When you think about diversification of your business, I often suggest a 'Related Diversification' approach to creating this type of strategy. There can be diversification that reduces value, neutralizes value and creates value. I am interested in the creation of value in a related diversification strategy. There is also the 'Cost Leader' strategy but those who know me know that does not interest me. There are risks associated with a cost leader strategy, and that the corporate focus is on cost reduction, cost reduction.... goodness, it is hard to create value, value that the customers are willing to pay for when you are in constant "s q u e e z i n g" mode. There is also a 'Differentiation' strategy which is really a nonstandarized, unique product/service offering. I like an organization that can differentiate because to me they are innovators and they are constantly listening to the consumer and responding! Sorry- - I digressed.... let’s get back to related diversification.
So, first thing: Economies of Scope, not "scale", you ask? Nop, Scope. What activities and or resources can be shared? That is the question to answer. I have a client who is looking to diversify the business, in doing so we need to ensure we answer the first question or there is little to point going further because there is likely to be only value-neutral or worse, value reduced as the result. Related diversification can mean multiple product markets and or industries (Hitt, Ireland and Hoskin). Doing this will lead to a better use of assets and people; hence "value creation". Assets could include an inventory management system or a delivery system or office space/storage facility, or heavy equipment etc. I am suggesting you look at economies of scope as you diversify as this will lead to value creation.
Secondly the transference of one's core competency can thwart competition - - I like that. Let’s look at this in two ways. First, there is a time and cost advantage which is critical in aiding your time-to-market, leaving your competitors trailing. The patents and intellectual property, brand recognition and the up and downstream activities can be linked. Secondly, the intangible resources you may have will make it very difficult for your competitors to copy; this represents an immediate competitive advantage. A side note, that outsourcing too much can reduce this. In the last 20 years, the push was to "outsource", great but your IP just went along with it when you deemed it "non-core". Think about how much outsourcing is needed, I don't think GM makes cars anymore..... they are brand managers more so.
There are organizations today that are not creating value by using a Related Diversification Strategy (Hsu & Wang, 2008. A model for interorganizational knowledge sharing. Journal of Global Information Management).
