Why diversify

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

Why diversify? Four decadesof management thinkingMichael GooldKathleen Luchs

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

There have been relatively few influential ideas about what constitutes asuccessful strategy for a diversified company. In the 1960s, the spectacularperformance of a few successful conglomerates seemed to prove that any degreeof diversification was possible if corporate level managers had the requisitegeneral management skills. In the 1970s, many diversified companies turned toportfolio planning, aiming to achieve an appropriate mix of growth and maturebusinesses. In the 1980s, many corporations restructured and rationalized, basingtheir strategies on "sticking to the knitting" and eschewing broaddiversification.

Should chief executives in the 1990s aim to focus only on a few closely relatedbusinesses? Or should they aim to exploit synergies, or core skills, across avariety of businesses? Just how important are the managerial approaches of topexecutives in adding value to different businesses? These are the crificaiquestions 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 theHaivaid Business Review:

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

Such companies were accused of being too powerful, and, in particular, ofcross-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 asbeing "up to no good," but for just the opposite reason; they are now chargedwith being uncompetitive. The problem is not that they are over-mightycompetitors, but that they add no value to their businesses. In 1987, MichaelPorter wrote of the failure of many corporate strategies:

/ studied fhe diversification recoids of thiity-thiee large, prestigious U.S.companies over *he 1950-1986 period and found that most of them had divestedmany more acquisitions than they had kept. The corporate strategies of mostcompanies have dissipated instead of created shareholder value. . . . By taking

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over companies and bieaking them up, coipoiate raiders thrive on failedcorporate strategies.^

How has thinking about the rationale for diversified companies evolved duringthis period of time? Why has fear of the power of diversified companies beenreplaced with skepticism about their results? What have we learned, both aboutdiversification strategies that work and those that don't work? There have beenrelatively few influential ideas about what constitutes a successful strategy fora diversified company. This article explores the development of these ideas,and examines current thinking about corporate level strategy.

Diversification and Corporate Strategy in the 1950s and 1960sAn important and enduring justification for the diversified company is theargument that the managers of these companies possess general managementskills that contribute to the overall performance of a company. Kenneth Andrewsargued that there had been a steady growth of executive talent in America,equal to the task of managing diversity. The establishment of business schoolsin the early twentieth century created the basis for the education of professionalmanagers, and the divisionalized structure of large corporations provided theopportunities for younger managers to gain the requisite experience.^

General Management SkillsThe idea that professional managers possessed skills that could be put to gooduse across different businesses rested on the assumption that differentbusinesses nevertheless required similar managerial skills. This assumptionreceived support from management theory. During the 1950s and 1960s muchscholarly attention focused on identifying basic principles of management,useful to all managers and applicable to all kinds of enterprises. Peter Druckerargued that "intuitive" management was no longer sufficient. He encouragedmanagers to study the principles of management and to acquire knowledge andanalyze their performance systematically.*

The interest in investigating and analyzing underlying management principlescontinued into the 1960s. Harold Koontz wrote of the "deluge of research andwriting from the academic halls." According to Koontz, it was the managementprocess school, which aimed to identify universal principles of management,that held the greatest promise for advancing the practice of management.^

Theorists such as Koontz and Drucker naturally emphasized the issues andproblems which were common across different types of businesses, since theiraim was to help all managers improve their skills and the performance of theirbusinesses. Though they did not explicitly claim that professional managerscould manage any business, it was not a great leap to conclude that, if allmanagers face similar problems, professional managers might be able to usetheir skills in different businesses. Simple observation, as well as theory,supported this idea. Robert Katz noted that, "We are all familiar with those'professional managers' who are becoming the prototypes of our modernexecutive world. These men shift with great ease, and with no apparent loss ineffectiveness, from one industry to another. Their human and conceptual skillsseem to make up for their unfamiliarity with the new job's technical aspects."^There was widespread respect for management skills, and business peoplewere encouraged to apply their general management skills to improve theeffectiveness of charities, universities, and government.^

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For more than twentyyears, faith in generalmanagement skillsseemed to justify akind of virfuous circleof corporate growthand diversification.

In Europe, too, there was interest in general management skills. The foundingof business schools in the U.K. and in France during the 1960s, and the growinginterest in management training, was in part motivated by the perceived needto provide European managers with the same kind of general managementskills as their U.S. competitors. Indeed, there was concern in Europe that themanagement skills of U.S. companies were so powerful that Americans wouldtake over large chunks of European industry.^

flise of CongiomerafesDuring the 1960s, the growth of conglomerates, with their numerous acquisitionsof unrelated businesses across different industries, provided almost laboratoryconditions in which to test out the idea that professional managers could applytheir skills to many different businesses. Conglomerates such as Textron, ITT,and Litton not only grew rapidly, but also profitably, and top managers of thesecompanies perceived themselves as breaking new ground. For example, DavidJudleson of Gulf & Western claimed, "Without the high degree of sophistication,skill, and effectiveness that management has developed only in the last twodecades, the conglomerate could not exist. These management techniquesprovide the necessary unity and compatibility among a diversity of operationsand acquisitions."^ Harold Geneen used a system of detailed budgets, tightfinancial control, and face-to-face meetings among his general managers tobuild ITT into a highly diversified conglomerate.'° In 1967, Royal Little, whomasterminded Textron's broad diversification, explained that the companysucceeded because, "we are adding that intangible called businessjudgement."^' Textron had common financial controls, budgetary systems, andcapital allocation procedures across its many businesses, but it provided fewcentral services and had only a very small corporate office. The group vicepresidents, who were responsible for a number of divisions, were appointedfrom outside the company. They acted as overseers and consultants to thedivisions.

