Death of Diversification:

Introduction :
The 1990s saw the worlds industrial companies turn away in droves from
the strategy of product diversification.
recognition of the poor performance of highly diversified firms
a trend toward decision frameworks based on market allocation of
resources among disparate activities
rise of institutional shareholders that demand performance and
clarity.

These developments will continue to raise the intensity of global industrial

competition, requiring managers to cope by thinking more about
multinational than multiproduct expansion.

Amovebegunduringthe1980sawayfromconglomerationwasfollowedduringthe
1990sbyabroadreductionindiversification,evenofrelateddiversification,bythe
majorityoftheworldslargemanufacturingcompanies.

Table1

Numberofdiversifiedfirms(20%ormoreoutsidemainindustry)droppedb/w
19802000toalmosthalfwithmostin1990s
Numberoffocusedfirms(95%businessmainindustry)rose2/3oftheworlds
top200
Conglomerates:disappearedonly5%.Werentabigpartevenin1980sonly
(19%)

2measures

Trueconglomerates:,meaningfirmswithmultiple,unrelatedproductlines.
However,becausejudgmentsoftherelatednessofproductlinescanbe
subjective,
Thenumberofhighlydiversifiedfirmsinthetotal,orcompaniesdefinedas
havingmorethan40percentoftheirsalesoutsidetheirmainindustry.This
measureshowsthattheturnawayfromextremediversification,conglomerate
orotherwise,startedinthe1980s.

Themovetofocus
1980sfocusedfirmswereveryfew
In1990withfocusedfirmscomprisingthemajorityinonly3outof17
industriessurveyed.
Asof2000halformoreofthefirmsinnofewerthan16of17sectorswere
focusedontheirmainindustry,
Thisrisetodominanceoffocusedfirmswasparticularlypronouncedinthe
 pharmaceuticals,chemicals,paperandforestproducts,andtextilesandapparel
industries.

Inpharmaceuticalsandpaper,themovewasprimarilytheresultofrestructuringand
divestituresbycorporationslongprominentintheindustry.Inchemicals,firmsspun
offpharmaceuticalsandenergyactivities.Inthetextilesandapparelindustry,
however,conglomeratesanddiversifiedfirms,somebasedindevelopingcountries,
wereeclipsedandsupplantedbyfocused,largelyAmericancategorykillers.

Americanfirmsledtheway
America198090sdiversification(morethan20%outsidemainindustry)droppedto
halfespinaerospace,computersandofficeequipment,electricalandelectronics,food
andbeverages,pharmaceuticals,andtires.

Thisdropwasprimarilyduetotheacquisitionand/orcarveupofdiversifiedfirms
suchasITT,RCA,Sperry,CDC,Greyhound,Goodrich,andUniroyalandtheir
consequentdisappearancefrom,andreplacementon,thelistofeachindustrystop12.

Similarly,thenumberoffocusedUSfirmsincreasedfromlessthanhalftomorethan
twothirdsofallUSfirmsamongtheworldsleadersbetween1980and1990

whilethenumbersandproportionsofEuropeanandJapanesefocusedfirmsrose
muchmoremodestlyduringthatdecade.

Europe:

AlthoughtherewassomedeclineinthenumbersandproportionsofEuropean
diversifiersduringthe1980sagain,largelyduetoacquisitionsandcarveups
neitherasignificantfocusorientedrestructuringnoramajorreplacementbyfocused
companiesoccurredduringthatdecade.

Japan

AsfortheJapanese,the1980sweretheperiodinwhichtheywererisingto
prominenceindeed,doublinginnumberonthelistoftheworldstopfirmsbut
diversifiedandfocusedfirmsroseinaboutequalnumber.

AhandfulofAustralian,Canadian,andemergingmarketdiversifiersand
conglomeratesalsocameontothe1990list,buttheirtimeofprominencefadedas
theytooendedupacquired,carvedup,orwithslowergrowththanotherfirmsintheir
industriesandthuswerereplacedamongthetop12duringthesubsequentdecade.

