Lakhasly

ble.NEC integrates its computer, semiconductor, telecommunications, and consumer electronics businesses by merging computers and communication.Despite such pitfalls, opportunities to gain advantage from sharing activities have proliferated because of momentous developments in technology, deregulation, and competition.Sharing can lower costs if it achieves economies of scale, boosts the efficiency of utilization, or helps a company move more rapidly down the learning curve.And if compromise greatly erodes the unit's effectiveness, then sharing may reduce rather than enhance competitive advantage.The infusion of electronics and information systems into many industries creates new opportunities to link businesses.Prime examples of companies that have diversified via using shared activities include P&G, Du Pont, and IBM.The costs of General Electric's advertising, sales, and after-sales service activities in major appliances are low because they are spread over a wide range of appliance products.Conversely, diversification based on the opportunities to share only corporate overhead is rarely, if ever, appropriate.Sharing activities inevitably involves costs that the benefits must outweigh.The shared salesperson, for example, can be provided with a remote computer terminal to boost productivity and provide more customer information.Companies using the shared-activities concept can also make acquisitions as beachhead landings into a new industry and then integrate the units through sharing with other units.Marriott illustrates both successes and failures in sharing activities over time.A shared service network, for example, may make more advanced, remote servicing technology economically feasible.Often, sharing will allow an activity to be wholly reconfigured in ways that can dramatically raise competitive advantage.P&G's distribution system is such an instance in the diaper and paper towel business, where products are bulky and costly to ship.Companies also merge activities without consideration of whether they are sensitive to economies of scale.Companies compound such errors by not identifying costs of sharing in advance, when steps can be taken to minimize them.The fields into which each has diversified are a cluster of tightly related units.A shared order-processing system, for instance, may allow new features and services that a buyer will value.Sharing must involve activities that are significant to competitive advantage, not just any activity.Costs of compromise can frequently be mitigated by redesigning the activity for sharing.Internal development is often possible because the corporation can bring to bear clear resources in launching a newunit.Sharing can also enhance the potential for differentiation.Sharing can also reduce the cost of differentiation.A salesperson handling the products of two business units, for example, must operate in a way that is usually not what either unit would choose were it independent.Many companies have only superficially identified their potential for sharing.When they are not, the coordination costs kill the benefits.Jamming business units together without such thinking exacerbates the costs of sharing.Start-ups are less difficult to integrate than acquisitions.One cost is the greater coordination required to manage a shared activity.The corporate strategy of sharing can involve both acquisition and internal development.It is all too easy to create a shallow corporate theme.More important is the need to compromise the design or performance of an activity so that it can be shared.