These new American conglomerates were admired abroad. In the U.K., onewriter wrote glowingly of Litton Industries and its spectacular growth acrosshigh-tech industries, claiming that the company was " . . . a technologicalachievement of its own, an operation in the technology of management as muchas the management of technology."'^ Several British companies, such as SlaterWalker, embarked upon a strategy of conglomerate diversification during the1960s and 1970s. The emphasis in Britain, however, was more on identifying andbuying companies whose assets were worth more than their stock market priceand less on the application of sound, underlying general managementprinciples by the top management group. ̂ ^

Did the conglomerates add value to their numerous businesses across differentindustries? The practices of at least some conglomerates such as Textron heldup well under academic scrutiny. Norman Berg argued that corporate executivesin such companies were fulfilling new roles as "managers of managers." Whilehe admitted that it was too early to draw firm conclusions about the long-termsuccess of conglomerates. Berg suggested that corporate strategies based onimproving the performance of a diverse collection of businesses would haveimportant implications for the practice of management and also for publicpolicy.'*

For more than twenty years, faith in general management skills seemed tojustify a kind of virtuous circle of corporate growth and diversification.


Andrews summarized the basic premise, arguing that, "successfuldiversification—because it always means successful surmounting of formidableadministrative problems—develops know-how which further diversification willcapitalize and extend."'^ The conglomerate movement of the 1960s, involvingextensive diversification across a wide variety of industries, seemed todemonstrate that the specialized skills and practices of corporate generalmanagers enabled them to manage ever greater complexity and diversity.

Conglomerates and Performance ProblemsThere was little reason to question the belief that general management skillsprovided a sufficient rationale for diversified companies while such corporationswere performing well and growing profitably. But by the late 1960s,conglomerates were encountering performance problems. In early 1969, thestock prices of conglomerates such as Litton, Gulf & Western, and Textron fellas much as fifty percent from their highs a year earlier, compared to a ninepercent decline in the Dow Jones Industrial Average over the period, and oneobserver foresaw a round of conglomerate divestitures if such companies wereto survive. Even ITT's consistent record of increased quarterly earnings overfifty-eight quarters during the 1960s and 1970s was broken in 1974.'^

What became apparent was that sound principles of organization and financialcontrol, coupled with a corporate objective of growth, were not, alone, sufficientto ensure satisfactory performance in highly diversified companies. Indeed,General Electric, a leader in the development of sophisticated techniques andprinciples for the management of a diverse portfolio of businesses, found by theearly 1970s that its management approach had resulted in an extended period ofwhat GE called "profitless growth." For example, the company's sales increasedforty percent from 1965 to 1970, while its profits actually fell."

By the late 1960s, there was an increasing awareness that a new approach tothe management of diversity was needed.

Diversification and Corporate Strategy in the 1970sAs a response to the increasing recognition that large and diversifiedcompanies present particular management problems, increasing attention wasdevoted to the question of the issues on which general managers should focustheir efforts.

The Concept of StrategyOne theme that emerged with increasing force during the 1960s and 1970s wasthe need for senior managers to focus their attention on the "strategies" of theircompanies. Strategy was more than long-range planning or objective setting; itwas a way of deciding the basic direction of the company and preparing it tomeet future challenges. ̂ ^

C. Roland Christensen, one of the creators of the business policy course atHarvard during the 1960s, argued that the concept of strategy made it possibleto simplify the complex tasks of top managers. '̂ A focus on strategy preventedsenior executives from meddling in operating details and day-to-day issueswhich should be left to more junior managers with direct responsibility forthem. It allowed them to concentrate on the most important issues facing theircompanies—and it simplified management by providing a framework fordecisions.

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CEOs readily accepted that strategy should be their main and uniqueresponsibility. During the late 1960s and 1970s many companies establishedformal planning systems, and the appropriate structure and uses of suchsystems received much attention from academics.^" In the early 1970s, LouisGerstner remarked on how quickly strategic planning had been adopted bycompanies, noting that, "Writer after writer has hailed this new discipline asthe fountainhead of all corporate progress."^^

The strategic frameworks, models, and tools being developed by academics andconsultants focused mainly on strategic issues at the business unit level, andthey were, therefore, less relevant in helping to define an overall strategy forcompanies with many different businesses. Andrews, however, defined themain task of corporate-level strategy as identifying the businesses in which thefirm would compete, and this became the accepted understanding of corporatestrategy. ̂ ^ This general concept of corporate strategy, though, did not providemuch practical guidance to some of the problems managers of diversifiedcompanies confronted. In particular, it did not help them decide how resourcesshould be allocated among businesses, especially when investment proposalswere being put forward by a large number of disparate businesses, each withits own strategy. This problem was exacerbated when the aggregate demandfor resources exceeded what was available.

Problems with Resource AllocationResource allocation decisions in diversified companies are a key part ofcorporate strategy, but they present particular difficulties. Corporatemanagement must grasp the relative merits of investment proposals comingfrom a range of businesses in different sectors, with different time horizons,competitive positions, and risk profiles, not to mention management teams withdiffering credibilities. This can be complex. In the early 1970s, for example, acompany such as ITT had to allocate resources among businesses that includedtelecommunications, insurance, rental cars, bakeries, and construction. Withmany divisions competing for funds, how could a company be sure it wasinvesting in the best projects for future ^̂

Joseph Bower explored in detail how a large, diversified firm allocatedresources. His research highlighted the gulf between financial theory, whichsaw the manager's task as choosing projects with the highest returns, andcorporate reality, where all proposed projects showed at least the returnrequired by the corporate hurdle rate for investment. In practice, divisionalmanagers only proposed projects with acceptable forecast returns, andcorporate-level managers had little basis on which to choose among projects.

