Why diversify

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I Academy ot Management Executive, 1993 Vol. 7 No. 3

Why diversify? Four decades of management thinking Michael Goold Kathleen Luchs

Executive Overview This article explores both the thinking and practice of diversification during the last four decades, and our current understanding of diversification strategies that work and those that do not.

There have been relatively few influential ideas about what constitutes a successful strategy for a diversified company. In the 1960s, the spectacular performance of a few successful conglomerates seemed to prove that any degree of diversification was possible if corporate level managers had the requisite general management skills. In the 1970s, many diversified companies turned to portfolio planning, aiming to achieve an appropriate mix of growth and mature businesses. In the 1980s, many corporations restructured and rationalized, basing their strategies on "sticking to the knitting" and eschewing broad diversification.

Should chief executives in the 1990s aim to focus only on a few closely related businesses? Or should they aim to exploit synergies, or core skills, across a variety of businesses? Just how important are the managerial approaches of top executives in adding value to different businesses? These are the crificai questions for corporafe strategy today.

Large, diversified corporations have been under critical scrutiny for many years. In 1951 the prevailing view in America was summarized in an article in the Haivaid Business Review:

The basic piesumption is that a company turning from one type of activity to anothei is up to no good, especially if in the piocess it has become "big business."^

Such companies were accused of being too powerful, and, in particular, of cross-subsidizing their different businesses to force competitors from the field. They were therefore seen as anti-competitive.

Today, diversified companies are also regarded by many commentators as being "up to no good," but for...