Extending the strategy dynamics principles to related businesses is essentially simple. If a single business is a system of customers, products, capacity, people and cash, then a multi-business corporation could simply be a number of such independent systems. Indeed, that was a popular model in the 1970s – the diversified conglomerate, in which only investment and financial-objective choices were made at the centre. But this is now a discredited model because investors can make those decisions themselves.
Even then – and certainly now – there were seen to be advantages in ‘related’ diversification … several businesses doing similar things to each other. The mechanisms by which this works are simply that related businesses can share resources and capabilities. At its simplest, this might mean no more than different products in the same industry sharing a sales force or distribution network to access the market. But the principle can go much further, with large numbers of products sharing resources in R&D, production, distribution, sales and marketing, and customer support to reach many different markets.
To figure out the advantage of adding a line-of-business to an existing portfolio of businesses, simply build the model of the resource-system that would be necessary to create and grow that business independently (see http://sdl.re/04B02SAQ), then add the same activity to a pre-existing system model and compare both the potential growth and profitability of the two alternatives. You can choose to implement sharing on whatever resource[s] seem to make sense.
There is no free lunch here – this sharing comes at some cost, whether the additional costs of coordination or the possible diversion of resources away from existing businesses. So it is possible that highly focused single-activity businesses can beat similar business units in larger corporations. (No full-range airlines have managed to beat focused low-cost rivals, for example). Nevertheless, the reasons for the strategic advantages of related-diversified corporations in many settings is clear.
From this resource-sharing logic, several extensions become obvious. First, the power of capability-building means that a new or acquired venture may be developed and run by a corporation much more powerfully than it could alone. My own experience in this concerned acquiring and growing a number of restaurant and hotel operations, where our resources and capabilities in real-estate, sourcing, logistics and administration meant we could grow stronger businesses much faster than the previous owners and beat rivals who lacked the same R&Cs. And every business we added increased our capabilities further (see http://sdl.re/100L8KA). The limits to this, though, were interesting – every business retained its own brand and marketing because sharing those would DISadvantage them [consumers still don’t know who actually owns these companies!].
It is also obvious, on this logic, how joint ventures and networks, such as SAP and its network of partners, can work so well.Share