Bower argued that investment decisions should not be made on aproject-by-project basis, but had to be integrally related to a business's strategicproduct and market decisions. '̂* During the 1970s, the new techniques ofportfolio planning that were introduced by the Boston Consulting Group andothers gained wide acceptance because they helped corporate executives toresolve practical problems of capital allocation in the context of an overallcorporate ^̂

Portiolio PlanningPortfolio planning provided corporate managers with a common framework tocompare many different businesses. The industry attractiveness/businessposition matrix developed at GE, the Boston Consulting Group's growth/share

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In many companies,portfolio planningtechniques becamemore than analyticaltools to help chiefexecutives directcorporate resourcestowards the mostprofitableopportunities: theybecame the basis ofcorporate strategyitself.

matrix, and variations developed at other consultancies were used to classifybusinesses in terms of their strategic position and opportunities. Theseclassifications helped managers both to set appropriate objectives and resourceallocation strategies for different businesses, and to determine the overall cashrequirements and cash generation of the corporate portfolio. ̂ ^

The helicopter view provided by portfolio planning techniques was widelyperceived as useful. For example, one CEO explained:

Portfolio planning became relevant to me as soon as I became CEO. I wasfinding it very difficult to manage and understand so many different productsand markets. I just grabbed at portfolio planning, because it provided me with away to organize my thinking about our businesses, and the resource aiiocafionissues facing the total company. 1 became and still am very enthusiastic. I guessyou couid say that I went for it hook, line, and sinker.'"

During the 1970s, more and more corporations adopted portfolio planning, withthe largest diversified companies being among the earliest adherents. Onesurvey showed that by 1979, forty-five percent of the Fortune 500 companieswere using some form of portfolio planning. ̂ ^

In many companies, portfolio planning techniques became more than analyticaltools to help chief executives direct corporate resources towards the mostprofitable opportunities: they became the basis of corporate strategy itself. Thekey concept here was the idea of a balanced portfolio: made up of businesseswhose profitability, growth, and cash flow characteristics would complementeach other, and add up to a satisfactory overall corporate performance.Imbalance could be caused, for example, either by excessive cash generationwith too few growth opportunities or by insufficient cash generation to fund thegrowth requirements elsewhere in the portfolio. ̂ ^ Often, the first step towardsbalancing the corporate portfolio was to identify businesses that were a drainon corporate resources. Monsanto, for example, used portfolio planning torestructure its portfolio, divesting low-growth commodity chemicals businessesand acquiring businesses in higher growth industries such as biotechnology.^^

Portfolio planning reinforced the virtuous circle of corporate growth anddiversification that had been originally founded on general management skills.It helped corporate-level managers correct past diversification mistakes, leadingto divestiture of weak businesses, and it encouraged them to invest in a mix ofbusinesses, with different strategic (and cash) characteristics to balance theircorporate portfolios and ensure future growth.

Problems with Portfolio ManagementEven as an increasing number of corporations turned to portfolio planning,problems emerged in managing balanced portfolios.^' Companies discoveredthat while certain businesses appeared to meet all the economic requirementsof the corporate portfolio, they did not fit easily into the corporate family. Itturned out to be extremely difficult, for example, for corporate managers withlong experience of managing mature businesses in a particular industry sectorto manage effectively their acquired growth businesses in new, dynamic, andunfamiliar sectors.

Research on how companies actually used portfolio planning confirmed thedifficulties of managing businesses with different strategic characteristics,missions, or mandates. Philippe Haspeslagh investigated whether companies

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adjusted their systems of financial planning, capital investment appraisal,incentive compensation, or strategic planning to fit the requirements of theirdifferent businesses. The focus of his study was on the role played by generalmanagement, rather than on specific business-level strategies. He found thatcompanies made few changes in their formal corporate-level systems, butcorporate-level managers in successful companies did make informal attemptsto adapt these systems to their businesses.^^ In another study on theeffectiveness of portfolio planning techniques, the authors discovered that cashcows performed better in an organizational context of autonomy whilefast-growing businesses benefitted from more control. They concluded that theadministrative context was an important variable in explaining businessperformance, and that many companies were taking the wrong approach tosome of their businesses.^^

The recognition that different types of businesses had to be managed differentlyundermined the argument that general management skills, buttressed by thecommon frameworks of strategy and portfolio planning, provided the rationalefor diversified companies. Many companies discovered that common systemsand approaches, when applied to different kinds of businesses, could minimizevalue from those businesses. Portfolio planning helped corporate executives sortout the contribution of each of their businesses to the corporate portfolio, but itdid not answer the other critical question confronting a diversified company:what contribution should the corporation make to each of its businesses?

Diversification and Corporate Strategy in the 1980sDuring the 1980s, there was widespread skepticism about the ability ofcompanies to manage and add value to diverse, conglomerate portfolios.Haiders such as Carl Icahn and T. Boone Pickens demonstrated that they couldacquire even the largest companies, break them up, and realize huge profits.The takeover activity of the 1980s prompted a re-thinking of both the role ofcorporate management in large companies, and of the kinds of strategies whichwere appropriate for diversified companies.

Cosf Cuffing af HeadquartersWhat seemed most obvious about the corporate level in many companies wasnot its contribution, but its cost. Thus, attention shifted to cutting headquarterscosts. Some companies turned central services into profit centers, charged withselling their services to the business units, while other companies disbandedsome central functions altogether. The pruning of corporate staffs often meantdevolving more authority to line managers in decentralized units.^^

Cost cutting and the downsizing of corporate staffs, however, were not alonesufficient to demonstrate that corporate management could add value to theirbusinesses, and the overall performance of large, diversified corporations alsocame under increasing scrutiny. Michael Porter published a study showing thehigh rate of divestiture of acquisitions among American corporations, arguingthat the diversification strategies of many companies had failed to createvalue.^^ Also, the wave of takeovers caused executives to pay increasingattention to their company's stock price as analysts and raiders identified"value gaps," or the difference between the current stock market price of acompany and its breakup value. ̂ ^

