Lakhasly

Online English Summarizer tool, free and accurate!

Summarize result (39%)

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.


Original text

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



  • Ibid., p. 142.
    to diversify, commonly known as vertical diversification,
    is to branch out into production of components,
    parts, and materials. Perhaps the most
    outstanding example of vertical diversification is
    the Ford empire in the days of Henry Ford, Sr.
    At first glance, vertical diversification seems inconsistent
    with our definition of a diversification
    strategy. However, the respective missions which
    components, parts, and materials are designed to
    perform are distinct from the mission of the overall
    product. Furthermore, the technology in fabrication
    and manufacture of these parts and materials
    is likely to be very different from the technology
    of manufacturing the final product. Thus, vertical
    diversification does imply both catering to new
    missions and introduction of new products.
    (2) Another possible way to go is horizontal diversification.
    This can be described as the introduction
    of new products which, while they do not
    contribute to the present product line in any way,
    cater to missions which lie within the company's
    know-how and experience in technology, finance,
    and marketing.
    (3) It is also possible, by lateral diversification,
    to move beyond the confines of the industry to
    which a company belongs. This obviously opens
    a great many possibilities, from operating banana
    boats to building atomic reactors. While vertical
    and horizontal diversification are restrictive, in the
    sense that they delimit the field of interest, lateral
    diversification is "wide open." It is an announcement
    of the company's intent to range far afield
    from its present market stmcture.
    Choice of Direction
    How does a company choose among these diversification
    directions? In part the answer depends
    on the reasons which prompt diversification.
    For example, in the light of the trends described
    for the industry, an aircraft company
    may make the following moves to meet longrange
    sales objectives through diversification:



  1. A vertical move to contribute to the technological
    progress of the present product line.

  2. A horizontal move to improve the coverage
    of the military market.

  3. A horizontal move to increase the percentage
    of commercial sales in the over-all sales
    program.

  4. A lateral move to stabilize sales in case of a
    recession.

  5. A lateral move to broaden the company's
    technological base.
    Some of these diversification objectives apply
    to characteristics of the product, some to those (even to the people who preach it) what this
    flexibility means.
    An interesting study by The Brookings Institution
    ^ provides an example of the importance
    of the unforeseeable events to business. EXHIBIT
    IV shows the changing make-up of the
    list of the I oo largest corporations over the last
    50 years. Of the 100 largest on the 1909 list
    (represented by the heavy marble texture) only
    36 were among the 100 largest in 1948; just
    about half of the new entries to the list in 1919
    (represented by white) were left in 1948; less
    than half of the new entries in 1929 (represented
    by the zigzag design) were left in 1948;
    and so on. Clearly, a majority of the giants of
    yesteryear have dropped behind in a relatively
    short span of time.
    Many of the events that hurt these corporations
    could not be specifically foreseen in 1909.
    If the companies which dropped from the original
    list had made forecasts of the foreseeable
    kind at that time — and some of them must
    have — they would very likely have found the
    future growth prospects to be excellent. Since
    then, however, railroads, which loomed as the
    ' A. D. H. Kaplan, op. cit.
    primary means of transportation, have given
    way to the automobile and the airplane; the textile
    industry, which appeared to have a built-in
    demand in an expanding world population, has
    been challenged and dominated by synthetics;
    radio, radar, and television have created means
    of communication unforeseeable in significance
    and scope; and many other sweeping changes
    have occurred.
    Planning for the Unknown
    The lessons of the past 50 years are fully applicable
    today. The pace of economic and technological
    change is so rapid that it is virtually
    certain that major breakthroughs comparable to
    those of the last 50 years, but not yet foreseeable
    in scope and character, will profoundly change
    the structure of the national economy. 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.
    € 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 £>/i/£/?S/F/C4T/OA/
    -ST-ABIL/TY B£FOR.B D/VBR.S/F/CAT/C
    1
    OT.
    »•
    .•••«•
    ^ ^
    ^ ^
    • ! : •
    ^ ^
    ^ *
    ae O.8
    ==- • M B
    /.o
    F, -1.0
    f, =0.9
    a=0.75
    Ft-as
    SALES OF SUBSIDIARY AS A riSACTION OF
    PAR€NT SAL£S 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."
    C Another approach is to set long-term growth
    policy in terms of the breadth of market which
    the company intends to cover. It may choose to
    confine its diversifications to the vertical or horizontal
    direction, or it may select a type of lateral
    diversification controlled by the characteristics of
    the missions to which the company intends to
    cater. For example, a company in the field of air
    transportation may expand its interest to all forms
    of transportation of people and cargo. 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." Top
    management delegates a large share of its productplanning
    and administrative functions to the divisions
    and concerns itself largely with coordination,
    financial problems, and with building up a balanced
    "portfolio of products" within the corporate
    structure.
    Successful Alternatives
    These alternative long-range policies demonstrate
    the extremes. No one course is necessarily
    better than the others; management's choice
    will rest in large part on its preferences, objectives,
    skiUs, and training. The aircraft industry
    illustrates the fact that there is more than
    one successful path to diversification:
    e Among the major successful airframe manufacturers,
    Douglas Aircraft Company, Inc., and
    Boeing Airplane Company have to date limited
    their growth to horizontal diversification into missiles
    and new markets for new types of aircraft.
    Lockheed has carried horizontal diversification further
    to include aircraft maintenance, aircraft service,
    and production of ground-handling equipment.
    C North American Aviation, Incorporated, on
    the other hand, appears to have chosen vertical
    diversification by establishing its subsidiaries in
    Atomics International, Autonetics, and Rocketdyne,
    thus providing a basis for manufacture of complete
    air vehicles of the future.
    e Bell Aircraft Corporation has adopted a policy
    of technological consistency among the items in
    its product line. It has diversified laterally but primarily
    into types of products for which it had previous
    know-how and experience.
    e General Dynamics Corporation provides a further
    interesting contrast. It has gone far into lateral
    diversification. 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.
    But, since our aim is to use the concept as a
    measure of relative performance of different diversification
    strategies, we need not be concerned
    with its failure to measure absolute
    values. And as long as we are consistent in our
    definition of investment in alternative courses
    of action, the question of terminology is not so
    troublesome. We cannot define profit-producing
    capital in general terms, but we can define
    it in each case in the light of particular business
    characteristics and practices (such as the extent
    of government-owned assets, depreciation practices,
    inflationary trends).
    For the numerator of our return on investment,
    we can use net earnings after taxes. A
    going business concern has standard techniques
    for estimating its future earnings. These depend
    on the projected sales volume, tax structure,
    trends in material and labor costs, productivity,
    and so forth. If the diversification opportunity
    being considered is itself a going concern,
    its profit projections can be used for estimates of
    combined future earnings. If the opportunity
    is a new venture, its profit estimates should be
    made on the basis of the average performance
    for the industry.
    Changes in Investment Structure
    A change in the investment structure of the
    diversifying company accompanies a diversification
    move. The source of investment for the
    new venture may be: (i) excess capital, (2) capital
    borrowed at an attractive rate, (3) .an exchange
    of the company's equity for an equity in
    another company, or (4) capitd withdrawn from
    present business operations.
    If we let ii, ig, is, and i^, respectively, repre-
    ^ See Charles R. Schwartz, The Return-on-Investment
    Concept as a Tool for Decision Making, General Management
    Series No. 183 (New York, American Management
    Association, 1956), pp. 42-61; Peter F. Drucker, The
    Practice of Management (New York, Harper & Brothers,
    1954); and Edward M. Barnet, "Showdown in the Market
    Place," HBR July-August 1956, p. 85.
    sent investments made in the nevp product in
    the preceding four categories during the first
    year of diversified operations, we can derive a
    simple expression for the improvement in return
    on investment resulting from diversification:
    I + is-l-i
    where pi and p2 represent the avera;ge return
    on capital invested in the original product and
    in the nevp product, respectively, and quantity
    I is the total capital in the business before
    diversification.
    We can easily check this expression by assuming
    that only one type of new investment will be
    made at a time. We can then use the formula to
    compute the conditions under which it pays to
    diversify (that is, conditions where AR is greater
    than zero):
    (1) If excess capital is the only source of new
    investment (i2 = i3 = i4 = o), this condition is
    P2 — r > o. That is, return on diversified operations
