2 Why Diversify

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I Academy ot Ma nag em ent Executive, 1993 Vol. 7 No. 3

W hy diversify? Four d ecadesof management thinkingMichael GooldKathleen LuchsThis article explores both the thinking and practice of diversification during thelast four decades, and our current understanding of diversification strategiesthat work and those that do not.There have been relatively few influential ideas about what constitutes asuccessful strategy for a diversified company. In the 1960s, the spectacularperformance of a few successful conglomerates seemed to prove that any degreeof diversification was possible if corporate level managers had the requisitegeneral management skills. In the 1970s, many diversified companies turned toportfolio planning, aiming to achieve an appropriate mix of growth and maturebusinesses. In the 1980s, many corporations restructured and rationalized, basintheir strategies on "sticking to the knitting" and eschewing broaddiversification.Should chief executives in the 1990s aim to focus only on a few closely relatedbusinesses? Or should they aim to exploit synergies, or core skills, across avariety of businesses? Just how important are the managerial approaches of topexecutives in adding value to different businesses? These are the crificaiquestions for corporafe strategy today.

Large, diversified corporations have been under critical scrutiny for ma ny ye a r sIn 1951 the prevail ing view in America was summarized in an art ic le in theHaivaid Business Review:The basic piesumption is that a company turning from one type of activity toanothei is up to no good, especially if in the piocess it has become "bigbusiness."^Such companies were accused of being toopowerful, and, in part icular, ofcross-subsidizing their different businesses to force competitors from the field.They were therefore seen as anti-competi t ive.Today, diversified companies are a lso regarded by many commenta tors asbeing "up to no good," but for just the opposite reason; they are now chargedwith being uncompeti t ive. The problem is not that they are over-mightycompeti tors, but that they add no va lue to the i r businesses . In 1987, MichaelPorter wrote of the failure of many corporate strategies:/ studied fhe diversification recoids of thiity-thiee large, prestigious U.S.companies over *he 1950-1986 period and found that most of them had divestedmany more acquisitions than they had kept. The corporate strategies of mostcompanies have dissipated instead of created shareholder value. . . . By taking


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Academy of Management Executive

over companies and bieaking them up, coipoiate raiders thrive on failedcorporate strategies.^How has thinking about the rationale for diversified companies evolved durinthis period of time? Why has fear of the power of diversified companies beenreplaced with skepticism about their results? What have we learned, both abdiversification strategies that work and those that don't work? There have beerelatively few influential ideas about what constitutes a successful strategy foa diversified company. This article explores the development of these ideas,and examines current thinking about corporate level strategy.Diversification and Corporate Strategy in the 1950s and 1960sAn important and enduring justification for the diversified company is theargument that the managers of these companies possess general managem enskills that contribute to the overall performance of a company. Kenneth Andreargued that there had been a steady growth of executive talent in America,equal to the task of managing diversity. The establishment of business schooin the early twentieth century created the basis for the education of professiomanagers, and the divisionalized structure of large corporations provided theopportunities for younger m anage rs to gain the requisite experience.^General Management SkillsThe idea that professional managers possessed skills that could be put to goouse across different businesses rested on the assumption that differentbusinesses nevertheless required similar managerial skills. This assumptionreceived support from management theory. During the 1950s and 1960s muchscholarly attention focused on identifying basic principles of management,useful to all m anager s an d a pplicable to all kinds of enterprise s. P eter Druckargued that "intuitive" manag ement wa s no longer sufficient. He encouragedmanagers to study the principles of management and to acquire knowledge aanalyze their performance systematically.*The interest in investigating and analyzing underlying management principlecontinued into the 1960s. Harold Koontz wrote of the "deluge of research andwriting from the academic halls." According to Koontz, it was the managemenprocess school, which aimed to identify universal principles of management,that held the greatest promise for advancing the practice of management.^Theorists such as Koontz and Drucker naturally emphasized the issues andproblems which were common across different types of businesses, since theiaim was to help all managers improve their skills and the performance of thebus iness es. Though they did not explicitly claim that professional m anag erscould manage any business, it was not a great leap to conclude that, if allmanagers face similar problems, professional managers might be able to usetheir skills in different businesses. Simple observation, as well as theory,supported this idea. Robert Katz noted that, "We are all familiar with those'professional m anag ers' who are becoming the prototypes of our modernexecutive world. These men shift with great ease, and with no apparent loss effectiveness, from one industry to another. Their human and conceptual skillseem to make up for their unfamiliarity with the new job's technical aspects."^There was widespread respect for management skills, and business peoplewere encouraged to apply their general management skills to improve theeffectiveness of charities, universities, and government.^


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than twentyin general

to justify avirfuous circlecorporate growth

In Europe, too, there was interest in general management skills. The foundingof business schools in the U.K. and in France during the 1960s, and the growinginterest in management training, was in part motivated by the perceived needto provide European managers with the same kind of general managementskills as their U.S. competitors. Indeed, there was concern in Europe that themanagement skills of U.S. companies were so powerful that Americans wouldtake over large chunks of European industry.^flise of CongiomerafesDuring the 1960s, the growth of conglomerates, with their numerous acquisitionsof unrelated businesses across different industries, provided almost laboratoryconditions in which to test out the idea that professional m anag ers could ap plytheir skills to many different businesses. Conglomerates such as Textron, ITT,and Litton not only grew rapidly, but also profitably, and top managers of thesecompanies perceived themselves as breaking new ground. For example, DavidJudleson of Gulf & Western claimed, "Without the high degree of sophisticationskill, and effectiveness that management has developed only in the last twodecades, the conglomerate could not exist. These management techniquesprovide the necessary unity and compatibility among a diversity of operationsand acquisitions."^ Harold Geneen used a system of detailed budgets, tightfinancial control, and face-to-face meetings among his general managers tobuild ITT into a highly diversified conglomerate.' In 1967, Royal Little, whomasterminded Textron's broad diversification, explained that the companysucceeded because, "we are adding that intangible called businessjudgement."^' Textron had common financial controls, budgetary systems, andcapital allocation procedures across its many businesses, but it provided fewcentral services and had only a very small corporate office. The group vicepresidents, who were responsible for a number of divisions, were appointedfrom outside the company. They acted as overseers and consultants to thedivisions.These new American conglomerates were admired abroad. In the U.K., onewriter wrote glowingly of Litton Industries and its spectacular growth acrosshigh-tech industries, claiming that the company was " . . . a technologicalachievement of its own, an operation in the technology of management as muchas the management of technology."'^ Several British companies, such as SlaterWalker, embarked upon a strategy of conglomerate diversification during the1960s and 1970s. The emp has is in Britain, however, w as m ore on identifying anbuying companies whose assets were worth more than their stock market priceand less on the application of sound, underlying general managementprinciples by the top man agemen t group. ^Did the conglomerates add value to their num erous bus inesse s acro ss differentindustries? The practices of at least some conglomerates such as Textron heldup well under academ ic scrutiny. Norman Berg argued that corporate executivein such companies were fulfilling new roles as "m anage rs of m ana ger s." Whilehe admitted that it was too early to draw firm conclusions about the long-termsuccess of conglomerates. Berg suggested that corporate strategies based onimproving the performance of a diverse collection of businesses would haveimportant implications for the practice of management and also for publicpolicy.'*For more than twenty years, faith in general management skills seemed tojustify a kind of virtuous circle of corporate growth and diversification.