Value-Based PlanningFaced with the threat from raiders and the criticism of academics such asPorter, chief executives devoted themselves increasingly to the task of creating

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shareholder value. Managers were encouraged to evaluate corporateperformance in the same terms as the stock market (and raiders), usingeconomic rather than accounting measures, and to take whatever actions werenecessary to improve their company's stock price. Value-based planning, usingthe financial tools of discounted cash flow, ROE spreads, and hurdle rates,provided corporate managers with a fresh perspective on the link between stockprices and competitive strategy.^'

A company's stock price, according to proponents of value-based planning, isdetermined by the value of the strategies of its businesses. However, it can bevery difficult for managers to assess the strategies of dissimilar businesses:". . . corporate level planners facing a portfolio of four, ten, dozens, or dozensand dozens of units do not know—probably cannot know—enough about eachunit's competitive position, industry, rivals, and customers to make thisdetermination."^^ One of the appeals of value-based planning is that, likeportfolio planning, it offers corporate-level executives a means of evaluatingmany different businesses using a common framework. The corporate level canrequire business units to make strategic choices on the basis of economicreturns, and doing this systematically across all units, it is argued, providescorporate management with the basis for making decisions on capitalallocation.

Value-based planning techniques gained many adherents, especially amongAmerican corporations. In 1987 an article in Forfune described how"managements have caught the religion. At first reluctant, they pound at thedoor of consultants who can teach them the way to a higher stock price—aprice so high it would thwart even the most determined raider. "̂ ^

But value-based planning also has limitations as a guide to corporate strategy.It can help corporate managers to focus on the goal of increasing shareholderwealth and to understand the criteria that must be met to do so. It does not,however, provide much insight into the kind of corporate strategies that shouldbe pursued to meet these criteria. A higher stock price is a reward for creatingvalue. But the key question remains: how can corporations add value to diversebusiness portfolios? Perhaps the most influential view on this vital topic to haveemerged during the 1980s is that they should "stick to the knitting."

Stick to the KnittingThe concept of corporate success based on core businesses, or stick to theknitting, gained popularity in 1982 with the publication of Peters' andWaterman's In Search of Excellence. Successful corporations, they observed, didnot diversify widely. They tended to specialize in particular industries andfocused intently on improving their knowledge and skills in the areas they knewbest.""

Stick-to-the-knitting advice was also a reaction against the analyticaltechniques and impersonal approach of much of strategic and portfolioplanning. Bob Hayes and Bill Abernathy voiced these concerns in their article"Managing Our Way to Economic Decline." In their view, too many Americancorporations were being run by "pseudo-professional" managers, skilled infinance and law, but lacking in technological expertise or in-depth experiencein any particular industry. They warned that portfolios diversified acrossdifferent industries and businesses were appropriate for stocks and bonds, but

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The need forexperience and deepknowledge of abusiness was alsoemphasized by HenryMintzberg, whocriticized the "thinand lifeless"strategies that resultfrom treatingbusinesses as merepositions on aportfolio matrix.

not for corporations.^' The need for experience and deep knowledge of abusiness was also emphasized by Henry Mintzberg, who criticized the "thin andlifeless" strategies that result from treating businesses as mere positions on aportfolio matrix. He argued that instead of broad diversity, we need "focusedorganizations that understand their missions, 'know' the people they serve, andexcite the ones they employ; we should be encouraging thick management,deep knowledge, healthy competition and authentic social responsibility."*^

The widespread conviction that companies should stick to the knitting increasedskepticism about the ability of corporations to manage and add value to diverseportfolios. It reinforced the practical pressures created by the corporate raidersand contributed to a wave of retrenching. From the mid-1980s onwards, a goalfor many corporations has been to rationalize their portfolios to overcome theperceived disadvantages of broad diversification.

Corporafe flesfrucfuringRestructuring (whether voluntary or not) has frequently led to the disposal ofcorporate assets. In 1985, for example. General Mills announced its intention tofocus on its core businesses of consumer foods and restaurants, and thecompany sold off its toy and fashion businesses.*^ More recently. GeneralSignal embarked on a strategy of "back to the basics," retreating from its earliermajor investments in high-tech businesses to focus on its traditional "boring"products such as industrial mixers.**

Restructuring has been widely regarded as a salutary correction to the excessesof broad diversification. Michael Jensen has argued that corporate break-ups,divisional sell-offs, and LBOs are critical developments that can prevent thewasteful use of capital by managers of large public corporations, and otherrecent academic studies support the view that restructuring does help improvethe performance of corporations.*^ But restructuring implies a sense of whichbusinesses a company should retain and which it should divest. How should thecore businesses be selected?

One answer is that companies should restructure to limit their businesses toone, or a few, closely related industries. In this way, managers stick to whatthey know well, and are best able to exploit corporate expertise. This approachis consistent with stick-to-the-knitting advice, but it is not a complete answer.Successful companies such as GE, Hanson, and Cooper Industries neverthelesshave businesses in many different industries. Furthermore, sticking to a singleindustry does not necessarily limit complexity or ensure that companies expandinto areas they "know." During the 1980s, companies such as Prudential andMerrill Lynch sought to combine different types of financial services businesses.They discovered that businesses such as insurance, stockbroking, and banking,though all in the financial services industry, nonetheless required very differentapproaches, resources, and skills.*^

Another reservation about a stick-to-the-knitting strategy based on limitingdiversification to closely related businesses is that, despite extensive research,empirical evidence on the performance of companies pursuing more and lessrelated diversification strategies is ambiguous and contradictory. Many studieshave compared the performance of single-product firms, companies thatdiversify into related products, markets, or technologies, and unrelatedconglomerates, but no firm relationship between different diversificationstrategies and performance has been discovered.*^

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Those who viewsynergy as theessence ofcorporate-levelstrategy, includingPorter and Kanter,acknowledge thatcompanies find itdifficult to gainsynergy benefits andthat the failure rate ishigh.

