business would
follow several of these paths at the same time.
As a matter of fact, a simultaneous pursuit of
market penetration, market development, and
product development is usually a sign of a progressive,
well-run business and may be essential
to survival in the face of economic competition.
The diversification strategy stands apart from
the other three. WhUe the latter are usually
followed with the same technical, financial, and
merchandising resources which are used for the
original product line, diversification generally
requires new skills, new techniques, and new
facilities. As a result, it almost invariably leads
to physical and organizational changes in the
structure of the business which represent a distinct
break with past business experience.
Forecasting Growth
A study of business literature and of company
histories reyeals many different reasons for
diversification. Companies diversify to compensate
for technological obsolescence, to distribute
risk, to utilize excess productive capacity, to reinvest
earnings, to obtain top management, and
so forth. In deciding whether to diversify, management
should carefully analyze its future
growth prospects. It should think of market
penetration, market development, and product
development as parts of its over-all product strategy
and ask whether this strategy should be
broadened to include diversification.
Long-Term Trends
A standard method of analyzing future company
growth prospects is to use long-range sales
forecasts. Preparation of such forecasts involves
simultaneous consideration of a number of major
factors:
• General economic trends.
• Political and international trends.
• Trends peculiar to the industry. (For example,
forecasts prepared in the airplane industry
must take account of such possibilities
as a changeover from manned aircraft to
missiles, changes irt the government "mobilization
base" concept with all that would mean
for the aircraft industry, and rising expenditures
required for research and development.)
• Estimates of the firm's competitive strength
relative to other members of the industry.
• Estimates of improvements in the company
performance which can be achieved through
market penetration, market development, and
product development.
• Trends in manufacturing costs.
Such forecasts usually assume that company
management will be aggressive and that management
policies will take full advantage of the opportunities
offered by the different trends. They
are, in other words, estimates of the best possible
results the business can hope to achieve short
of diversification.
Different patterns of forecasted growth are
shown in EXHIBIT II, with hypothetical growth
curves for the national economy (GNP) and the
company's industry added for purposes of comparison.
One of the curves illustrates a sales
curve which declines with time. This may be
the result of an expected contraction of demand,
the obsolescence of manufacturing techniques,
emergence of new products better suited to the
mission to which the company caters, or other
changes. Another typical pattern, frequently
caused by seasonal variations in demand, is one
of cyclic sales activity. Less apparent, but more
important, are slower cyclic changes, such as
trends in construction or the peace-war variation
in demand in the aircraft industry.
If the most optimistic sales estimates which
can be attained short of diversification fall in
either of the preceding cases, diversification is
strongly indicated. However, a company may
choose to diversify even if its prospects do, on
the whole, appear favorable. This is illustrated
by the "slow growth curve." As drawn in EXHIBIT
II, the curve indicates rising sales which,
in fact, grow faster than the economy as a whole.
Nevertheless, the particular company may belong
to one of the so-called "growth industries"
which as a whole is surging ahead. Such a company
may diversify because it feels that its pro-
Strategies for Diversification 115
EXHIBIT II. TREND FORECASTS
SALES
VOLUME
, ^ ' INDUSTRY
SLOW GROWTH
CYCLIC
GROWTH
DECLINE
I9S5 I960 1965
spective growth rate is unsatisfactory in comparison
to the industry growth rate.
Making trend forecasts is far from a precise
science. The characteristics of the basic environmental
trends, as well as the efEect of these
trends on the industry, are always uncertain.
Furthermore, the ability of a particular business
organization to perform in the new environment
is very difficult to assess. Consequently, any
realistic company forecast should include several
different trend forecasts, each with an explicitly
or implicitly assigned probability. As
an alternative, the company's growth trend forecast
may be represented by a widening spread
between two extremes, similar to that shown
for GNP in EXHIBIT II.
Contingencies
In addition to trends, another class of events
may make diversification desirable. These are
certain environmental conditions which, if they
occur, will have a great effect on sales; however,
we cannot predict their occurrence with certainty.
To illustrate such "contingent" events,
an aircraft company might foresee these possibilities
that would upset its trend forecasts:
• A major technological "breakthrough" whose
characteristics can be foreseen but whose timing
cannot at present be determined, such as
the discovery of a new manufacturing process
for high-strength, thermally resistant aircraft
bodies.
• An economic recession which would lead to
loss of orders for commercial aircraft and
would change the pattern of spending for
military aircraft.
• A major economic depression.
• A limited war which would sharply increase
the demand for air industry products.
• A sudden cessation of the cold war, a currently
popular hope which has waxed and waned
with changes in Soviet behavior.
The two types of sales forecast are illustrated
in EXHIBIT HI for a hypothetical company. Sales
curves Si and S2 represent a spread of trend
forecasts; and S3 and S4, two contingent forecasts
for the same event. The difference between
the two types, both in starting time and
effect oh sales, lies in the degree of uncertainty
associated with each.