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Andrews summarized the basic premise, arguing that , "successfuldiversificationbecause i t a lways means successful surmounting of formidabadministrat ive problemsdevelops know-how which further diversification wcapitalize and extend."'^ The conglomerate movement of the 1960s, involvingextensive diversification across a wide variety of industries, seemed todemonstrate that the special ized skil ls and practices of corporate generalmanagers enabled them to manage ever greater complexity and diversi ty.Conglomerates and Performance P roblemsThere was l i t t le reason to question the belief that general management skil lsprovided a sufficient rationale for diversified companies while such corporatiowere performing well and growing profitably. But by the late 1960s,conglomerates were encountering performance problems. In early 1969, thestock prices of conglo m erates such a s Litton, Gulf & W estern, an d Textron fellas much as fifty percent from their highs a year earlier, compared to a ninepercent decline in the Dow Jones Industria l Average over the period, and oneobserver foresaw a round of conglomerate divesti tures if such companies wereto survive. Even ITT's consistent record of increased quarterly earnings overfifty-eight quarters during the 1960s and 1970s was broken in 1974.'^What became apparent was that sound principles of organization and financicontrol, coup led with a corporate objective of growth, w ere not, alone , sufficieto ensure sat isfactory performance in highly diversified companies. Indeed,General Electric , a leader in the development of sophist icated techniques andprinciples for the management of a diverse portfolio of businesses, found by tearly 1970s that i ts ma nage me nt appro ach had re sulted in an exten ded periodwhat GE called "profi t less growth." For example, the company's sales increasforty perce nt from 1965 to 1970, w hile its profits ac tua lly fe ll ."By the la te 1960s, there wa s an increasin g aw are ne ss that a new app roac h tothe management of diversi ty was needed.Diversification and Corporate Strategy in the 1970sAs a response to the increasing recognit ion that large and diversifiedcompanies present par t icu la r management problems, increasing a t ten t ion wadevoted to the question of the issues on which general managers should focustheir efforts.The Concept of StrategyOne theme that emerged with increasing force during the 1960s and 1970s wasthe need for senior managers to focus their attention on the "strategies" of thecompanies. Strategy was more than long-range planning or objective set t ing; was a way of deciding the basic direction of the company and preparing i t tomeet future challenges. ^C. Roland Christensen, one of the creators of the business policy course atHarvard during the 1960s, argued that the concept of strategy made it possibleto simplify the complex tasks of top managers. '^ A focus on strategy preven tedsenior executives from meddling in operating detai ls and day-to-day issueswhich should be left to more junior managers with direct responsibility forthem. It a l lowed them to concentrate on the most important issues facing theircompaniesand i t simplified management by providing a framework fordec is ions .


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CEOs readily accepted that strategy should be their main and uniqueresponsibility. During the late 1960s and 1970s many companies establishedformal planning systems, and the appropriate structure and uses of suchsystem s received much atten tion from academics.^" In the early 1970s, LouisGerstner remarked on how quickly strategic planning had been adopted bycomp anies, noting that, "Writer after writer has hailed this new discipline asthe fountainhead of all corporate progress."^^The strategic frameworks, models, and tools being developed by academics andconsultants focused mainly on strategic issues at the business unit level, andthey were, therefore, less relevant in helping to define an overall strategy forcompanies with many different businesses. Andrews, however, defined themain task of corporate-level strategy as identifying the businesses in which thefirm would compete, and this became the accepted understanding of corporatestrategy. ^ This general concept of corporate strategy, though, did not providemuch practical guidan ce to some of the problems m anag ers of diversifiedcompanies confronted. In particular, it did not help them decide how resourcesshould be allocated among businesses, especially when investment proposalswere being put forward by a large number of disparate businesses, each withits own strategy. This problem was exacerbated when the aggregate demandfor resources exceeded what was available.Problems with Resource AllocationResource allocation decisions in diversified companies are a key part ofcorporate strategy, but they present particular difficulties. Corporatemanagement must grasp the relative merits of investment proposals comingfrom a range of businesses in different sectors, with different time horizons,competitive positions, and risk profiles, not to mention management teams withdiffering credibilities. This can be complex. In the early 1970s, for example, acompany such as ITT had to allocate resources among businesses that includedtelecommunications, insurance, rental cars, bakeries, and construction. Withmany divisions competing for funds, how could a company be sure it wasinvesting in the bes t projects for future ^Joseph Bower explored in detail how a large, diversified firm allocatedresources. His research highlighted the gulf between financial theory, whichsaw the manager's task as choosing projects with the highest returns, andcorporate reality, where all proposed projects showed at least the returnrequired by the corporate hurdle rate for investment. In practice, divisionalmanagers only proposed projects with acceptable forecast returns, andcorporate-level m anag ers had little basis on which to choose amon g projects.Bower argued that investment decisions should not be made on aproject-by-project basis, but had to be integrally related to a business's strategiproduct and market decisions.^'* During the 1970s, the new techniques ofportfolio planning that were introduced by the Boston Consulting Group andothers gained wide acceptance because they helped corporate executives toresolve practical problems of capital allocation in the context of an overallcorporate ^^Portiolio PlanningPortfolio planning provided corporate managers with a common framework tocompare many different businesses. The industry attractiveness/businessposition matrix developed at GE, the Boston Consulting Group's growth/share


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In many companies,portfolio planningtechniques becamemore than analyticaltools to help chiefexecutives directcorporate resourcestowards the mostprofitableopportunities: theybecame the basis ofcorporate strategyitself.

matrix, and variat ions developed at other consultancies were used to classifybusinesses in terms of their strategic posit ion and opportunit ies. Theseclassifications helped managers both to set appropriate objectives and resourallocation strategies for different businesses, and to determine the overall casrequ irem ents an d ca sh g ene ration of the corporate portfolio. ^The helicopter view provided by portfolio planning techniques was widelyperceived as useful . For example, one CEO explained:Portfolio planning became relevant to me as soon as I became CEO . I wasfinding it very difficult to man age and under stand so many different productsand markets. I just grabbed at portfolio planning, because it provided me withway to organize m y thinking about our businesses , and the resource aiiocafionissues facing the total company. 1 became and still am very enthusiastic. I gueyou couid say that I went for it hook, line, and sinker.'"During the 1970s, more and more corporations adopted portfolio planning, withthe largest diversified companies being among the earl iest adherents. Onesurvey showed that by 1979, forty-five percent of the Fortune 500 companiesw ere u sing som e form of portfolio pla nn ing . ^In many companies, portfolio planning techniques became more than analytictools to help chief executives direct corporate resources towards the mostprofi table opportunit ies: they became the basis of corporate strategy itself. Thkey concept here was the idea of a balanced portfolio: made up of businesseswhose profi tabil i ty, growth, and cash flow characterist ics would complementeach other, and add up to a sat isfactory overall corporate performance.Imbalance could be caused, for example, e i ther by excessive cash generationwith too few growth opportunities or by insufficient cash generation to fund thgrow th requ irem ents else w her e in the portfolio. ^ Often, th e first step tow ard sbalancing the corporate portfolio was to identify businesses that were a drainon corporate resources. Monsanto, for example, used portfolio planning torestructure i ts portfolio, divesting low-growth commodity chemicals businesseand acquiring businesses in higher growth industries such as biotechnology.^^Portfolio planning reinforced the virtuous circle of corporate growth anddiversification that had been originally founded on general management skil lI t helped corporate-level managers correct past diversification mistakes, leadito divestiture of weak businesses, and it encouraged them to invest in a mix ofbusinesses, with different strategic (and cash) characterist ics to balance theircorporate portfolios and ensure future growth.Problems with Portfolio ManagementEven as an increasing number of corporations turned to portfolio planning,problems emerged in managing balanced portfolios.^ ' Companies discoveredthat while certain businesses appeared to meet a l l the economic requirementsof the corporate portfolio, they did not fit easily into the corporate family. Itturned out to be extremely difficult, for example, for corporate managers withlong experience of managing mature businesses in a part icular industry sectorto manage effectively their acquired growth businesses in new, dynamic, andunfamiliar sectors.Research on how companies actually used portfolio planning confirmed thedifficulties of managing businesses with different strategic characteristics,miss ions , o r mandates . Phi l ippe Haspeslagh invest iga ted whether companies