Some concept of what constitutes a "core portfolio"—or the corporate"knitting"—is required, though, if restructuring is to result in long-termimprovement in corporate performance.

Diversification and Corporate Strategy in the 1990sThe main issues for corporate strategy in the 1990s have therefore emerged ashow to identify the businesses that should form a core portfolio for acorporation, and how to find ways of adding value to those businesses.

Three main alternative answers to these questions have received support incurrent management thinking:

1) diversification should be limited to those businesses with synergy;2) the corporate focus should be on exploiting core competences across different

businesses; and,3) successful diversification depends on building a portfolio of businesses

which fit with the managerial "dominant logic" of top executives and theirmanagement style.

Synergy-Synergy occurs when the performance of a portfolio of businesses adds up tomore than the sum of its parts. The concept of synergy is based in part oneconomies of scale; two or more businesses can lower their costs if they cancombine manufacturing facilities, use a common salesforce, or advertise jointly,and in this way the combined businesses are worth more than they would be ona stand-alone basis. *̂

In much of the current management literature, synergy has become virtuallysynonymous with corporate-level strategy. Michael Porter views themanagement of interrelationships between businesses as the essence ofcorporate-level strategy, arguing that without synergy a diversified company islittle more than a mutual fund.*^ Rosabeth Moss Kanter, too, argues that theachievement of synergy is the only justification for a multi-business company. ̂ °In a review of the literature on mergers, Friedrich Trautwein, a Germanacademic, found that managers almost always justified diversification moves interms of the synergies available, and that most of the advice in themanagement literature on diversification was based on the concept of realizingsynergies.^'

In practice, however, many companies have found it very difficult to gainbenefits from a corporate strategy based on synergy. ̂ ^ Acquisitions aimed atrealizing synergies can be especially risky; for example, two academiccommentators have noted that anticipated synergy benefits " . . . show analmost unshakeable resolve not to appear when it becomes time for theirrelease."^^ Quantitative evidence appears to support the observation thatsynergies are hard to achieve; a recent study on takeovers concluded that mostgains arise from asset disposals and restructuring rather than from synergy.^*

Those who view synergy as the essence of corporate-level strategy, includingPorter and Kanter, acknowledge that companies find it difficult to gain synergybenefits and that the failure rate is high. Much of the current literature,therefore, focuses on implementation—what companies have to do to gainbenefits from sharing skills or activities across businesses. Porter, for instance,discusses the need for the evolution of a new organizational form, which he

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The assumption thatsynergy is the onlyrationale for a groupof companies does notfit the availableevidence, and thissuggests that not allcorporations need tofocus their efforts onconstructing andmanaging portfolios ofinterrelatedbusinesses.

calls the "horizontal organization." These organizations facilitateinterrelationships across different businesses by overlaying horizontalstructures, systems, and managerial approaches onto the vertical relationshipswhich currently characterize the ties between business units and corporatemanagement.^^ Kanter describes the emergence of the "post-entrepreneurialcorporation," which aims to create the relationships and management processesrequired for cross-business cooperation.^^ Christopher Bartlett and SumantraGhoshal argue a similar case for the complex problems facing multinationalsattempting to make the most of their businesses in different countries. In theirview, multinationals need to develop new organizational capabilities so thatcomponents, products, resources, people and information can flow freely amonginterdependent units. Bartlett and Ghoshal describe such an integrated networkas a "transnational organization."^'

Transnational or horizontal or post-entrepreneurial organizations, by definition,capture many synergy benefits because they have the organizationalcapabilities to manage complex interrelationships across businesses. There are,however, very few examples of companies that represent these new kinds oforganizations, at least in full fledged form. Consequently, much of the adviceon synergy remains theoretical and prescriptive.

There is evidence, furthermore, that managing complex interrelationships tocreate synergies across businesses is not the only means of creating value.Michael Goold and Andrew Campbell, in their study of strategic managementstyles, found that companies such as Hanson and Courtaulds, which placedvery little emphasis on synergy as a source of corporate value added, performedat least as well as companies that placed more emphasis on linkages acrossbusinesses.^^ These findings are reinforced by successful multi-businesscompanies such as KKR, the leveraged buy-out specialists, and BerkshireHathaway, managed by the renowned investor Warren Buffet, which arecollections of independent businesses, and whose strategies are not based onexploiting synergies across their businesses. The assumption that synergy is theonly rationale for a group of companies does not fit the available evidence, andthis suggests that not all corporations need to focus their efforts on constructingand managing portfolios of interrelated businesses.

Synergy remains a powerful concept in our understanding of corporate strategy,but it is difficult to accept that it is the "one best way" to create value in amulti-business company. For some companies, the advantages of managingstand-alone businesses may outweigh the long-term investment required tocreate linkages among those businesses, and the potential for synergy maysimply not exist in some corporate portfolios. We need to discover more aboutwhen synergy is an appropriate corporate strategy, and we need to learn moreabout how companies successful at managing interrelationships acrossbusinesses go about it.

Core CompefencesAnother approach to corporate strategy stresses building on the corecompetences of the corporation. This can be seen as a particular case ofsynergy, with corporate value creation dependent on exploiting unique skillsand capabilities across a portfolio of businesses. Gary Hamel and C.K.Prahalad focus on technological competences. They argue that the corporateportfolio should not be perceived simply as a group of businesses, but also as acollection of such competences. In managing the corporate portfolio, managers

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must ensure that each part draws on and contributes to the core competencesthe corporation is seeking to build and exploit. Even a poorly performingbusiness may be contributing to an important core competence, and if managersdivest such businesses they may also be discarding some of their competences.If corporations are unable to transfer a core competence from one business toanother, then they are wasting their resources. According to Prahalad andHamel, many of the current management approaches of Western corporations,including SBUs, decentralization, and resource allocation practices, underminethe ability of corporations to build core competences, since autonomousbusinesses seldom have the resources or vision to build world class

C Q

// corporations areunable to transfer acore competence fromone business toanother, then they arewasting theirresources.

competences.

