Diversification Strategy

Diversification refers to seeking unfamiliar products or markets or both in the pursuit of growth. Every company is best at certain products; diversification requires substantially different knowledge, thinking, skills, and processes. Thus, diversification is at best a risky strategy, and a company should choose this path only when current product/market orientation does not seem to provide further opportunities for growth. A few examples will illustrate the point that diversification does not automatically bring success. CNA Financial Corporation faced catastrophe when it expanded the scope of its business from insurance to real estate and mutual funds: it ended up being acquired by Loews Corporation. Schrafft's restaurants did little for Pet Incorporated. Pacific Southwest Airlines acquired rental cars and hotels, only to see its stock decline quickly. Diversification into the wine business (by acquiring Taylor Wines) did not work for the Coca-Cola Company.37

The diversification decision is a major step that must be taken carefully. On the basis of a sample from 200 Fortune 500 firms and the PIMS database (see Chapter 12), Biggadike notes that it takes an average of 10 to 12 years before the return on investment from diversification equals that of mature businesses.38

The term diversification must be distinguished from integration and merger. Integration refers to the accumulation of additional business in a field through participation in more of the stages between raw materials and the ultimate market or through more intensive coverage of a single stage. Merger implies a combination of corporate entities that may or may not result in integration. Diversification is a strategic alternative that implies deriving revenues and profits from different products and markets. The following factors usually lead companies to seek diversification:

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