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adjusted their systems of financial planning, capital investment appraisal ,incentive compensation, or strategic planning to fi t the requirements of theirdifferent businesses. The focus of his study was on the role played by generalmanagement, rather than on specific business-level strategies. He found thatcompanies made few changes in their formal corporate-level systems, butcorporate-level managers in successful companies did make informal at temptsto adapt these systems to their businesses.^^ In another study on theeffectiveness of portfolio planning techniques, the authors discovered that cashcows performed better in an organizational context of autonomy whilefast-growing businesses benefitted from more control. They concluded that theadministrative context was an important variable in explaining businessperformance, and that many companies were taking the wrong approach tosome of their businesses.^^The recognit ion that different types of busin ess es h ad to be m an ag ed differentlyundermined the a rgument tha t genera l management sk i l l s , but t ressed by thecommon frameworks of strategy and portfolio planning, provided the rationalefor diversified companies. Many companies discovered that common systemsand approaches, when applied to different kinds of businesses, could minimizevalue from those businesses. Portfolio planning helped corporate executives sorout the contribution of each of their businesses to the corporate portfolio, but itdid not answer the other critical question confronting a diversified company:what contribution should the corporation make to each of i ts businesses?Diversification and Corporate Strategy in the 1980sDuring the 1980s, there was widespread skepticism about the ability ofcompanies to manage and add value to diverse, conglomerate portfolios.Haiders such as Carl Icahn and T. Boone Pickens demonstrated that they couldacquire even the largest companies, break them up, and realize huge profi ts.The takeover activity of the 1980s prompted a re-thinking of both the role ofcorporate management in large companies, and of the kinds of strategies whichwere appropriate for diversified companies.Cosf Cuffing af HeadquartersWhat seemed most obvious about the corporate level in many companies wasnot its contribution, but its cost. Thus, attention shifted to cutting headquarterscosts. Some companies turned central services into profi t centers, charged withsell ing their services to the business units, while other companies disbandedsome central functions altogether. The pruning of corporate staffs often meantdevolving more authority to l ine managers in decentralized units.^^Cost cutting and the downsizing of corporate staffs, however, were not alonesufficient to demonstrate that corporate management could add value to theirbusinesses, and the overall performance of large, diversified corporations alsocame under increasing scrutiny. Michael Porter published a study showing thehigh rate of divesti ture of acquisi t ions among American corporations, arguingthat the diversification strategies of many companies had failed to createvalue.^^ Also, the wave of takeovers caused executives to pay increasingattention to their company's stock price as analysts and raiders identified"value gaps," or the difference between the current stock market price of acompan y a nd i ts breaku p valu e. ^Value-Based PlanningFaced with the threat from raiders and the criticism of academics such asPorter, chief executives devoted themselves increasingly to the task of creating


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shareholder va lue . Managers were encouraged to eva lua te corpora teperformance in the same terms as the stock market (and raiders), usingeconomic rather than accounting meas ures , and to take whatev er actions w ernecessary to improve their company's stock price. Value-based planning, usinthe financial tools of discounted cash flow, ROE spreads, and hurdle rates,provided corporate managers with a fresh perspective on the l ink between stoprices and competit ive strategy.^ 'A com pany's stock price, according to propon ents of value-b ased plan ning , isdetermined by the value of the strategies of i ts businesses. However, i t can bevery difficult for managers to assess the strategies of dissimilar businesses:". . . corporate level planners facing a portfolio of four, ten, dozens, or dozensand dozens of units do not knowprobably cannot knowenough about eachunit ' s competit ive posit ion, industry, r ivals, and customers to make thisdetermination."^^ One of the appeals of value-based planning is that , l ikeportfolio planning, it offers corporate-level executives a means of evaluatingmany different businesses using a common framework. The corporate level carequire business units to make strategic choices on the basis of economicreturns, and doing this systematically across al l units, i t is argued, providescorporate management with the basis for making decisions on capitalallocation.Value-based p lanning techniques ga ined many adherents , espec ia l ly amongAm erican corpo rations. In 1987 an ar ticle in Forfune de scrib ed how"managements have caught the religion. At first reluctant, they pound at thedoor of consultants who can teach them the way to a higher stock priceaprice so high it would th wart e ven th e most dete rm ined raid er. "^^But value-based planning also has l imitations as a guide to corporate strategyIt can help corporate managers to focus on the goal of increasing shareholderwealth and to understand the cri teria that must be met to do so. I t does not,however, provide much insight into the kind of corporate strategies that shoulbe pur su ed to meet th ese criteria. A high er stock price is a rew ard for crea tingvalue. But the key question remains: how can corporations add value to diverbusiness portfolios? Perhaps the most influential view on this vital topic to haemerged during the 1980s is that they should "stick to the knitting."Stick to the KnittingThe concept of corporate success based on core businesses, or stick to theknitting, ga ine d po pularity in 1982 with the publicatio n of Peters ' andWate rman ' s In Search of Excellence. Successful corporations, they observed, dnot diversify widely. They tended to specialize in particular industries andfocused intently on improving their knowledge and skills in the areas they knbest.""Stick-to-the-knit t ing advice was also a reaction against the analyticaltechniques and impersonal approach of much of strategic and portfolioplan ning . Bob Hayes an d Bill Abernathy voiced thes e concerns in their art icle"Managing Our Way to Economic Decline." In their view, too many Americancorporations were being run by "pseudo-professional" managers, skil led infinance and law, but lacking in technological expertise or in-depth experiencein any particular industry. They warned that portfolios diversified acrossdifferent industries and businesses were appropriate for stocks and bonds, bu


