Fundamentals of Management, 8th ed


unrelated diversification



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management english

unrelated

diversification

A strategy in which

an organization

operates multiple

businesses that are

not logically

associated with one

another


78

Part 2: Planning

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diversification was a very popular strategy several years ago. During that time, several

conglomerates such as ITT and Transamerica grew by acquiring literally hundreds of

other organizations and then running these numerous businesses as independent entities.

Even if there are important potential synergies among their different businesses, organi-

zations implementing a strategy of unrelated diversification do not attempt to exploit

them.


In theory, unrelated diversification has two advantages. First, a business that uses this

strategy should be able to achieve stable performance over time. During any given

period, some businesses owned by the organization are in a cycle of decline, whereas

others may be in a cycle of growth. Second, unrelated diversification is also thought to

have resource allocation advantages. Every year, when a corporation allocates capital,

people, and other resources among its various businesses, it must evaluate information

about the future of those businesses so that it can place its resources where they have

the highest potential for return. Given that it owns the businesses in question and thus

has full access to information about the future of those businesses, a firm implementing

unrelated diversification should be able to allocate capital to maximize corporate

performance.

Despite these presumed advantages, research suggests that unrelated diversification

usually does not lead to high performance. First, corporate-level managers in such a

company usually do not know enough about the unrelated businesses to provide helpful

strategic guidance or to allocate capital appropriately. To make strategic decisions, man-

agers must have complete and subtle understanding of a business and its environment.

Because corporate managers often have difficulty fully evaluating the economic impor-

tance of investments for all the businesses under their wing, they tend to concentrate

only on a business’s current performance. This narrow attention at the expense of

broader planning eventually hobbles the entire organization.

Second, because organizations that implement unrelated diversification fail to exploit

important synergies, they are at a competitive disadvantage compared to organizations

that use related diversification. Universal Studios has been at a competitive disadvantage

relative to Disney because its theme parks, movie studios, and licensing divisions are less

integrated and therefore achieve less synergy.

For these reasons, almost all organizations have abandoned unrelated diversification

as a corporate-level strategy. Transamerica, for instance, sold off numerous unrelated

businesses and now concentrates on a core set of related businesses and markets.

Large corporations that have not concentrated on a core set of businesses have eventu-

ally been acquired by other companies and then broken up. Research suggests that

these organizations are actually worth more when broken up into smaller pieces than

when joined.

28


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