Hiroyuki Itami, a Japanese academic, focuses on building the corporation's"invisible assets," such as expertise in a particular technology, brand names,reputation, or customer information. Such assets, he argues, can be employedthroughout the firm without being used up, and they are the only sustainablesource of competitive advantage.^° Philippe Haspeslagh and David Jemison,authors of a recent study on acquisitions, support a capabilities-based view ofcorporate value creation, defining core capabilities as managerial andtechnological skills gained mainly through experience. Such capabilities can beapplied across the corporation's businesses and make an important contributionto customer benefits.^' It can be difficult to define a corporation's capabilitiesobjectively, but understanding what they are can provide important insightsinto its sources of competitive advantage and the strategic options of the ^̂

The work on core skills, capabilities, or resources has generated much interest.Walter Kiechel, in Forfune magazine, describes how some executives areperceiving their role, and that of the corporate management, as guardians andpromoters of the company's core skills, and sums up the current understandingof these concepts: "To the extent that such skills can be exploited by each of thecompany's businesses, they represent a reason for having all those businessesunder one corporate umbrella—a much better reason, the experts add, than thefabled synergies that multibusiness companies of yore were supposed to realizebut seldom ^̂

But corporations which do base their strategy on core competences have to becareful that the overall competence-based strategy does not become an excusefor poor performance or poor judgment. IBM, for example, acquired Holm to gainaccess to the smaller company's expertise in PBX systems. Five years later,however, following heavy losses, IBM sold a majority stake in Rolm to Siemens.Some commentators think that IBM was too optimistic about Rolm's competencesand potential and not sufficiently knowledgeable about changes underway inthe PBX market or within Rolm.^* It can be difficult to judge when an investmentin a business is justified in terms of building a core competence, particularly ifit means suspending normal profitability criteria and if the investment is in anunfamiliar business area.

Another danger with the competence approach to corporate strategy is thatbusinesses may require similar core competences, but demand different overallstrategies and managerial approaches. Texas Instruments, for example,attempted to exploit the core competence it had developed in itssemi-conductors business in areas such as calculators, watches, and homecomputers. It failed in these new areas not because it lacked the coresemi-conductor competence, but because its top management had no experience

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in managing such consumer-oriented businesses.^^ Similarly, Procter andGamble applied its skills in product innovation and consumer promotion to asoft drinks business. Crush, but eventually divested the business because it raninto unfamiliar problems managing the local bottlers who largely controldistribution of soft drinks.^^ Core competences may add value in specific areasin a variety of different businesses, but this is no guarantee that, overall, acompany will be able to manage those different businesses successfully.

The work on core competences and capabilities broadens our understanding ofa corporation's resources, and points out the important role of corporatemanagement in building such resources and ensuring that they are used to bestadvantage. As with synergy, however, it is difficult to accept that this is theonly way to add value to a corporate portfolio. Corporate executives areconcerned not only with building skills and competences in their businesses,but also with allocating resources to them, approving their plans and strategies,and monitoring and controlling their results. These important "shareholder"functions can also be a source of added value, if done well. Some companiessuch as Berkshire Hathaway and Hanson lay far more stress on theseshareholder functions than on competence building; and, in all companies, theshareholder functions occupy a vital place, even where the management of corecompetences is also a focus of attention.

Dominant Logic and Management StyleA third approach to corporate success focuses on how corporate managementadds value to a portfolio of businesses, in particular in its shareholder role.O.K. Prahalad and Richard Bettis argue that the more diverse a firm, the morecomplex the problems in managing it. Diversity, however, cannot be definedsimply in terms of the number of products or markets in which a firm competes;the strategic variety of the firm's businesses is a more significant measure of itsdiversity. With firms in strategically similar businesses, executives can usecommon methods and approaches, using a single managerial dominant logic:"A dominant general management logic is defined as the way in whichmanagers conceptualize the business and make critical resource allocationdecisions—be it in technologies, product development, distribution, advertising,or in human resource management."^'

When managerial dominant logic does not match the needs of the business,tensions and problems arise. Corporate management is liable to appoint thewrong managers to the business, to sanction inappropriate plans andinvestments, to control against the wrong targets and to interfere unproductivelyin the managing of the business.

Goold and Campbell's work on strategic management styles shows howdominant logic works in specific companies. In their research on large,diversified companies they identified different types of strategic managementstyles, with the main styles being Financial Control, Strategic Control, andStrategic Planning. The different styles each added value, but in different waysand to businesses with different characteristics and requirements. FinancialControl companies, for example, have distinctive administrative and controlsystems, emphasizing the setting and meeting of annual budget targets.Although they may invest in a wide variety of industries, the portfolios ofbusinesses of successful Financial Control companies share commoncharacteristics.^^ Hanson is a good example: "The company's strategy is to focus

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on mature, stable businesses: 'We avoid areas of very high technology. We donot want to be in businesses which are highly capital intensive, where decisionmaking has to be centralized or which rely on huge and sometimes expensiveresearch with a prospect of a return sometime or never.' "̂ ^