The1990s:FocusdominatesandcomestoEurope
Duringthe90s,focusedcompaniescameevenmoretodominatethepopulationof
USfirmsamongtheindustryleaders.Eightyfourpercentofthe80UScompanies
amongthe201worldleadersin2000werefocused,upfrom68percentamong1990s
worldleaders..

FocusedEuropeanfirmsreachedtwothirdstheproportionthattheUShadreached
adecadeearlier.Europeanchemicalfirmsspunoffpharmaceuticalactivities.
Pharmaceuticalandfoodcompaniesdivestedchemicalbusinesses.Firmssuchas
GermanysDegussa,whichhadsprawledacrosschemicals,nonferrousmetals,and
healthcare,reinventedthemselvesasfocusedspecialtychemicalcompanies.British
Aerospacestoppedseekingnonexistentsynergiesbetweenaerospaceandautos.And
conglomeratedominoeslikeBritainsHansonandBTRfellbydismembermentand
acquisition.

AJapaneseexception?
Japanesefirmsareamorecomplicatedcase.Intheaggregate,Table3showslittle
movetowarddediversificationandonlyamodestonetowardfocus.Acloser
inspectionofTable1,however,showsaremarkablebifurcationofJapanesecorporate
structurebetweensunrisesectorsofglobalsuccessandsunsetindustriesunder
competitivethreat.

InspiteofthemoribundJapaneseeconomyofthe1990s,Japansglobalcompany
leadersinelectronicsandautomobiles(Canon,Fujitsu,Ricoh,Toyota,andHonda)
allgainedworldmarketshareattheexpenseoftheirWesterncompetitorsduringthe
decade.Allwereeitherfocusedorhaddiversifiedintobusinesseswithaveryclose
relationshiptothecompanycore,evenifsomeofthosebusinesseswerein
differentindustries.

AnexampleisCanoncombiningcopiersandprinterswithoptics.Focusinghelped
themachievethisfeat,combinedwithinnovationandmultinationalizationthesame
ingredientsthatpropelledsuccessfulglobalAmericanandEuropeanfirms.The
Japanesehadtheaddedchallengeofmanagingaroundablackholeofdismalhome
marketdemand,buttheysucceededbyorientingtheirproductdevelopmentand
marketingincreasinglytoChina,otherAsiangrowthmarkets,andhighgrowthNorth
America.

Japanesefirmsbasedinsuchsunsetindustriesasiron&steelandtextiles&apparel,
however,wereandareexceptionstothegeneralworldwidetrendthenumbersand
proportionsofdiversifiedfirmsinthesesectorsincreasedovertime.Domestic
diversificationratherthanmultinationalexpansionwasthemainpathchosenbyKobe
andNKKfromtheirbaseinsteel,andbyTorayandTeijinfromtextiles&apparel.
Thesefirmsremainedlargelydomesticandhadmuchlowerproportionsofforeign
salesthandidthegreatJapanesemultinationalsuccesses.IncontrasttoAmericas
NikeandLeviStrauss,whosesuccessintextiles&apparelcorrespondedtoaphi
losophyofFindandrejuvenateaniche,anddominateitworldwide,Japanesefirms
inmaturesectorsseemedtobesayingthattherewasnohopeintheircore,sothey
shoulddosomethingelse.

Focusandperformance
With rare exceptions, highly diversi- fied firms have performed more
poorly than focused ones, whether measured by accounting returns, total
returns to shareholders, ability to reduce risk, gains or losses in world
market share, or company survival rates.

Despite the publicity, the success of General Electric, United Tech-

nologies, and a handful of other conglomerates and high diversifiers
around the world has not been the norm. More typical has been the fate of
such US companies as ITT, RCA, CDC, Uniroyal, and W.R. Grace and the
Euro- pean firms Hanson, BTR, and the like. There is more than a little
justification for the coinage of the term di-worsifi- cation by Peter Lynch
(Lynch and Rothchild 1989) of Fidelitys Magellan Fund fame.