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and deep

zed the "thin

not for corporations.^' The need for experience and deep knowledge of abusin ess wa s also emphasized by Henry M intzberg, who criticized the "thin andlifeless" strategies that result from treating businesses as mere positions on aportfolio matrix. He argued that instead of broad diversity, we need "focusedorganizations that understand their missions, 'know' the people they serve, andexcite the ones they employ; we should be encouraging thick management,deep knowledge, healthy competition and authentic social responsibility."*^The widespread conviction that com panies should stick to the knitting increasedskepticism about the ability of corporations to manage and add value to diverseportfolios. It reinforced the practical pressures created by the corporate raidersand contributed to a wave of retrenching. From the mid-1980s onwards, a goalfor many corporations has been to rationalize their portfolios to overcome theperceived disadvantages of broad diversification.Corporafe flesfrucfuringRestructuring (whether voluntary or not) has frequently led to the disposal ofcorporate assets. In 1985, for example. General Mills announced its intention tofocus on its core businesses of consumer foods and restaurants, and thecompany sold off its toy and fashion businesses.*^ More recently. GeneralSignal embarked on a strategy of "back to the basics," retreating from its earliermajor investments in high-tech businesses to focus on its traditional "boring"products such as industrial mixers.**Restructuring has been widely regarded as a salutary correction to the excessesof broad diversification. Michael Jensen has argued that corporate break-ups,divisional sell-offs, and LBOs are critical developments that can prevent thewasteful use of capital by m anag ers of large pu blic corporations, and otherrecent academic studies support the view that restructuring does help improvethe performance of corporations.*^ But restructuring implies a sense of whichbusinesses a company should retain and which it should divest. How should thecore businesses be selected?One answer is that companies should restructure to limit their businesses toone, or a few, closely related industries. In this way, managers stick to whatthey know well, and are best able to exploit corporate expertise. This approachis consistent with stick-to-the-knitting advice, but it is not a complete answer.Successful companies such as GE, Hanson, and Cooper Industries neverthelesshave b usine sses in many different industries. Furthermore, sticking to a sing leindustry does not necessarily limit complexity or ensure that companies expandinto areas they "know." During the 1980s, companies such as Prudential andMerrill Lynch sought to combine different types of financial services businesses.They discovered that businesses such as insurance, stockbroking, and banking,though all in the financial services industry, nonetheless required very differentapproaches, resources, and skills.*^Another reservation about a stick-to-the-knitting strategy based on limitingdiversification to closely related bu sinesses is that, despite ex tensive resea rch,empirical evidence on the performance of companies pursuing more and lessrelated diversification strategies is ambiguous and contradictory. Many studieshave compared the performance of single-product firms, companies thatdiversify into related products, markets, or technologies, and unrelatedcong lomerates, but no firm relationship betw een different diversificationstrategies and performance has been discovered.*^


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Academy of Man agem ent Executive

Those who viewsynergy as theessence ofcorporate-levelstrategy, includingPorter and Kanter,acknowledge thatcompanies find itdifficult to gainsynergy benefits andthat the failure rate ishigh.

Some concept of what constitutes a "core portfolio"or the corporate"knitting"is required, though, if restructuring is to result in long-termimprovement in corporate performance.Diversification and Corporate Strategy in the 1990sThe m ain is sue s for corpor ate stra tegy in the 1990s ha ve therefore em erg ed ashow to identify the businesses that should form a core portfolio for acorpora t ion , and how to f ind ways o f add ing va lue to those businesses .Three main a l te rna t ive answers to these quest ions have rece ived suppor t incurren t management th ink ing :1) diversification should be l imited to those businesses with synergy;2) the corporate focus should be on exploit ing core competences across differeb u s in e sse s ; a n d ,3) successful diversification depends on building a portfolio of businesseswhich fi t with the manageria l "dominant logic" of top executives and theirma n a g e me n t s ty le .Synergy-Synergy occurs when the performance of a portfolio of businesses adds up tomore than the sum of i ts parts. The concept of synergy is based in part oneconomies of scale; two or more businesses can lower their costs if they cancombine manufac tur ing fac i l i t ie s , use a common sa lesforce , o r adver t ise jo in tand in th is way the combined businesses a re worth more than they would be a s tand -a lon e b asis . *In much of the curren t management l i te ra tu re , synergy has become v ir tua l lysynonymous wi th corpora te - leve l s t ra tegy . Michae l Por te r v iews thema n a g e m e n t of in te r re la t io n sh ip s b e twe e n b u s in e sse s a s th e e sse n c e ofcorpora te - leve l s t ra tegy , a rgu ing tha t wi thou t synergy a d ivers i f ied company li t t le more than a mutual fund.*^ Rosabeth Moss Kanter, too, argues that theach ieve m ent of synergy is the only justif ication for a m ulti-b usin ess c om pan yIn a review of the l i terature on mergers, Friedrich Trautwein, a Germanacademic , found tha t managers a lmost a lways jus t i f ied d ivers i f ica t ion movesterms of the synergies available , and that most of the advice in themanagement l i te ra tu re on d ivers i f ica t ion was based on the concep t o f rea l iz insy n e rg ie s . ^ 'In practice , however, many companies have found it very difficult to gainbenefits from a cor porate str a teg y ba se d on syne rgy. ^ Acq uisit ions a i m ed atrea l iz ing synerg ies can be espec ia l ly r isky ; fo r example , two academicc o mm e n ta to rs h a v e n o te d th a t a n t i c ip a te d sy n e rg y b e n e fi t s " . . . sh o w a na lmost unshakeab le reso lve no t to appear when i t becomes t ime fo r the i rre lease ."^^ Quant i ta t ive ev idence appears to suppor t the observa t ion tha tsynerg ies a re ha rd to ach ieve ; a recen t s tudy on takeovers conc luded tha t moga ins a r ise f rom asse t d isposa ls and res t ruc tu r ing ra ther than f rom synergy .^*Those who v iew synergy as the essence o f corpora te - leve l s t ra tegy , inc lud ingPorter and Kanter, acknowledge that companies find i t d ifficult to gain synergbenefits and that the fa ilure ra te is high. Much of the current l i terature ,the re fore , focuses on implementa t ionwhat companies have to do to ga inbenefits from sharing skil ls or activit ies across businesses. Porter, for instancdiscusses the need for the evolution of a new organizational form, which he


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assumption thatfor a gro upcompanies does notthe available