    should he more attractive than current rates
    for capital on the open market.
    (2) If only borrowed capital is used (ii = i3 =
    i4 = o), it pays to diversify if p2 — pi > r. That
    is, the difEerence between return from diversification
    and return from the original product should
    be greater than the interest rate on the money.
    (3) If the diversified operation is to be acquired
    through an exchange of equity or through
    Internal reallocation of capital, p2 — pi > o is the
    condition under which diversification will pay ofE.
    A Comprehensive Yardstick
    The formula for AR just stated is not sufficiently
    general to serve as a measure of profit
    potential. It gives improvement in return for
    the first year only and for a particular sales
    trend. In order to provide a reasonably comprehensive
    comparison between alternative over-all
    company strategies, the yardstick for profit potential
    should possess the following properties:
    (1) Since changes in the investment structure
    of the business invariably accompany diversification,
    the yardstick should reflect these changes.
    It should also take explicit account of new capital
    brought into the business and changes in the rate
    of capital formation resulting from diversification,
    as well as costs of borrowed capital.
    (2) Usually the combined performance of the
    new and the old product-market lines is not a simple
    sum of their separate performances; it should
    " See H. Igor Ansoff, A Model for Diversification (Burbank,
    Lockheed Aircraft Corporation, 1957); and John
    Strategies for Diversification 123
    be greater. The profit potential yardstick must
    take account of this nonlinear characteristic.
    (3) Each diversification move is characterized
    by a transition period during which readjustment
    of the company structure to new operating conditions
    takes place. The benefits of a diversification
    move may not be realized fully for some time, so
    the measurement of profit potential should span a
    sufficient length of time to allow for effects of the
    transition.
    (4) Since both profits and investments will be
    spread over time, the yardstick should use their
    present value.
    (5) Business performance will differ depending
    on the particular economic-political environment.
    The profit potential yardstick must somehow
    average out the probable effect of alternative
    environments.
    (6) The statement of sales objectives, as pointed
    out previously, should specify the general characteristics
    of growth and stability which are desired.
    Profit potential functions should be compatible
    with these characteristics.
    We can generalize our formula in a way
    which will meet most of the preceding requirements.
    The procedure is to write an expression
    for the present value of AR for an arbitrary year,
    t, allowing for possible yearly diversification investments
    up to the year t, interest rates, and
    the rate of capital formation. Then this present
    value is averaged over time as well as over the
    alternative sales forecasts. The procedure is
    straightforward (although the alegebra involved
    is too cumbersome to be worth reproducing
    here
    ). The result, which is the "average expected
    present value of AR," takes account of
    conditions (i) through (5), above. Let us call
    it (AR)e. It can be computed using data normally
    found in business and financial forecasts.
    Final Evaluation
    This brings us to the final step in the evaluation.
    We have discussed a qualitative method
    for constructing several over-all product-market
    strategies which meet the diversification and the
    long-range objectives. We can now compute
    (AR)e for each of the over-all strategies and, at
    the same time, make sure that the strategies
    satisfy the sales objectives previously stated, thus
    fulfilling condition (6), above.
    If product-market characteristics, which we
    have used to narrow the field of choice and to
    compute (AR)e, were the sole criteria, then the
    Burr Williams, The Theory of Investment Value (Amsterdam,
    The North-Holland Publishing Co., 1938).
    124 Harvard Business Review
    strategy with the highest (AR)e would be the
    "preferred" path to diversification. The advantages
    of a particular product-market opportunity,
    however, must be balanced against the chances
    of business success.
    Conclusion
    A study of diversification histories shows that
    a firm usually arrives at a decision to make a
    particular move through a multistep process.
    The planners' first step is to determine the preferred
    areas for search; the second is to select a
    number of diversification opportunities within
    these areas and to subject them to a preliminary
    evaluation. They then make a final evaluation,
    conducted by the top management, leading to
    selection of a specific step; finally, they work
    out details and complete the move.
    Throughout this process, the company seeks
    to answer two basic questions: How well will a
    particular move, if it is successful, meet the
    company's objectives? What are the company's
    chances of making it a success? In the early
    stages of the program, the major concern is with
    business strategy. Hence, the first question plays
    a dominant role. But as the choice narrows,
    considerations of business ability, of the particular
    strengths and weaknesses which a company
    brings to diversification, shift attention to the
    second question.
    This discussion has been devoted primarily to
    selection of a diversification strategy. We have
    dealt with what may be called external aspects
    of diversification — the relation between a company
    and its environment. To put it another
    way, we have derived a method for measuring
    the profit potential of a diversification strategy,
    but we have not inquired into the internal factors
    which determine the ability of a diversifying
    company to make good this potential. A company
    planning diversification must consider such
    questions as how the company should organize
    to conduct the search for and evaluation of
    diversification opportunities; what method of
    business expansion it should employ; and how
    it should mesh its operations with those of a subsidiary.
    These considerations give rise to a new
    set of criteria for the lousiness fit of the prospective
    venture. These must be used in conjunction
    with (AR)e as computed in the preceding
    section to determine which of the over-all product-
    market strategies should be selected for
    implementation.
    Thus, the steps outlined in this article are
    the first, though an important, preliminary to a
    diversification move. Only through further careful
    consideration of probable business success
    can a company develop a long-range strategy that
    will enable it to "run twice as fast as that" (using
    the Red Queen's words again) in the ever-changing
    world of today.
    IN a highly diversified company . . . there is a natural tendency to
    assign a single executive the responsibility for so many diverse businesses
    that he becomes a jack of all trades and a master of none
    This is serious, because American business competition no longer permits
    survival of businesses without managers of special intelligence and
    competence in their individual fields. Therefore, as a continuing process,
    we attempt to organize our company [W. R. Grace h Co.] so that the
    manager for any business or group of businesses is as expert in them as his
    competition. This is sometimes difficult. As one important aid, we have
    tried to minimize the number of management levels; we have tried to keep
    the organization "flat." The more management levels you have, we
    feel, the more friction, inertia and slack you have to overcome, and the
    greater the distortion of objectives and the misdirection of attention. In
    this you must always be on your guard, because levels of management,
    like tree rings, grow with age. As one company president put it, "If aU an
    executive does is agree with his subordinate executive, you don't need both
    of them."