Duringthe1980s,evidenceaccumulatedindicatingthatdiversificationstrategies,
especiallythoseoftheconglomeratevariety,werelesssuccessfulthanstrategies
basedonfocus.Montgomery(1994)summedupmorethanadecadeofresearchon
corporatediversificationintheUS,notingthatcompaniespursuingstrategiesof
relatedconstraineddiversificationthatis,diversificationbuiltaroundacore
organizationalcapabilitywere,onaverage,moreprofitablethansingleline
businessesorhighlydiversifiedfirms,butthatprofitabilitydecreasedas...
diversificationincreased.Shenotedfurther,Narrowlydiversifiedfirms,presumably
builtaroundmorespecializedassets,earnhigherlevelsofprofitthandowidely
diversifiedfirms.

Otherstudiesfoundthatnotonlydidfocusedfirmsgeneratehigheraccountingprofit
andothermeasuresofeconomicreturnthanhighdiversifiers

Pathsofdiversification

Aerospacecompaniesthatacquiredautopartsandotherbusinessesintheareaof
transportationequipment,orautoandtirecompaniesthatacquiredaerospace
businesses,werenotcombiningactivitieswhosereturnswereindependentof,or
lightlycorrelatedwith,eachother.Returnsoftenvariedwiththesameeconomicor
interestratecycles.

Similarly,oilcompaniesthatbrieflystyledthemselvesenergycompaniesand
movedintouraniumandcoalmininginthe1980sfoundnotonlythattheylackedthe
managerialresourcesoraptitudestoproduceadequateeconomicreturnsbutthatthe
returnsthemselvescorrelatedcloselywithmovementsinoilprices.
Consequencesharepricesdroppedandcompaniesbecameacquisitioncandidates

Thus,duringthe1980s,diversifiedfirmsweremorethanthreetimesaslikelyas
focusedcompaniestodisappearfromthetop12intheirindustryasaresultofwhole
orpartialacquisition,andtwiceaslikelyduringthe90s.

Nineteen(27percent)ofthe71diversifiedfirmsof1980hadexitedthetop12by
1990becausetheyhadbeenacquiredorcarvedupaftersomedegreeoranotherof
corporatefailure.Incontrast,onlysix(8percent)ofthe72focusedfirmslosttheir
identitybybeingacquiredduringthe1980s.Inthe1990s,12(19percent)ofthe64
diversifiedfirmsonthe1990leaderslistlosttheiridentitiesbyacquisitionorcarve
up,versusonlyeight(or8percent)ofthe99focusedfirmsonthatlist.

Focusedstrategiescontinuedtobepresentin90s.InthesectorswhereUScompany
gainsweremostevidentelectricalandelectronics,pharmaceuticals,andtextilesand
appareltheadvancewasclearlyledbyfocusedorrefocusingfirms.

Inelectricalandelectronics,themajorgainersofworldmarketsharewereMotorola
andLucent,bothfocusedfirms,whilemajorlosersincludedsuchEuropeanfirmsas
theconglomerateElectroluxandthewidelyspreadABB,AlcatelCGE,andPhilips.

Inpharmaceuticals,MerckandPfizergainedsharedramatically,whilediversified
AmericanHomeProductslostshare(eventuallydediversifyingandbecomingapure
pharmaceuticalfirm,renamedWyeth);SwedensconglomerateProcordiawas
dismemberedanditspharmaceuticalactivitiesmutatedintowhatisnowUS
headquarteredPharmacia.Intextilesandapparel,focusedNike,VF,andJones
AppareladvancedagainstEuropean,Japanese,andotherdiversifiersand
conglomerates.

ThefivenewUScompaniesthatarrivedamongtheworldstop12incomputers
duringthe1990sCompaq,Dell,Sun,GatewayandEMCandthatcollectively
raisedUSfirmsworldmarketshareinthatsectordespitethedemiseofDECandthe
fallofUnisysandNCRwereallhighlyfocused.Sowereallthefirmsinthenewest
sectorofAmericanglobaldominance,computersoftware.TheJapanesefirmsthat,
eveninthefaceofrecessionintheirhomemarket,gainedworldmarketshareduring
the1990sweresimilarlyfocusedonactivitiesintheirmainindustry.