In this view, the dominant logic or management style of the corporatemanagement group is central to the performance of a diversified firm, and agroup of businesses is best managed when the dominant logic of top managersmatches the strategic characteristics and requirements of the businesses. Theimportance of the "fit" between top managers and the businesses in thecorporate portfolio has also been emphasized by executives. Orion Hoch ofLitton, for example, has explained the reasons for Litton's extensive divestmentsand restructuring: "Our aim was to go back to businesses that we could becomfortable with . . . We want to get back to doing what we were good atdoing. "̂ ° Gary Roubos, CEO of Dover Corporation, argues that the company is asuccessful conglomerate because if invests only in businesses in which it hasconsiderable management "feel," even though these businesses are highlydiverse: "Automatic lifts and toggle clamps are different—but they have muchmore in common than, say, investment banking and selling ' '

Dominant logic may help explain why conglomerate diversification cansucceed, and also why diversification based on synergy or core competencescan fail. If conglomerate diversification, such as that of Hanson, is based onbusinesses with a similar strategic logic, then it is possible for corporatemanagement to fake a common approach and to add value to those businesses.On the other hand, businesses with opportunities for sharing activities or skills,or ones requiring the same core competence, may nonetheless have differentstrategic logics. This makes it difficult for corporate management to realizesynergy or exploit a core competence across the businesses. Oil companies thatdiversified into other extractive, energy or natural resource businesses inpursuit of synergies or core competences tended to find that the benefits theysought were overwhelmed by the problems caused by dissimilarities in strategiclogic between the new businesses and the core oil businesses.

The concepts of dominant logic and management style offer some promisinginsights into both successful and unsuccessful diversification efforts, butthere are unanswered questions.'^ Should diversified corporations aim tobuild portfolios of strategically related businesses, to ensure that topmanagement and corporate systems and approaches do add value? Or shouldcorporations seek to differentiate their approaches—develop "multiple dominantlogics"—to manage businesses with different strategic characteristicssuccessfully?

Goold and Campbell discovered that companies tend to adopt a particularstrategic management style, even though the style was usually implicit, andthat it was difficult for managers to cope with a variety of approaches or styles.They argued that CEOs should aim to focus their portfolios on the kinds ofbusinesses which would gain benefits from their strategic management style.'^On the other hand, authorities on multinationals argue that the increasingcomplexities of globally spread businesses and international competitionrequire corporations to develop new capabilities to manage businesses facingdifferent strategic issues. C.K. Prahalad and Yves Doz maintain that thewinners in the struggle for global competitive advantage will be those

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Goold and Luchs

companies that can develop differentiated structures, management processesand systems, appropriate to the wide variety of their businesses.'* Bartlett andGhoshal describe how the "administrative heritage" of companies emphasizes aparticular approach to issues such as coordination across businesses, but theyargue that the idealized transnational company should be able to combinedifferent approaches and develop "a full arsenal of coordinating processes,practices, and tools, and to use those mechanisms in the most effective andefficient manner. "̂ ^

The question of whether it is possible to differentiate your managementapproaches to add value to many different kinds of businesses remains open.Bartlett and Ghoshal found evidence that some companies were seeking waysto encompass much more variety, but none had yet become a true transnational.We need more research to establish when it is appropriate to differentiate yourmanagement approaches to encompass the needs of diverse kinds ofbusinesses, and when it is reasonable to adjust the corporate portfolio to aparticular management style, or to a single managerial dominant logic. Work isalso needed to clarify how to operationalize the concepts of dominant logic andstrategic relatedness. We do not yet know how the limits of a dominant logicshould be defined, how managers and corporations develop a new strategicmanagement style, or if this is even possible.

The Challenge of DiversificationDuring the last four decades, managers and academics have sought both tounderstand the basis of successful diversification, and to address the problemscreated by it. Exhibit 1 summarizes the evolution of thinking and practice duringthis time.

From the 1950s onwards, the development of management principles and theprofessional education of managers led to the belief that general managementskills provided the justification for diversification. Diversified companies andconglomerates were seen to add value through the skills of their professionaltop managers, who applied modern management techniques and generalizedapproaches to a wide variety of businesses across different industries. Duringthe late 1960s, however, the performance of many conglomerates weakened, anda new approach to corporate management of diversity was sought. The conceptsof strategy and strategic management provided a new focus for seniormanagement's attention during the 1970s, but soon proved unable to resolvemany of the choices and trade-offs involved in resource allocation in themulti-business firm. Portfolio planning techniques helped many companiesimprove capital allocation across businesses with different strategic positions,and led to the idea of balanced portfolio management. But such analyticalapproaches overlooked the problem of manageability. Many companies found itdifficult to manage businesses facing different strategic issues, and during the1980s poor corporate performance again became a critical issue. Raiders,executives, and academics realized that many diversified corporations were notcreating shareholder value, and there was a wave of takeovers, corporatebreak-ups, and restructuring. The main themes of corporate strategy during the1980s became restructuring back to core businesses and a resolve to stick to theknitting.

As we move into the 1990s, it has, however, become increasingly clear thatthere is no consensus on what sticking to the knitting in practice implies, or on

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Basis oi CorporateValue Added

1950s

1960s

GeneralManagementSkills

1970s

1980s

1990s

Strategy Concept

Portfolio PlanningTechniques

Value BasedPlanning Concepts

Synergy ~)Core Competences IDominant Logic and (Management Style J

Diversification Approachesand Issues

Rise of Conglomerates

Performance Problemswith Conglomerates

IStrategic Managementof Diversity

IResource AllocationProblems

Balanced PortfolioManagement

IManageability Problems

Restructuring

"Core" Portfolios

Exhibit 1. Evolution of Thinking on Corporate Strategy and Diversification

how companies should be adding value to their remaining core businesses.Among the currently popular themes, the search for synergy and the building ofcore competences each have significant foUowings. But both views need to becomplemented with some account of how the corporation can discharge itsshareholder functions well. Here the concept of understanding the dominantstrategic logic of a portfolio, and its compatibility with the approaches of topmanagement, seems promising.