ble. Sharing can lower costs if it achieves economies
of scale, boosts the efficiency of utilization, or helps
a company move more rapidly down the learning
curve. The costs of General Electric’s advertising,
sales, and after-sales service activities in major appliances
are low because they are spread over a wide
range of appliance products. Sharing can also enhance
the potential for differentiation. A shared order-processing
system, for instance, may allow new features
and services that a buyer will value. Sharing can also
reduce the cost of differentiation. A shared service
network, for example, may make more advanced,
remote servicing technology economically feasible.
Often, sharing will allow an activity to be wholly
reconfigured in ways that can dramatically raise competitive
advantage.
Sharing must involve activities that are significant
to competitive advantage, not just any activity.
P&G’s distribution system is such an instance in the
diaper and paper towel business, where products are
bulky and costly to ship. Conversely, diversification
based on the opportunities to share only corporate
overhead is rarely, if ever, appropriate.
Sharing activities inevitably involves costs that the
benefits must outweigh. One cost is the greater coordination
required to manage a shared activity. More
important is the need to compromise the design or
performance of an activity so that it can be shared. A
salesperson handling the products of two business
units, for example, must operate in a way that is
usually not what either unit would choose were it
independent. And if compromise greatly erodes the
unit’s effectiveness, then sharing may reduce rather
than enhance competitive advantage.
Many companies have only superficially identified
their potential for sharing. Companies also merge
activities without consideration of whether they are
sensitive to economies of scale. When they are not,
the coordination costs kill the benefits. Companies
compound such errors by not identifying costs of
sharing in advance, when steps can be taken to minimize
them. Costs of compromise can frequently be
mitigated by redesigning the activity for sharing. The
shared salesperson, for example, can be provided with
a remote computer terminal to boost productivity
and provide more customer information. Jamming business units together without such thinking exacerbates
the costs of sharing.
Despite such pitfalls, opportunities to gain advantage
from sharing activities have proliferated because
of momentous developments in technology, deregulation,
and competition. The infusion of electronics
and information systems into many industries creates
new opportunities to link businesses. The corporate
strategy of sharing can involve both acquisition
and internal development. Internal development is
often possible because the corporation can bring to
bear clear resources in launching a newunit. Start-ups
are less difficult to integrate than acquisitions. Companies
using the shared-activities concept can also
make acquisitions as beachhead landings into a new
industry and then integrate the units through sharing
with other units. Prime examples of companies that
have diversified via using shared activities include
P&G, Du Pont, and IBM. The fields into which each
has diversified are a cluster of tightly related units.
Marriott illustrates both successes and failures in
sharing activities over time. (See the insert “Adding
Value with Hospitality.”)
Following the shared-activities model requires an
organizationalcontextinwhichbusinessunitcollaboration
is encouraged and reinforced. Highly autonomous
business units are inimical to such collaboration.
The company must put into place a variety of
what I call horizontal mechanisms—a strong sense of
corporate identity, a clear corporate mission statement
that emphasizes the importance of integrating
business unit strategies, an incentive system that rewards
more than just business unit results, cross-business-
unittaskforces, and othermethods of integrating.
A corporate strategy based on shared activities
clearlymeetsthebetter-off testbecausebusinessunits
gain ongoing tangible advantages from others within
the corporation. It also meets the cost-of-entry test by
reducing the expense of surmounting the barriers to
internal entry. Other bids for acquisitions that do not
shareopportunities willhavelowerreservationprices.
Even widespread opportunities for sharing activities
do not allow a company to suspend the attractiveness
test, however. Many diversifiers have made the criticalmistake
of equating the close fit of a target industry
with attractive diversification.Target industriesmust
pass the strict requirement test of having an attractive
structure as well as a close fit in opportunities if diversification
is to ultimately succeed.
CHOOSING A CORPORATE STRATEGY
Each concept of corporate strategy allows the diversified
company to create shareholder value in a different
way. Companies can succeed with any of the
concepts if they clearly define the corporation’s role
and objectives, have the skills necessary for meeting
the concept’s prerequisites, organize themselves to
manage diversity in a way that fits the strategy, and
find themselves in an appropriate capital market environment.
The caveat is that portfolio management
is only sensible in limited circumstances.
A company’s choice of corporate strategy is partly
a legacy of its past. If its business units are in unattractive
industries, the company must start from
scratch. If the company has few truly proprietary
skills or activities it can share in related diversification,
then its initial diversification must rely on other
concepts. Yet corporate strategy should not be a onceand-
for-all choice but a vision that can evolve. A
company should choose its long-term preferred concept
and then proceed pragmatically toward it from
its initial starting point.
Both the strategic logic and the experience of the
companies studied over the last decade suggest that
a company will create shareholder value through
diversification to a greater and greater extent as its
strategy moves from portfolio management toward
sharing activities. Because they do not rely on superior
insight or other questionable assumptions about
the company’s capabilities, sharing activities and
transferring skills offer the best avenues for value
creation.
Each concept of corporate strategy is not mutually
exclusive of those that come before, a potent advantage
of the third and fourth concepts. A company can
employ a restructuring strategy at the same time it
transfers skills or shares activities. A strategy based
on shared activities becomes more powerful if business
units can also exchange skills. As the Marriott
case illustrates, a company can often pursue the two
strategies together and even incorporate some of the
principles of restructuring with them. When it
chooses industries in which to transfer skills or share
activities, the company can also investigate the possibility
of transforming the industry structure. When
a company bases its strategy on interrelationships, it
has a broader basis on which to create shareholder
value than if it rests its entire strategy on transforming
companies in unfamiliar industries.
My study supports the soundness of basing a
corporate strategy on the transfer of skills or shared
activities. The data on the sample companies’ diversification
programs illustrate some important characteristics
of successful diversifiers. They have made
a disproportionately lowpercentage ofunrelated acquisitions,
unrelated being defined as having no clear
opportunity to transfer skills or share important activities
(see Exhibit 3). Even successful diversifiers
such as 3M, IBM, and TRW have terrible records
when they have strayed into unrelated acquisitions.
which is related to many others. Procter & Gamble
and IBM, for example, operate in 18 and 19 interrelated
fields respectively and so enjoy numerous opportunities
to transfer skills and share activities.
Companies with the best acquisition records tend
to make heavier-than-average use of start-ups and
joint ventures. Most companies shy away from
modes of entry besides acquisition. My results cast
dount on the conventional wisdom regarding startups.
Exhibit 3 demonstrates that while joint ventures
are about as risky as acquisitions, start-ups are not.
Moreover, successful companies often have very good
records with start-up units, as 3M, P&G, Johnson &
Johnson, IBM, and United Technologies illustrate.
When a company has the internal strength to start up
a unit, it can be safer and less costly to launch a
company than to rely solely on an acquisition and
then have to deal with the problem of integration.
Japanese diversification histories support the soundness
of start-up as an entry alternative.
My data also illustrate that none of the concepts of
corporate strategy works when industry structure is
poor or implementation is bad, no matter how related
the industries are. Xerox acquired companies in related
industries, but the businesses had poor structures
and its skills were insufficient to provide
enough competitive advantage to offset implementation
problems.
An Action Program
To translate the principles of corporate strategy into
successful diversification, a company must first take
an objective look at its existing businesses and the
value added by the corporation. Only through such
an assessment can an understanding of good corporate
strategy grow. That understanding should guide
future diversification as well as the development of
skills and activities with which to select further new
businesses. The following action program provides a
concrete approach to conducting such a review. A
company can choose a corporate strategy by:

1. Identifying the interrelationships among already
   existing business units. A company
   should begin to develop a corporate strategy by
   identifying all the opportunities it has to share
   activities or transfer skills in its existing portfolio
   of business units. The company will not
   only find ways to enhance the competitive advantage
   of existing units but also come upon
   several possible diversification avenues. The
   lack of meaningful interrelationships in the
   portfolio is an equally important finding, suggesting
   the need to justify the value added by
   the corporation or, alternately, a fundamental
   restructuring.


2. Selecting the core businesses that will be the
   foundation of the corporate strategy. Successful
   diversification starts with an understanding
   of the core businesses that will serve as the basis
   for corporate strategy. Core businesses are those
   that are in an attractive industry, have the potential
   to achieve sustainable competitive advantage,
   have important interrelationships
   with other business units, and provide skills or
   activities that represent a base from which to
   diversify.
   The company must first make certain its core
   businesses are on sound footing by upgrading
   management, internationalizing strategy, or
   improving technology. The study shows that
   geographic extensions of existing units,
   whether by acquisition, joint venture, or startup,
   had a substantially lower divestment rate
   than diversification.
   The company must then patiently dispose of
   the units that are not core businesses. Selling
   them will free resources that could be better
   deployed elsewhere. In some cases disposal implies
   immediate liquidation, while in others the
   company should dress up the units and wait for
   a propitious market or a particularly eager
   buyer.