Diversificationandthegrowthofthefirm
EXperience with and research on the underperformance of highly
diversified firms has resulted in a dramatic shift in management thinking
about diversification.

Product diversification was long considered the normal, almost inevitable

consequence of the growth and development of large, successful
companies. Growth led to the accumulation of resources and capabilities,
which often led to new opportunities in new product markets.

The unchallenged assumption was that those newly accumulated

resources and capabilities would be more profitable being allocated by the
visible hand of management than being sold or traded in the
marketplace.

Indeed, diversification was celebrated well into the 1980s not only as a
description of one of the eventual stages of corporate growth but also as a
normative proposition.

Managerial outlook :
Theconglomerationwaveofthe60sandearly70swasrationalizedfirstasawayto
spreadthepresumablyscarceresourceofprofessionalmanagementacross
industries,thenasameanstoreducecorporateriskbybuildingaportfolioofcounter
cyclicalbusinesses.

Later,inthe70sand80s,growthsharestrategyanalysisproposeddiversification
asanecessarymeanstocorporaterenewal.Extramarketresourceallocationwithin
thefirmwastheimplicitcorporatenorminthelongpopularBostonConsultingGroup
conceptualframeworkforresourceallocationamongdiverseproductactivities.
Businesseswereclassifiedasfollows:highmarketshare,lowgrowthcashcows;
lowgrowth,lowsharedogs;highgrowth,highsharestars;andhighgrowth,low
sharequestionmarks.

Whilethisportfolioplanningapproachtodiversificationwasseductiveintheory,it
begantocollapseinpractice.AsGooldandLuchsexplain,

Companiesdiscoveredthatwhilecertainbusinessesappearedtomeetalltheeconomic
requirementsofthecorporateportfolio,theydidnotfiteasilyintothecorporate
family.Itturnedouttobeextremelydifficult,forexample,forcorporatemanagers
withlongexperienceofmanagingmaturebusinessesinaparticularindustrysectorto
manageeffectivelytheiracquiredgrowthbusinessesinnew,dynamic,andunfamiliar
sectors.

Theriseofincentivebasedcompensation,andespeciallytheuseofstockoptions,
madeincompanyportfoliomanagementyetmoreunattractive.

Combiningahighdegreeofbothproductdiversificationandgeographicaldispersion
provedaparticularlydauntingcircletosquare.Liketheirfocusedbrethren,diversified
firmswereoftenpulledintomultinationalitybymarketopportunities,orpushedby
competitivethreatstotheirforeignmarkets.

MultinationalanddiversifiedTheresultwasoftenexcessivefinancialleveragein
ordertomeetdemandsforbothproductandgeographicalexpansion,underinvestment
ineitherinternationalexpansionorR&D,orboth.Thesefactorsplayedaroleinthe
demiseofdomesticallyorientedUSconglomerateslikeUniroyalandRCA.

Somefirmssucceededinbecomingdiversifiedbybothproductandgeographyonlyto
enterintoabravenewworldoforganizationalcomplexity.Nolongercouldthey
choosebetweenrelativelystraightforwardarchetypessuchasfunctional,product,or
regionalallocationsofmanagerialresponsibility.Instead,theyweredriveninto
tryingtocoordinateactivitiesinmanyproductsandcountriesviadual(ormore)
responsibilityandauthoritylinedmatrix,grid,andmixedstructures.Whenthese
structuralsolutionstogreatorganizationalcomplexityfailedduetotheircostly
multiplereportinglinesandtheconflictsendemicinmanagersattemptstoserve
multipleproduct,nation,andfunctionalmasters,salvationwassoughtinother
mechanismsofcoordination,suchaspersonneltransfers,crossnationalandcross
industryteambuilding,incompanyeducationprograms,andotherattemptstochange
interpersonalrelationshipsandprocessesandindividualattitudesandmentalities,
asBartlettandGhoshal(1989)putit.