Summarize English and Arabic text online

Summarize text automatically

Summarize English and Arabic text using the statistical algorithm and sorting sentences based on its importance

Download Summary

You can download the summary result with one of any available formats such as PDF,DOCX and TXT

Permanent URL

ٌYou can share the summary link easily, we keep the summary on the website for future reference,except for private summaries.

Other Features

We are working on adding new features to make summarization more easy and accurate


Latest summaries

تعتبر البولي فو...

تعتبر البولي فوسفات مهمة في صناعة المواد الغذائية لممتلكاتها المحددة ، بما في ذلك احتباس الماء والمل...

فً هذا النوع من...

فً هذا النوع من العمود ٌتم اإلتفاق على سعر محدد مستهدف لألعمال. • وحٌن إستكمال األعمال إذا كانت التك...

إن توفير بيئة ل...

إن توفير بيئة لعب متطورة وشاملة في ساحة المدرسة أمر بالغ الأهمية لتحقيق حق الأطفال في اللعب والراحة ...

DNA structure •...

DNA structure • Deoxyribonucleic acid (DNA) : Double helix, Polymeric molecule , unit of heredit...

Lesson No. 03: ...

Lesson No. 03: Concepts of Civil and Criminal Procedures Civil Procedure In court, the procedure beg...

الثقافي من جهة ...

الثقافي من جهة ومدى نوعية البنية التحتية المطلوبة لرفع المستوى الثقافي للأمة. التنمية الثقافية الحد...

المقال العلمي ف...

المقال العلمي في العلوم التربوية: نوع نصي ذو مظهر موحد يتكون من أقسام ذات خصائص مميزة التدريب والمه...

بحث حول محل الح...

بحث حول محل الحق المـقـدمـة: تنقسم الحقوق المرتبطة بالذمة المالية من حيث محلها، إلى حقوق ترد على أشي...

المتغيرات: • ال...

المتغيرات: • المتغير المستقل: تسويق التنوع الثقافي • المتغير التابع: تعزيز الإرشاد السياحي • المتغير...

على الرغم من ات...

على الرغم من اتساع نطاق الصلاحيات الرئاسية، يعمل أعضاء الكونغرس بشكل مستقل عن الرئيس، لأن معظمهم يُع...

المعلم هو سيف ا...

المعلم هو سيف الحق ودليله ورمز العلم والمعرفة وهو الأب الحاني وهو الذي يخرج الطلاب من مستنقعات الجهل...

موازنة قصيرة ال...

موازنة قصيرة الأجل: هي عملية تقدير الدخل والنفقات لفترة زمنية قصيرة تكون شهراً أو ربع سنة أو سنة وهي...