on

calls the "horizontal organization." These organizations facilitateinterrelationships across different businesses by overlaying horizontalstructures, systems, and managerial approaches onto the vertical relationshipswhich currently characterize the ties between business units and corporatemanagement.^^ Kanter describes the em ergence of the "post-entrepreneurialcorporation," which aims to create the relationships and management processesrequired for cross-business cooperation.^^ Christopher Bartlett and SumantraGhosh al argu e a sim ilar case for the complex problems facing mu ltinationalsattempting to make the most of their businesses in different countries. In theirview, multinationals need to develop new organizational capabilities so thatcomponents, products, resources, people and information can flow freely amonginterdependent units. Bartlett and Ghoshal describe such an integrated networkas a "transnational organization."^'Transnational or horizontal or post-entrepreneurial organizations, by definition,capture many synergy benefits because they have the organizationalcapabilities to manage complex interrelationships across businesses. There arehowever, very few examples of companies that represent these new kinds oforganizations, at least in full fledged form. Consequently, much of the adviceon synergy remains theoretical and prescriptive.There is evidence, furthermore, that managing complex interrelationships tocreate synergies across businesses is not the only means of creating value.Michael Goold and Andrew Campbell, in their study of strategic managementstyles, found that companies such as Hanson and Courtaulds, which placedvery little em phasis on synergy a s a source of corporate value ad ded, performedat least as well as companies that placed more emphasis on linkages acrossbusinesses.^^ These findings are reinforced by successful multi-businesscompanies such as KKR, the leveraged buy-out specialists, and BerkshireHathaway, managed by the renowned investor Warren Buffet, which arecollections of independent businesses, and whose strategies are not based onexploiting synergies across their businesses. The assumption that synergy is thonly rationale for a group of companies does not fit the available evidence, andthis suggests that not all corporations need to focus their efforts on constructingand managing portfolios of interrelated businesses.Synergy remains a powerful concept in our understanding of corporate strategy,but it is difficult to accept that it is the "one best way" to create va lue in amulti-business company. For some companies, the advantages of managingstand-alone businesses may outweigh the long-term investment required tocreate linkages among those businesses, and the potential for synergy maysimply not exist in some corporate portfolios. We need to discover more aboutwhen synergy is an appropriate corporate strategy, and we need to learn moreabout how companies successful at managing interrelationships acrossbusinesses go about it.Core CompefencesAnother approach to corporate strategy stresses building on the corecompetences of the corporation. This can be seen as a particular case ofsynergy, with corporate value creation dependent on exploiting unique skillsand capab ilities across a portfolio of bu siness es. G ary Hamel and C.K.Prahalad focus on technological competences. They argue that the corporateportfolio should not be perceived simply as a group of businesses, but also as acollection of such competences. In managing the corporate portfolio, managers


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must ensure that each part draws on and contributes to the core competencesthe corporation is seeking to build and exploit. Even a poorly performingbusiness may be contributing to an important core competence, and if managedivest such businesses they may also be discarding some of their competencesIf corporations are unable to transfer a core competence from one business toanother, then they are wasting their resources. According to Prahalad andHamel, many of the current management approaches of Western corporations,including SBUs, decentralization, and resource allocation practices, underminethe abil i ty of corporations to build core competences, since autonomousbusinesses seldom have the resources or vision to build world class

C Q

/ / corporations areunable to transfer acore comp etence fromone business toanother, then they arewasting theirresources.

competences.Hiroyuki Itami, a Japanese academic, focuses on building the corporation's"invisible assets," such as expertise in a part icular technology, brand names,reputation, or customer information. Such assets, he argues, can be employedthroughout the firm without being used up, and they are the only sustainablesource of competit ive advantage.^ Phil ippe Haspeslagh and David Jemison,authors of a recent study on acquisi t ions, support a capabil i t ies-based view ofcorporate value creation, defining core capabil i t ies as managerial andtechnological skil ls gained mainly through experience. Such capabil i t ies can bapplied across the corporation's businesses and make an important contributioto customer benefits.^ ' It can be difficult to define a corporation's capabilitiesobjectively, but understanding what they are can provide important insightsinto its sourc es of comp etitive ad va nt ag e an d the strate gic option s of the ^The work on core skil ls, capabil i t ies, or resources has generated much interestWalter Kiechel, in Forfune magazine, describes how some executives areperceiving their role, and that of the corporate management, as guardians andpromoters of the company's core skil ls, and sums up the current understandingof these concepts: "To the extent that such skills can be exploited by each of thcompany's businesses, they represent a reason for having all those businessesunder one corporate umbrellaa much better reason, the experts add, than thfabled synergies that multibusiness companies of yore were supposed to realizbut seld om ^But corporations which do base their strategy on core competences have to becareful that the overall competence-based strategy does not become an excusefor poor performance or poor judgment. IBM, for example, acquired Holm to gaacce ss to the sm aller comp any's expertise in PBX system s. Five yea rs later,how ever, following heav y los ses, IBM sold a majority sta ke in Rolm to Siem ensSome comm entators think that IBM was too optimistic about Rolm's com petencand potential and not sufficiently knowledgeable about changes underway inthe PBX ma rket or within Rolm.^* It can be difficult to jud ge w hen an inve stm ein a business is justified in terms of building a core competence, particularly ifit means suspending normal profitability criteria and if the investment is in anunfamil ia r business a rea .Another danger with the competence approach to corporate strategy is thatbusinesses may require similar core competences, but demand different overals t ra tegies and manager ia l approaches. Texas Inst ruments , for example ,attempted to exploit the core competence i t had developed in i tssemi-conductors business in areas such as calculators, watches, and homecomputers. I t fai led in these new areas not because i t lacked the coresemi-conductor competence, but because i ts top management had no experien


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in managing such consumer-oriented businesses.^^ Similarly, Procter andGamble applied i ts skil ls in product innovation and consumer promotion to asoft drinks business. Crush, but eventually divested the business because i t raninto unfamiliar problems managing the local bott lers who largely controldistribution of soft drinks.^^ Core competences may add value in specific areasin a variety of different businesses, but this is no guarantee that, overall, acompany will be able to manage those different businesses successfully.The work on core competences and capabil i t ies broadens our understanding ofa corporation's resources, and points out the important role of corporatemanagement in building such resources and ensuring that they are used to besadvantage. As with synergy, however, it is difficult to accept that this is theonly way to add value to a corporate portfolio. Corporate executives areconcerned not only with building skil ls and competences in their businesses,but also with allocating resources to them, approving their plans and strategiesand monitoring and controll ing their results. These important "shareholder"functions can also be a source of added value, if done well . Some companiessuch as Berkshire Hathaway and Hanson lay far more stress on theseshareholder functions than on competence building; and, in al l companies, theshareholder functions occupy a vital place, even where the management of corecompetences is also a focus of attention.Dominant Logic and Managem ent StyleA third app roach to corporate success focuses on how corporate ma nag em entadds value to a portfolio of businesses, in part icular in i ts shareholder role.O.K. Prahalad and Richard Bettis argue that the more diverse a firm, the morecomplex the problems in managing i t . Diversity, however, cannot be definedsimply in terms of the number of products or markets in which a firm competes;the strategic variety of the firm's businesses is a more significant measure of itdiversi ty. With firms in strategically similar businesses, executives can usecommon methods and approaches, using a s ingle manager ia l dominant logic :"A dom inant gen eral m anag em ent logic is defined a s the way in whichmanagers conceptualize the business and make cri t ical resource allocationdecisionsbe it in technologies, product development, distribution, advertisingor in human resource management ."^ 'When managerial dominant logic does not match the needs of the business,tensions and problems arise. Corporate management is l iable to appoint thewrong managers to the business , to sanc t ion inappropr ia te p lans andinvestments, to control against the wrong targets and to interfere unproductivelin the managing of the business .Goold and Campbell ' s work on strategic management styles shows howdominant logic works in specific companies. In their research on large,diversified companies they identified different types of strategic managementstyles, with the main styles being Financial Control , Strategic Control , andStrategic Planning. The different styles each added value, but in different waysand to businesses with different characterist ics and requirements. FinancialControl companies, for example, have dist inctive administrative and controlsystems, emphasizing the sett ing and meeting of annual budget targets.Although they may invest in a wide variety of industries, the portfolios ofbusinesses of successful Financial Control companies share commoncharacteristics.^^ Hanson is a good example: "The company's strategy is to focu