Fewoftheseattemptsatinternalextramarketsolutionstocomplexityhave
survivedthe1990s.AmericasGeneralElectricissofrequentlycitedasasuccessful
conglomeratepreciselybecauseithasbecometheexceptiontothegeneralrule.The
counterexamplesarelegion.Corningsolveditsproblemofgreatproduct/geography
complexitybysellingandspinningoffitsconsumerproductsandhealthcareservice
activitiesin1998.Volvosmatrixorganizationwasabandonedandnonvehicle
activitiesweredivestedsometimeago.SwedishSwissABB,onceknownasAsea
BrownBoveriandonceanexponentoftheproductnationmatrix,hasspunoffmuch
ofitsheavyequipmentmanufacturingactivityandsimplifieditsstructure.Philipsof
theNetherlandsspeaksnomoreofmatricesbutofworldwideproductdivisionsand
(external)restructuringviaacontinuingrefocusonfewerscaleefficientactivities.

Confrontedwithmountingevidenceofthefailureofcomplexdiversificationand
diversificationcummultinationalstrategies,strategicmanagementthinkerscameto
exhortfirmstosticktotheirknittingandfocusontheircorecompetencies.Still,
theseinjunctionshadenoughelasticitytoallowmanagerstorationalizethespreadof
synergybasedcompetenciesintodiverseindustrieswellintothe1990s.

For their part, finance theorists had already long pointed out that in
countries with developed stock markets, share- holders could build
portfolios diversified by industry, company, and asset class on their own,
without paying for company managements to do it for them. Agency theo-
rists then chimed in, accusing management agents of frequently
undertaking diversification activities for rea- sons of self-interested
empire-building at the expense of shareholder principals. Free cash flow
cash flow net of capital expenditures to sustain core businessesshould
not be squandered on corporate empire-building through value-destroying
investments in overcapacity, in di-worsification, or on overpriced
acquisitions. Rather, it should be returned to shareholders.
Change in the external
environment
still, much as management and finance researchers might like to think
that their influence was the primary cause of the great refocusing of the
1990s, otherforceswereprobablymuchstronger.

first,thebreakdownofthenegotiableenvironmentoftradeprotectionand
theriseoffreetradeareasliketheEUandNAFTA,culminatinginmonetary
unioninEurope;
second,thedevelopmentofglobalandinstitutionallydominatedcapital
markets,ortheriseoffiduciarycapitalism.
Thefirstenabledgreaterspecializationoffirmscompetingacrossbordersinworld
markets;thesecondforcedit.
Theopeningofworldmarkets
Thedivisionoflabourislimitedbytheextentofthemarket.AdamSmith(The
WealthofNations,1776)

Withfitsandstarts,thestoryoftheinternationalbusinessenvironmentfrom1970to
2000hasbeenafairlycontinuousoneoftheopeningofcrossbordertrade,the
creationofregionalandworldmarkets,andthearrivalofmoreandmoreglobally
orientedcompetitors.

ThewallsofthenegotiableenvironmentatermfirstusedbyVanderHaas(1967)
todescribethebusinessclimateofgovernmentsanctionedtradebarriers,currency
controls,andtoleratedcartelsandcollusionsoftheinterwarandearlypostWW2
yearsgraduallygaveway,thencrumbled,atleastrelativetowhattheyhadbeen.

Successivetraderoundsledtoopenmarketsandaboominworldtrade,andthe
GATTbecametheWTO.Bytheearly1990smuchofthedevelopingworld,uptoand
includingcommunistChina,wasconvincedthatopeninguptoworldmarketsand
tradingwiththemwasamuchsurerroutetoprosperitythanweretheoldstatist,
closed,orprotectedeconomicmodels.TheNorthAmericanFreeTradeAreabecame
arealityinthemid1990s.TheeverexpandingEuropeanCommunitymovedfrom
reducingtariffandnontariffbarrierstotradeduringEurope92andontomonetary
unionandtheeuro.Notonlyisproductspecializationevermorepossibleacross
borders,butapremiumisplacedonproductiveefficiencybythefactthattheeuro
facilitatescustomerscomparisonshoppingacrossborders.Withthewideningof
markets,thenumberofcompetitorshasmultipliedandcompetitionandpressuresfor
efficiencyhaveintensified.

