Instructors’ Manual to Accompany Contemporary Strategy Analysis (9th edn. Wiley, 2016)
CHAPTER 13. DIVERSIFICATION STRATEGY
Introduction
Diversification lies at the heart of corporate strategy. It also gives rise to highly contentious strategy
decisions—diversification has been the source of more destruction of shareholder value than almost any
other type of strategy. Its study, therefore, is important!
Diversification decisions require an appraisal of a firm’s resources and capabilities of the firm and
assessment of their potential to establish competitive advantage through deploying them across industry
boundaries. This requires understanding and applying the following concepts:
• Economies of scope in resources and capabilities.
It also requires recognition of situations where diversification does not create value – for example, where
diversification is directed towards reducing risk and where economies of scale can be exploited efficiently
through market transactions.
Class Outline
To get quickly to the core issue of diversification—whether owning different businesses creates value
(“synergy”)—it is useful to kick off with a case that involves a diversified company or one that is
considering diversification. I particularly like companies whose past diversification decisions seem to lack
obvious business logic. For this purpose, my Virgin Group case works well – despite the fact that it is
dealing with a network of companies rather than diversification by a single corporation.
The principal issues that arise from these cases are:
• The conditions under which diversification creates value. Diversification directed towards growth
and risk spreading is more likely to destroy rather than create value. This takes us to Porter’s
“essential tests.” Here my key point is that “cost of entry” tends to offset “industry attractiveness” –
hence the key test is the “better off” test. This focuses the discussion on the analysis of competitive
advantage.
• The conventional treatment of relatedness (and sources of synergy) between industries emphasizes
the benefits form sharing resources and transferring capabilities. However, when we look at
Cases
The Virgin Group in 2015 (R. M. Grant, Contemporary Strategy Analysis: Text and Cases, 9th edn., Wiley,
2016).
At the beginning of 2007, Branson’s Virgin Group of companies is continuing to diversify into new fields
and at the same time divesting – selling businesses to other owners, or floating its businesses through initial
Google Is Now Alphabet—But What’s the Corporate Strategy? (R. M. Grant, Contemporary Strategy
Analysis: Text and Cases, 9th edn., Wiley, 2016.).
Google’s transformation into a holding company called Alphabet in August 2015 did little to clarify its
corporate strategy. Although its highly successful web search engine still generates most of its revenues,
established technology giants, such as Google, Microsoft, and IBM. The case requires students to consider
whether entry into web services by Amazon—an online retailer of books, music and other products—is a
prudent move by the company. The case requires students to identify and assess overlaps exist between
Amazon’s core retailing business and AWS. Students are also provided with an opportunity to discuss
operational diversification and its limits within the AWS context