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on mature, stable businesses: 'We avoid areas of very high technology. We donot want to be in businesses which are highly capital intensive, where decisiomaking has to be centralized or which rely on huge and sometimes expensiveresearch with a prospect of a return sometime or never.' "^^In this view, the dominant logic or management style of the corporatemanagement group is central to the performance of a diversified firm, and agroup of businesses is best managed when the dominant logic of top managermatches the strategic characteristics and requirements of the businesses. Theimportance of the "fit" between top managers and the businesses in thecorporate portfolio has also been emphasized by executives. Orion Hoch ofLitton, for example, has explained the reasons for Litton's extensive divestmenand restructuring: "Our aim was to go back to businesses that we could becomfortable with . . . We want to get back to doing what we were good atdoing . "^ Gary Roubos, CEO of Dover Corporation, arg ues tha t the comp any issuccessful conglomerate becau se if invests only in bus iness es in which it ha sconsiderable management "feel," even though these businesses are highlydiverse: "Automatic lifts and toggle clam ps are differentbut they hav e muchmore in common than, say, investment banking and selling ' 'Dominant logic may help explain why conglomerate diversification cansucceed, and also why diversification based on synergy or core com petencescan fail. If conglomerate diversification, such as that of Hanson, is based onbusinesses with a similar strategic logic, then it is possible for corporatemanagement to fake a common approach and to add value to those businessesOn the other hand, busin esses with opportunities for sha ring activities or skillor ones requiring the sam e core competence, may none theless h ave differentstrategic logics. This makes it difficult for corporate management to realizesynergy or exploit a core competence across the businesses. Oil companies thadiversified into other extractive, energy or natural resource businesses inpursuit of synergies or core competences tended to find that the benefits theysought were overwhelmed by the problems caused by dissimilarities in strateglogic between the new businesses and the core oil businesses.The concepts of dominant logic and management style offer some promisinginsights into both successful and unsuccessful diversification efforts, butthere are una nswered questions.'^ Should diversified corporations aim tobuild portfolios of strategically related businesses, to ensure that topmanagement and corporate systems and approaches do add value? Or shouldcorporations seek to differentiate their approaches develop "multiple do minalogics"to m anag e bu sinesses with different strategic characteristicssuccessfully?Goold and Campbell discovered that companies tend to adopt a particularstrategic management style, even though the style was usually implicit, andthat it was difficult for managers to cope with a variety of approaches or stylesThey argued that CEOs should aim to focus their portfolios on the kinds ofbusinesses which would gain benefits from their strategic management style.'^On the other hand, authorities on multinationals argue that the increasingcomplexities of globally spread businesses and international competitionrequire corporations to develop new capabilities to manage businesses facingdifferent strategic issues. C.K. Prahalad and Yves Doz maintain that thewinners in the struggle for global competitive advantage will be those

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oold and Luchs

companies that can develop differentiated structures, management processesand systems, appropriate to the wide variety of their businesses.'* Bartlett andGhoshal describe how the "administrative heritage" of companies emphasizes particular approach to issues such as coordination across businesses, but theyargue that the idealized transnational company should be able to combinedifferent approaches and develop "a full arsenal of coordinating processes,practices, and tools, and to use those mechanisms in the most effective andefficient manner. " ^The question of whether it is possible to differentiate your managementapproaches to add value to many different kinds of businesses remains open.Bartlett and Ghoshal found evidence that some companies were seeking waysto encompass much more variety, but none had yet become a true transnationaWe need m ore research to establish w hen it is appropriate to differentiate yourmanagement approaches to encompass the needs of diverse kinds ofbus inesses , an d when it is reasonab le to adjust the corporate portfolio to aparticular management style, or to a single managerial dominant logic. Work ialso needed to clarify how to operationalize the concepts of dominant logic andstrategic relate dne ss. W e do not yet know how the limits of a dom inant logicshould be defined, how managers and corporations develop a new strategicmanagement style, or if this is even possible.The Challenge of DiversificationDuring the last four decades, managers and academics have sought both tounderstand the basis of successful diversification, and to address the problemscreated by it. Exhibit 1 summarizes the evolution of thinking and practice durithis time.From the 1950s onwards, the development of management principles and theprofessional education of managers led to the belief that general managementskills provided the justification for diversification. Diversified companies andconglomerates w ere seen to add value through the skills of their professionaltop man agers, w ho applied m odern management techniques and generalizedappro aches to a w ide variety of busin esses across different industries. Duringthe late 1960s, however, the performance of many conglomerates weakened, ana new approach to corporate management of diversity was sought. The concepof strategy and strategic management provided a new focus for seniormanagement's attention during the 1970s, but soon proved unable to resolvemany of the choices and trade-offs involved in resource allocation in themulti-business firm. Portfolio planning techniques helped many companiesimprove capital allocation across businesses with different strategic positions,and led to the idea of balanced portfolio management. But such analyticalapproaches overlooked the problem of manageability. Many companies found idifficult to manage businesses facing different strategic issues, and during the1980s poor corporate performance again became a critical issue. Raiders,executives, and academics realized that many diversified corporations were nocreating shareholder value, and there was a wave of takeovers, corporatebreak-ups, and restructuring. The main themes of corporate strategy during the1980s became restructuring back to core businesses and a resolve to stick to theknitting.As we move into the 1990s, it has, however, become increasingly clear thatthere is no consensus on what sticking to the knitting in practice implies, or on


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Basis oi CorporateValue Added

1950s1960s

GeneralManagementSkills

1970s

1980s

1990s

Strategy Concept

Portfolio PlanningTechniques

Value BasedPlanning Concepts

Synergy ~)Core Com petences IDom inant Logic and (Managem ent Style J

Diversification Approachesand Issues

Rise of Conglomerates

Performance Problemswith ConglomeratesI

Strategic Managementof DiversityIResource A llocationProblems

Balanced PortfolioManagementIManageabil i ty Problems

Restructuring

"Core" Portfolios

Exhibit 1. Evolution of Thinking on Corporate S trategy an d Diversification

how companies should be adding value to their remaining core businesses.Among the currently popular themes, the search for synergy and the building ocore competences each have significant foUowings. But both views need to becomplemented with some account of how the corporation can discharge itsshareholder functions well. Here the concept of und erstandin g the dom inantstrategic logic of a portfolio, and its compatibility with the approaches of topmanagement, seems promising.In our view, it is probable that a full account of corporate strategy and ofdiversification will need to draw on several of the strands of thought we havereviewed. Ultimately, diversity can only be worthwhile if corporate managemeadds value in some way and the test of a corporate strategy must be that thebusinesses in the portfolio are worth more under the management of thecompany in question than they would be under any other ownership.'^ Toachieve this goal with a diverse group of businesses, it may be necessary torestructure portfolios to allow more uniformity in dominant logic andman agem ent style, more effective mean s of realizing sy nergies an d moresharing of core competences.