Financialmarketpressures:Theriseoffiduciarycapitalism
Althoughcorporatemanagementscameunderpressuretoglobalizeandfocusasa
resultoftheopeningofworldgoodsmarkets,thestrawthatbrokethecamelsback
wasthechangeinfinancialandcapitalmarkets.

Thefirsttidingsbecamemanifestinthe1980sintheUnitedStates.Junkbond
financingofcorporateraidersledtoaboominthedevelopmentofthemarketfor
corporatecontrolandintheriseofthehostiletakeover.

EntrenchedmanagementsinmanylargeUSfirmsopposedthisthreattotheirempires,
theirdiscretionarypowers,andtheirpocketbooks.Theyusedmanymeanstoturnthe
lawintoaninstrumentofcorporateincumbentprotection.Yet,probablytotheirgreat
surprise,theMaginotLinestheythrewupdidnothaltcapitalmarketpressuresfor
efficiencyandshareholdervalue.Inspiteoftheroadblocksofpoisonpills,shark
repellants,andraiderdeterrentlaws,thetakeovers,carveups,andexternal
restructuringscontinued.Toavoidsuchafate,somewhatfocusedUSfirmsbecame
evenmorefocused.Whentheydidnotdothejobquicklyenough,theywereacquired
orcarvedup.

Muchofthecauseofthiscontinuingpressureonmanagementtobecomeevermore
efficiencyorientedwas,ironically,duetotheinterestsofpeoplerarelyidentifiedwith
thoseofmanagementasaclass:teachers,publicemployees,andoftunionized
workers.Theywerethebeneficiariesofnewinstitutionalshareowningfiduciaries
withnameslikeCALPERS(CaliforniaPublicEmployeesRetirementSystem)and
CALSTERS(CaliforniaStateTeachersRetirementSystem).Theirinstitutionswere
nowthemostvigorousadvocatesofshareholderinterestswithcorporatemanagers,
firstinAmericaandthenabroad.

Thelastquarterofthetwentiethcenturyhasseentheriseoffiduciarycapitalisminthe
UnitedStatesandareturntoconcentratedshareownershipafterahalfcentury
intervalofseparationofmanagementandshareholders.However,asStout(2001)
says,

Thistime,shareownershipisconsolidatednotinthehandsofwealthyindividualslike
HenryFordorAndrewCarnegie,butinthehandsofwealthyinstitutions.In
particular,publicandprivatepensionfundsnowholdasizeableportionofthe
outstandingequityofthelargestUSfirms.Thesefiduciaryinstitutionshaveboththe
incentiveandtheabilitytothrowtheirweightaroundinthecorporateboardroomthat
widelydispersedindividualinvestorsdontandcant.

Havingcometopossessfiduciaryownershipofalmost60percentofthe1,000largest
UScorporationsby1997,theseinstitutionalinvestorshaveincreasinglyusedvoice
aswellasexitindealingwithunderperformingcompanies.Theyhavetransformed
theprincipalagentrelationshipbetweenshareholdersandcorporatemanagements.

ThepressureoffiduciarycapitalismwasbornintheUSA,thenbegantospread
aroundtheworld.Financialmarkets,especiallyequitymarkets,werenotglobally
integratedasrecentlyasthelate1980s.Evenmanydevelopedcountriesstillhad
currencyandothercontrolsthatseverelyinhibitedcrossborderstockinvestmentsand
otherfinancialflows.