3. Creating horizontal organizational mechanisms
   to facilitate interrelationships among
   the core businesses and lay the groundwork for
   future related diversification. Top management
   can facilitate interrelationships by emphasizing
   cross-unit collaboration, grouping
   units organizationally and modifying incentives,
   and taking steps to build a strong sense of
   corporate identity.


4. Pursuing diversification opportunities that allow
   shared activities. This concept of corporate
   strategy is the most compelling, provided a
   company’s strategy passes all three tests. A
   company should inventory activities in existing
   business units that represent the strongest
   foundation for sharing, such as strong distribution
   channels or world-class technical facilities.
   These will in turn lead to potential new business
   areas. A company can use acquisitions as
   a beachhead or employ start-ups to exploit internal
   capabilities and minimize integrating
   problems.


5. Pursuing diversification through the transfer
   of skills if opportunities for sharing activities
   are limited or exhausted. Companies can pursue
   this strategy through acquisition, although
   they may be able to use start-ups if their existing units have important skills they can readily
   transfer.
   Such diversification is often riskier because
   of the tough conditions necessary for it to work.
   Given the uncertainties, a company should
   avoid diversifying on the basis of skills transfer
   alone. Rather it should also be viewed as a
   stepping-stone to subsequent diversification using
   shared activities. New industries should be
   chosen that will lead naturally to other businesses.
   The goal is to build a cluster of related
   and mutually reinforcing business units. The
   strategy’s logic implies that the company
   should not set the rate of return standards for
   the initial foray into a new sector too high.


6. Pursuing a strategy of restructuring if this fits
   the skills of management or no good opportunities
   exist for forging corporate interrelationships.
   When a company uncovers undermanaged
   companies and can deploy adequate
   management talent and resources to the acquired
   units, then it can use a restructuring
   strategy. The more developed the capital markets
   and the more active the market for companies,
   the more restructuring will require a patient
   search for that special opportunity rather
   than a headlong race to acquire as many bad
   apples as possible. Restructuring can be a permanent
   strategy, as it is with Loew’s, or a way
   to build a group of businesses that supports a
   shift to another corporate strategy.


7. Paying dividends so that the shareholders can
   be the portfolio managers. Paying dividends is
   better than destroying shareholder value
   through diversification based on shaky underpinnings.
   Tax considerations, which some companies
   cite to avoid dividends, are hardly legitimate
   reasons to diversify if a company cannot
   demonstrate the capacity to do it profitably.
   CREATING A CORPORATE THEME
   Defining a corporate theme is a good way to ensure
   that the corporation will create shareholder value.
   Having the right theme helps unite the efforts of
   business units and reinforces the ways they interrelate
   as well as guides the choice of new businesses to
   enter. NEC Corporation, with its “C&C” theme,
   provides a good example. NEC integrates its computer,
   semiconductor, telecommunications, and consumer
   electronics businesses by merging computers
   and communication.
   It is all too easy to create a shallow corporate
   theme. CBS wanted to be an “entertainment company,”
   for example, and built a group of businesses
   related to leisure time. It entered such industries as
   toys, crafts, musical instruments, sports teams, and
   hi-fi retailing. While this corporate theme sounded
   good, close listening revealed its hollow ring. None
   of these businesses had any significant opportunity
   to share activities or transfer skills among themselves
   or with CBS’s traditional broadcasting and
   record businesses. They were all sold, often at significant
   losses, except for a few of CBS’s publishingrelated
   units. Saddled with the worst acquisition
   record in my study, CBS has eroded the shareholder
   value created through its strong performance in
   broadcasting and records.
   Moving from competitive strategy to corporate
   strategy is the business equivalent of passing through
   the Bermuda Triangle. The failure of corporate strategy
   reflects the fact that most diversified companies
   have failed to think in terms of how they really add
   value. A corporate strategy that truly enhances the
   competitive advantage of each business unit is the
   best defense against the corporate raider. With a
   sharper focus on the tests of diversification and the
   explicit choice of a clear concept of corporate strategy,
   companies’ diversification track records from
   now on can look a lot different.