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oold and Luchs

ndnotes ' Kenneth R. Andrews, "ProductDiversification and the Public Interest,"Harvard Business Review, July 1951, 94.^ M.E. Porter, "From C omp etitive A dva ntag eto Corporate Strategy," Harvard BusinessReview, May-June 1987, 43.' Kenneth R. Andrews, op. cit. 91-107;"Toward Professionalism in BusinessManagement," Harvard Business Review,March-April 1969, 49-60.^ Peter Drucker, The Practice of Management(New York, 1955; re-is sue d Pa n B ooks, 1968), 21.^ Harold Koontz, "The Man agem ent TheoryJungle ," Academy of Managem ent Journal, Vol.4, No. 3, December 1961, 175.^ Robert L. Katz, "Skills of an EffectiveAdministrator," Harvard Business Review,Janu ary-Feb ruary 1955, 37.' Arthur B. Langlie, "Top Manag emen t'sResponsibility for Good Government," andThomas Roy Jones, "Top Management'sResponsibility to the C omm unity," both in H.B.Maynard, ed.. Top Management Handbook(New York, NY: McG raw-Hill, 1980); An drew s,op . cif.; Y.K. Shetty and Newman S. Perry, Jr.,"Are Top Executives Transferable AcrossCompanies?" Business Horizons, June 1976, 23-28.* Richard Whitley, Alan Thomas, and JaneMarceau, Masters of Business? Business Schoolsand Business Graduates in Britain and France(London: Tavistock Publications, 1981); J.-J.Servan-Schreiber, The American Challenge,trans lated by Ronald Steel (London: HamishHamilton, 1968).^ David N. Judelson, "The Conglomerate-Corporate Form of the Future," MichiganBusiness Review, July 1969, 8-12; Reprinted inJohn W. Bonge, and Bruce P. Coleman, Conceptsfor Corporate Strategy (New York, NY: Mac millan,1972), 458 .' Harold Gen een, with Alvin Moscow,Managing (New York, NY: Doubleday, 1984)." Norman Berg, "Textron, Inc.," HBS Cas eStudy, 373-337, 1973, 16.'^ R. Heller, "The Legend of Litton,"Management Today, October 1967; reprinted inIgor Ansoff, (Ed.), Business Strategy (PenguinBooks, 1989), 378.'^ Jim Slater, Return to Go: My Autobiography(London: Weidenfield and Nicolson, 1977), 91.'* Norm an A. Berg, "Wh at's Different abou tConglomerate Management?" Harvard Business

Review, November-December 1969, 112-120.'^ Kenneth R. Andrews, "Product Diversificationand the Public Interest," Harvard BusinessReview, July 1951, 98.'^ Robert S. Attiyeh, "Where Next forConglomerates?" Business Horizons, December1969, 39-44; Reprinted in John W. Bonge and BruceP. Coleman, Concepts for Corporate Strategy(New York, NY: Macmillan , 1972); G ene en, op .ci(., 43." Michael Goold and John Quinn, StrategicControl (Hutchinson and EconomistPub lication s, 1990); Richard G. H ame rmesh ,Making Strategy Work (New York: John Wiley &Sons, 1986), 3; William K. Hall, "SBUs: Hot, NewTopic in the Management of Diversification,"Business Horizons, February 1978, 17.

" Peter Drucker, "Long-Range Planning:Challenge to Management Science,"Management Science, Vol. 5, No. 3, 1959, 238-4Igor Ansoff, Corporate Strategy (New York:McGraw-Hill, 1965); Alfred P. Sloan, My Yearswith General Motors (New York: Doubleday,1963) (re-issued by Penguin Books, 1986); AlfredD. Chandler, Jr., Strategy and Structure(Cambridge: MIT, 1962) (re-issued 1982); MylesL. Mace, "The President and CorporatePlanning," Harvard Business Review,Jan uar y-F ebru ary 1965, 49-62.

'^ C. Roland Christensen, and others.Business PoJicy; Text and Cases (Richard D.Irwin, 1965).^ R.F. Vancil and P. Lorange, "StrategicPlanning in Diversified Companies," HarvardBusiness Review, Janu ary-Feb ruary 1975, 81-90Peter Lorange and Richard F. Vancil, StrategicPlanning Systems (New Jersey: Prentice-Hall,1977); K.A. Ringbakk, "Organized Planning inMajor U.S. Companies," Long flange PlanningVol. 2, No. 2, December 1969, 46-57; Norman A.Berg, "Strategic Planning in ConglomerateCompanies ," Harvard Business Review,May-June 1965, 79-92." Louis V. Gerstner, "Can StrategicManagement Pay Off?" Business Horizons, Vol15, No. 6, December 1972, 5.^ Kenneth R. Andrews, The Concept ofCorporate Strategy, 1971. Revised Edition(Homewood, IL: Rich ard D. Irwin, Inc., 1980), 35^ Berg, op. cit.^* Joseph L. Bower, M anagi ng the ResourceAllocation Process (Harvard Business SchoolPress, 1970), Harvard Business School ClassicsEdition, 1986." Bower, op. cit.; Ham ermesh, op. cit.''^ William K. Hall, "SBUs: Hot, New Topic inthe Management of Diversification," BusinessHorizons, Feb rua ry 1978, 17-25; Ge org e S. Day,"Diagnosing the Product Portfolio," Journal ofMarketing, April 1977, 29-38.^' Hamermesh, op. cit., 30.^ Philippe Haspeslagh, "Portfolio Planning:Uses and Limits," Harvard Business Review,January-February 1982, 58-73.^ Barry Hedley, "Strategy and the 'BusinessPortfolio,' " Long Range Planning, February1977, 9-15; Charles W. Hofer and Dan SchendelStrategy Formulation: Analytical Concepts (NeYork: West Publishing, 1978).^ Hamermesh, op. cit., 71.^' Richard A. Bettis and William K. Hall, "ThBusiness Portfolio ApproachWhere It FallsDown in Practice," Long Range Planning, vol.16, no. 2, April 1983, 95-104.'^ Haspeslagh, op. cif.^ Richard G. Hamermesh and Roderick E.White, "Manage Beyond Portfolio Analysis,"Harvard Business Review, January-February1984, 103-109.^ Rosabeth Moss Kanter, When Giants Learnto Dance (London: Simon & S chu ster, 1989) 94;Thomas More, "Goodbye, Corporate Staff,"Fortune, December 21, 1987.^ Porter, op . cit.^ David Young and Brigid Sutcliffe, "Value

GapsThe Raiders, The Market or the


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Managers?" Research Paper, Ashridge StrategicManagement Centre, January 1990.^ Alfred Rappaport, Creating ShareholderValue: The New Standard for BusinessPerformance (New York, NY: Free Press, 1986);Bernard C. Reimann, Managing for Value(Oxford: Basil Blackwell, 1987).^ William W. Alberts and James M.McTaggart, "Value Based Strategic InvestmentPlanning," Interfaces, January-February 1984,138-151; see also Enrique R. Arzac, "Do YourBusiness Units Create Shareholder Value?"Harvard Business Review, January-February1986, 121-126.