In the case of trend forecasts we can trace a
crude time history of sales based on events which
we fuUy expect to happen. Any uncertainty
arises from not knowing exactly when they will
take place and how they will influence business.
In the case of contingency forecasts, we can
again trace a crude time history, but our uncertainty
is greater. We lack precise knowledge
of not only when the event will occur but also
whether it will occur. In going from a trend
to a contingency forecast, we advance, so to
speak, one notch up the scale of ignorance.
In considering the relative weight we should
give to contingent events in diversification planning,
we must consider not only the magnitude
of their effect on sales, but also the relative probability
of their occurrence. For example, if a
severe economic depression were to occur, its
effect on many industries would be devastating.
Many companies feel safe in neglecting it in
their planning, however, because they feel that
the likelihood of a deep depression is very small,
at least for the near future.
It is a common business practice to put primary
emphasis on trend forecasts; in fact, in
many cases businessmen devote their long-range
planning exclusively to these forecasts. They
usually view a possible catastrophe as "something
one cannot plan for" or as a second-order
EXHIBIT III. A HYPOTHETICAL COMPANY FORECAST
— NO DIVERSIFICATION
SALES
VOLUME
time
correction to be applied only after the trends
have been taken into account. The emphasis is
on planning for growth, and planning for contingencies
is viewed as an "insurance policy"
against reversals.
People familiar with planning problems in
the military establishment will note here an interesting
difference between military and business
attitudes. While business planning emphasizes
trends, military planning emphasizes
contingencies. To use a crude analogy, a business
planner is concerned with planning for
continuous, successful, day-after-day operation
of a supermarket. If he is progressive, he also
buys an insurance policy against fire, but he
spends relatively little time in planning for fires.
The military is more like the fire engine company;
the fire is the thing. Day-to-day operations
are of interest only insofar as they can be
utilized to improve readiness and fire-fighting
techniques.
Unforeseeable Events
So far we have dealt with diversification forecasts
based on what may be called foreseeable
market conditions — conditions which we can
interpret in terms of time-phased sales curves.
Planners have a tendency to stop here, to disregard
the fact that, in addition to the events for
which we can draw time histories, there is a
recognizable class of events to which we can
assign a probability of occurrence but which we
cannot otherwise describe in our present state
of knowledge. One must move another notch
up the scale of ignorance in order to consider
these possibilities.
Many businessmen feel that the effort is not
worthwhile. They argue that since no information
is available about these unforeseeable circumstances,
one might as well devote the available
time and energy to planning for the foreseeable
circumstances, or that, in a very general
sense, planning for the foreseeable also prepares
one for the unforeseeable contingencies.
In contrast, more experienced military and
business people have a very different attitude.
Well aware of the importance and relative probability
of unforeseeable events, they ask why one
should plan specific steps for the foreseeable
events while neglecting the really important possibilities.
They may substitute for such planning
practical maxims for conducting one's business
— "be solvent," "be light on your feet," "be
flexible." Unfortunately, it is not always clear proved position in their own industry may be
identified as companies that are notable for drastic
changes made in their product mix and methods,
generating or responding to new competition.
"There are two outstanding cases in which the
industry leader of 1909 had by 1948 risen in
position relative to its own industry group and also
in rank among the 100 largest — one in chemicals
and the other in electrical equipment. These two
(General Electric and DuPont) are hardly recognizable
as the same companies they were in 1909
except for retention of the name; for in each case
the product mix of 1948 is vastly different from
what it was in the earlier year, and the markets
in which the companies meet competition are incomparably
broader than those that accounted for
their earlier place at the top of their industries.
They exemplify the flux in the market positions
of the most successful industrial giants during
the past four decades and a general growth rather
than a consolidation of supremacy in a circumscribed
line." *
This suggests that the existence of specific
undesirable trends is not the only reason for diversification.
A broader product line may be
called for even with optimistic forecasts for present
products. An examination of the foreseeable
alternatives should be accompanied by an
analysis of how well the over-all company product-
market strategy covers the so-called growth
areas of technology — areas of many potential
discoveries. If such analysis shows that, because
of its product lines, a company's chances of taking
advantage of important discoveries are limited,
management should broaden its technological
and economic base by entering a number of
so-called "growth industries." Even if the definable
horizons look bright, a need for flexibility,
in the widest sense of the word, may provide
potent reasons for diversification.
Diversification Objectives
If an analysis of trends and contingencies indicates
that a company should diversify, where
should it look for diversification opportunities?
Generally speaking, there are three types of
opportunities:
(1) Each product manufactured by a company
is made up of functional components, parts, and
basic materials which go into the final assembly.
A manufacturing concern usually buys a large
fraction of these from outside suppliers. One way
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