Notuntilthelate1980sdidUSpensionandmutualfundsbegintodomorethandipa
toeinthewatersofinternationalequityinvesting.Butbythemid1990s,US
institutionalinvestorshadalargeenoughshareownershipinnonUSfirmstobeginto
exercisethesamesortofpressureandinfluenceonmanagementstheyhadcometo
placeonAmericanfirms.Andtheywerenotalone.Fundedpensionplans,theriseof
mutualfundsinEuropeandelsewhere,andpensionreformaimedatshoringupsoon
tobeinsolventgovernmentretirementprogramshavebroughtsomethingofan
institutionalshareholdercultureeventothenonAngloSaxonworld.Aboomin
individualcompanylistingsonUSstockexchangesandinAmericanDepositary
Receipt(ADR)programsfrom924in1992tomorethan1,400bytheendof1999
hasfurtherexposednonUScompaniestoAmericanshareholderandinstitutional
investorpressures.

Corporatemanagementscontemplatingcorporateproductdiversificationstrategiesare
nowoperatingbetweentwoscissorbladesofglobalization.

Ononesideareincreasinglycompetitiveinternationalgoodsmarkets;ontheotherare
evermoreinterlinked,evermoreinstitutionalizedfinancialmarkets.Theimplication
isclear:Discretionary,outsidethemarketmanagerialoptionsforallocating
resourcesacrossindustrieshavebeengreatlynarrowed.

Crossbordercompetitionincreasinglylimitstheamountoftimeandmoney
managementscanburntryingoutcomplexstrategiesandstructuresandbuttressing
themwiththeinformationsystems,culturebuildingexercises,managementtraining,
andorganizationaldevelopmentmeetingsneededtosupportthem.Institutional
investors,whennotharassingmanagerswithwarningsnottousefreecashflowfordi
worsificationsandvaluedestroyingacquisitions,imposeconglomeratediscountson
thesharepricesoftheirfirms.Theseinturnfacilitatethetakeoveranddisappearance
offirmsthatresistthedictumthatinvestorscanbuildtheirowndiversifiedportfolios
anddonotneedhighcost,empirebuildingmanagementstodiversifyforthem.

Corporatefocushasclearlybeenafactorinthesuccessofmanyoftheworlds
leadingcorporationsduringthelasttwodecadesofthetwentiethcentury.One
implicationformanagersfromthatexperienceisclear:Withincreasinglyrare
exceptions,diversificationoutsideoneshomeindustry,especiallyconglomerate
diversification,doesntpay.WhileGEsfinancialandstockmarketsuccessmaystill

seducesomemanagersintoembarkingonormaintainingconglomerate
diversification,managerswhoareordinarymortalsandnotJackWelchmaywishto
thinktwice.AndafewhereticsevenwonderwhetherthehousethatJackbuiltwill
longsurviveintheformheleftit.
Determiningwhatisfocusedandwhatisnotremainsanartratherthananexact
science.Thereisstillmuchformanagementtodoindecidingwhatthedefinitionof
focusis.Manyhighlysuccessfulfirmsarehardlyfocusedexclusivelyonasingle
product.Itispossible,perhapseminentlydesirable,todiversifyquiteabitwithout
venturingintodangerousterritory.Economiesofscope(Themorethemerrier)and
ofscale(Biggerisbetter)doexist.CompanieslikeIBM,AmericanExpress,and
Disneythathaveadiversifiedpalletofrelatedactivitiesmay,sayCourt,Leiter,and
Loch(1999),beabletoleveragetheirbrandsacrossitinordertoobtaineconomies
incrosssellinganddistributingmultipleproductsandservices.

Itisalsonotobviousthatbecausesomefocusisgood,morefocusisnecessarily
better.Alaserbeamrefocusingcarriesitsownrisks.Corning,forexample,solveda
multiproduct,multinationstrategicandstructuraldilemmabydivestingconsumer
productsandhealthcarein199798andfocusingonthethensupergrowthareaof
opticalfiber.Itwasagreatridewhileitlasted,andshareholderswereindeedableto
diversifyawayfirmspecificrisk.Butthesubsequentfallfromgracesuggeststhat
managersandworkersinthefirmevenshareholderscanhardlybeindifferentto
totalrisktothefirm,includingtheriskofgreatfinancialandhumandistress.