^ John J. Curran, "Are Stocks Too High?"Fortun e, S eptem ber 28, 1987, 24.* Thomas J. Peters and Robert H. Waterman,In Search of Excellence (New York, NY: FreePress, 1982).*' Bob Hayes and Bill Abernathy, "ManagingOur Way to Economic Decline," HarvardBusiness Review, July-August 1980, 67-77.^ Henry Mintzberg, Mintzberg onManagement (New York, NY: Free Press, 1989),373. Michael E. Porter, "General Mills, Inc:Corporate Strategy," HBS Case Study 9-388-123,1988.*^ Seth Lubove, "Dog with Bone," Fortune,April 13, 1992, 106.*^ Michael Jensen, "The Eclipse of the PublicCorporation," Harvard Business Review,Septem ber-Octo ber 1989, 61-74; S. Chatte rjee,"Sources of Value in Takeovers: Synergy orRestructuringImplications for Target andBidder Firms," Strategic Management Journal,vol. 13, no. 4, May 1992, 267-286; S. Bhagat, A.Shleifer, R. Vishny, "Hostile Takeovers in the1980s: The Return to Corporate Specialization,"

Brookings Paper on Economic Activity:Microeconomics 1990.*^ Robert M. Grant, "On 'Dominant Logic,'Relatedness and the Link Between Diversityand Performance," Strategic ManagementJournal, vol. 9, no. 6, November-December 1988,639-642; Robert M. Gran t, "D iversification in theFinancial Services Industry," in AndrewCampbell and Kathleen Luchs, StrategicSynergy, (London: Butterworth Heinemann,1992).*'' There is an extensive literature on thistopic. See Richard P. Rumelt, Strategy,Structure and Economic Performance (Boston,MA: Harvard Bu siness School Press , 1974);Richard P. Rumelt, "Diversification Strategy

and Profitability," Strategic ManagementJournal, vol. 3, 1982, 359-369; Richard A. Bettis,"Performance Differences in Related andUnrelated Diversified Firms," StrategicM an ag em en t/o urn ai, vol. 2, 1981, 379-393; KurtH. Christensen and Cynthia A. Montgomery,"Corporate Economic Performance:Diversification Strategy Versus MarketStructure," Strategic Management Journal, vol.2, 1981, 327-343; Gerr y John son, an d How ardThomas, "The Industry Context of Strategy,Structure and Performance: The U.K. BrewingIndustry," Strategic Management Journal, vol.8, 1987, 343-361; Anju Seth, "Value Creation inAcq uisitions: A Re-Exam ination of PerformanceIssues," Stra tegic Managem ent/ourn ai , vol. 11,1990,99-115.

*^ Igor Ansoff, Corporate Strategy (New YoNY: McGraw-Hill, 1965).*^ Michael E. Porter, Competitive Advanta(New York, NY: Free Press, 1985).^ Kanter, op. cit., 90.^' Friedrich Trautwein, "Merger Motives anMerger Prescriptions," Strategic ManagemenJournal, vol. 11, 1990, 283-295.^ Vasudevan Ramanujam and P.Varadarajan, "Research on CorporateDiversification: A Synth esis," StrategicManagement Journal, vol. 10, 1989, 523-551;Andrew Campbell and Kathleen Luchs,Strategic Synergy (London: ButterworthHeinemann, 1992).^ Richard Reed and George A. Luffman,"Diversification: the Growing Confusion,"Strategic Management Journal, vol. 7, 1986, 3** S. Chatterjee, "Sources of Value inTakeovers: Synergy or Restructuring," StrateManagement/ournai, vol. 13, no. 4, May 1992267-286.'^ Porter, op. cit.^ Kanter, op. cit." Christopher A. Bartlett and Sum antraGhoshal, Managing Across Borders: TheTransnational Solution (Harvard BusinessSchool Press, 1989).^ Michael Goold and Andrew Campbell,Strategies and Styles (Oxford: Basil BlackweLtd., 1987).'^ C.K. Prahalad, and Gary Hamel, "The CCompetence of the Corporation," HarvardBusiness Review, May-June 1990, 79-91; GaryHamel and C.K. Prahalad, "Strategic Intent,Harvard Business Review, May-June 1989, 63-^ Hiroyuki Itami, Mobilizing Invisible Asse(Harvard University Press, 1987).^' Philippe Haspeslagh and David B. Jemis

Managing Acqu isitions (New York, NY: FreePre ss, 1991), 23.^ Robert M. Grant, "The Resou rce-BasedTheory of Competitive Advantage: Implicatiofor Strategy Formulation," CaliforniaM ana gem ent Review, Spring 1991, 114-135;Andrew Campbell, "Building Core Skills," inAndrew Campbell and Kathleen Luchs,Strategic Synergy (London: B utterworthHein ema nn; 1992); Geo rge Stalk, Ph ilip EvanLaurence E. Shulman, "Competing onCapabil i t ies ," Harvard Business Review,March/April 1992, 57-69.^ Walter Kiechel, "Corporate Strategy for 1990s," Fortune, February 29, 1988, 20." Robert D. Hof an d John J. Keller, " Behin d

the Scenes at the Fall of Rolm," Business WeJuly 10, 1989, 82-84.= C.K. Prahalad and R.A. Bettis, "TheDom inant Logic: A New Linkag e B etweenDiversity and Performance," StrategicManagement Journal, vol. 7, 1986, 495.^ Patricia Winters, "Crush Fails to Fit onP&G Shelf," Advertising Age, July 10, 1989.^' Prahalad and Bettis, op. cit., 490.^ Goold and Campbell, op. cit. Andrew Campbell, Marion Devine, andDavid Young, A Sense of Mission (London:Hutchinson, 1990), 242.'"Barron's, May 20, 1991.^' F.J. Aguilar, "Groen: A Dover IndustriesCompany," HBS Case 9-388-055, 1988.'^ Michael Goold and Andrew Campbell,


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"Brief Ca se: From Corporate Strategy to Gho shal, Ma nagin g Across Boideis: TheParenting Advantage," Long Range Planning, Tiansnational Solution (Harvard Businessvol. 24, no . 1, Feb rua ry 1991, 115-117. School Pre ss, 1989), 166.''^ Goold and Cam pbell, op. cit. '^ Michael Goold and Andrew Cam pbell,'* C.K. Prah alad and Yves L. Doz, The "Corporate Strategy and Parentin g Skills,"Muifinafiona/ Mission (London: Free Press, Res earch Report, Ash ridge Strateg ic1987), 261. M anag em ent Cen tre, 1991.'^ Christopher A. Bartlett and Sumantra

ou t th e A ut ho rs Michael Goold is a founding director and fellow of the Ashridge Strategic Man agem ent Centre,London, England. His research interests cover the management of multi-business companies. Priorto establishing the Centre, he was a senior fellow in the Centre for Business Strategy at the LondonBusiness School where he undertook the research into the role of the corporate headquarters inmanaging diversified companies that led to the publication, with Andrew Campbell, of Strategiesan d Styles (Blackwells, 1987). He has extensive consulting exp erience with senior ma nag em ent. Hewas a vice president of The Boston Consulting Group and continues to consult with a variety ofclients, in addition to his research and teaching responsibilities. He holds a B.A. with first classhonors in PPE from Merton College, Oxford, and an M.B.A. from the Stanford Business School,California.Kathleen Sommers Luchs is an associate at Ashridge Strategic Management Centre, London,England. She has a Ph.D. from Yale University and has been a lecturer in history at Yale andHarv ard U niversities. S he received a n M.B.A. from London Busin ess School in 1987 an d is co-au thor,with Andrew Campbell, of Strategic Synergy (1992), a book on synergy issues.

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