Willfocusbeasmuchofasuccessfactorinthefuture?Asubstantialmajorityof
firmshavealreadydrawntheconclusionthatfocusisbetter.Mosthavealreadytaken
thediversificationleadoutoftheirsaddlebags.Thosewhohavenotaresquarelyinthe
lineofcompetitiveandfinancialmarketfire.Buttheeraofeasy,oreasier,racesfor
focusedfirmsischanging.Todaythemajorityoffirmsareleanandmean,oratleast
leaner.Theresultisaratchetingupoftheintensityofglobalcorporatecompetition.

Thisisundoubtedlyexcellentnewsforcustomers,forproductivity,andfor
economicgrowth.Evidencehasbeenaroundforawhilethatmorefocusedfirmsare
moreproductivethandiversifiers.AndthefactthattheUnitedStatesgrew
considerablyfasterthanJapanandEuropeduringthe1990ssurelyowessomethingto
itshavingreducedcorporatesprawlearlierthanitscompetitors.

Buthowdomanagersraiseprofitandshareholdervalueinaworldwheremostfirms
havediscardedtheirdiworsifications?Theanswer,orpartofit,seemsimplicitinthe
phraseglobalcorporatecompetition.Theoperativewordisglobal.Managerscan
nolongergivelipservicetointernationalizingtheiroperationswhileinfactallocating
resourcestoproliferatingdiversificationsinfamiliardomesticmarkets.Ifyoudonot
globalize,yournewlyproductfocusedcompetitorwilldoitforyou.

Andyetmanagersstilldiworsify...
Onecanonlywonderatthefactthatmanymanagerscontinuetosuccumbtothesiren
callofindustriesotherthantheirown.Asrecentlyas1998,notesBeceren(2003),
whenthetotalvolumeofmergersandacquisitionsreachedover$1.5trillioninthe
UnitedStates,morethanhalfoftheseacquisitionswerebetweenfirmsindifferent
fourdigitindustries.Tyco,whoseexplicitgoalwastobecomeanotherGE,wasone
ofthemostactivediversifiers.Enron,beforeitbecameacautionarytaleofmanagerial
ethics,wasastoryofoverambitiousdiversificationfromthehumblebusinessof
runninggaspipelinestotradinginenergy,coal,steel,paperandpulp,andbroadband
cablecapacitynottomentionpowerplantconstructionincountrieswhereithad
nopreviousexperience,sayHealyandPalepu(2003).

CompaniesinEuropenotonlyremainmorediversifiedthantheirUScounterparts,
Europehasalsocontinuedtospawnnewwouldbeconglomerateempires,suchas
nowtroubled(anddediworsifying)VivendiandInvensys.AndJapanesesteeland
textilecompaniescontinuetoattempttostaveoffcorporateoblivionbydiversifying
intothemeparksandinformationtechnology,usuallycreatingnegativeshareholder
valueintheprocess.

Whydotheydoit?Governancestructurescontinuetoinsulatesomemanagersfrom
shareholderinterests.Legalinhibitionstomarketsforcorporatecontrolstillallow
firmstoevadecapitalmarketdiscipline.Decliningperformanceincorebusinesses
makesthegrassofotherindustrieslookevergreener,especiallyifcashisbeing
generatedthatcompaniescannotbeartoreturntoshareholders.

Diworsificationdiseaseisbecominglessandlesscommon.Butithasnotbeen
eradicated.Shareholdersandstakeholdersshouldtakenote,andactaccordingly.

Questions:

YourtaskiscapturedbyyourpresentationtopicDeathofDiversification?The
FocusingoftheWorldsIndustrialFirms,i.e.:

1.Describeandprovidekeydata/statisticsonthefocusingtrendthathasbeen
goingonsincethe1980s

2.Explainwhatcausedtheconglomeratewaveofthe1960sand70saswellasthe
subsequentdediversificationor(re)focusing

3.Inyouropinion,whatkeylessonsandmanagerialimplicationscanbedrawn
fromitall(i.e.points1&2)?

4.Youmayconsiderpreparingoneortwoquestionsfortheaudienceattheendof
yourpresentationtokickstarttheQ&A