In our view, it is probable that a full account of corporate strategy and ofdiversification will need to draw on several of the strands of thought we havereviewed. Ultimately, diversity can only be worthwhile if corporate managementadds value in some way and the test of a corporate strategy must be that thebusinesses in the portfolio are worth more under the management of thecompany in question than they would be under any other ownership.'^ Toachieve this goal with a diverse group of businesses, it may be necessary torestructure portfolios to allow more uniformity in dominant logic andmanagement style, more effective means of realizing synergies and moresharing of core competences.

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Goold and Luchs

Endnotes ' Kenneth R. Andrews, "ProductDiversification and the Public Interest,"Harvard Business Review, July 1951, 94.

^ M.E. Porter, "From Competitive Advantageto Corporate Strategy," Harvard BusinessReview, May-June 1987, 43.

' Kenneth R. Andrews, op. cit. 91-107;"Toward Professionalism in BusinessManagement," Harvard Business Review,March-April 1969, 49-60.

^ Peter Drucker, The Practice of Management(New York, 1955; re-issued Pan Books, 1968), 21.

^ Harold Koontz, "The Management TheoryJungle," Academy of Management Journal, Vol.4, No. 3, December 1961, 175.

^ Robert L. Katz, "Skills of an EffectiveAdministrator," Harvard Business Review,January-February 1955, 37.

' Arthur B. Langlie, "Top Management'sResponsibility for Good Government," andThomas Roy Jones, "Top Management'sResponsibility to the Community," both in H.B.Maynard, ed.. Top Management Handbook(New York, NY: McGraw-Hill, 1980); Andrews,op. cif.; Y.K. Shetty and Newman S. Perry, Jr.,"Are Top Executives Transferable AcrossCompanies?" Business Horizons, June 1976, 23-28.

* Richard Whitley, Alan Thomas, and JaneMarceau, Masters of Business? Business Schoolsand Business Graduates in Britain and France(London: Tavistock Publications, 1981); J.-J.Servan-Schreiber, The American Challenge,translated by Ronald Steel (London: HamishHamilton, 1968).

^ David N. Judelson, "The Conglomerate-Corporate Form of the Future," MichiganBusiness Review, July 1969, 8-12; Reprinted inJohn W. Bonge, and Bruce P. Coleman, Conceptsfor Corporate Strategy (New York, NY: Macmillan,1972), 458.

'° Harold Geneen, with Alvin Moscow,Managing (New York, NY: Doubleday, 1984).

" Norman Berg, "Textron, Inc.," HBS CaseStudy, 373-337, 1973, 16.

'̂ R. Heller, "The Legend of Litton,"Management Today, October 1967; reprinted inIgor Ansoff, (Ed.), Business Strategy (PenguinBooks, 1989), 378.

'̂ Jim Slater, Return to Go: My Autobiography(London: Weidenfield and Nicolson, 1977), 91.

'* Norman A. Berg, "What's Different aboutConglomerate Management?" Harvard BusinessReview, November-December 1969, 112-120.

'̂ Kenneth R. Andrews, "Product Diversificationand the Public Interest," Harvard BusinessReview, July 1951, 98.

'̂ Robert S. Attiyeh, "Where Next forConglomerates?" Business Horizons, December1969, 39-44; Reprinted in John W. Bonge and BruceP. Coleman, Concepts for Corporate Strategy(New York, NY: Macmillan, 1972); Geneen, op.ci(., 43.

" Michael Goold and John Quinn, StrategicControl (Hutchinson and EconomistPublications, 1990); Richard G. Hamermesh,Making Strategy Work (New York: John Wiley &Sons, 1986), 3; William K. Hall, "SBUs: Hot, NewTopic in the Management of Diversification,"Business Horizons, February 1978, 17.

" Peter Drucker, "Long-Range Planning:Challenge to Management Science,"Management Science, Vol. 5, No. 3, 1959, 238-49;Igor Ansoff, Corporate Strategy (New York:McGraw-Hill, 1965); Alfred P. Sloan, My Yearswith General Motors (New York: Doubleday,1963) (re-issued by Penguin Books, 1986); AlfredD. Chandler, Jr., Strategy and Structure(Cambridge: MIT, 1962) (re-issued 1982); MylesL. Mace, "The President and CorporatePlanning," Harvard Business Review,January-February 1965, 49-62.

'̂ C. Roland Christensen, and others.Business PoJicy; Text and Cases (Richard D.Irwin, 1965).

^ R.F. Vancil and P. Lorange, "StrategicPlanning in Diversified Companies," HarvardBusiness Review, January-February 1975, 81-90;Peter Lorange and Richard F. Vancil, StrategicPlanning Systems (New Jersey: Prentice-Hall,1977); K.A. Ringbakk, "Organized Planning inMajor U.S. Companies," Long flange Planning,Vol. 2, No. 2, December 1969, 46-57; Norman A.Berg, "Strategic Planning in ConglomerateCompanies," Harvard Business Review,May-June 1965, 79-92.

" Louis V. Gerstner, "Can StrategicManagement Pay Off?" Business Horizons, Vol.15, No. 6, December 1972, 5.

^̂ Kenneth R. Andrews, The Concept ofCorporate Strategy, 1971. Revised Edition(Homewood, IL: Richard D. Irwin, Inc., 1980), 35.

^ Berg, op. cit.^* Joseph L. Bower, Managing the Resource

Allocation Process (Harvard Business SchoolPress, 1970), Harvard Business School ClassicsEdition, 1986.

" Bower, op. cit.; Hamermesh, op. cit.''^ William K. Hall, "SBUs: Hot, New Topic in

the Management of Diversification," BusinessHorizons, February 1978, 17-25; George S. Day,"Diagnosing the Product Portfolio," Journal ofMarketing, April 1977, 29-38.

^' Hamermesh, op. cit., 30.^ Philippe Haspeslagh, "Portfolio Planning:

Uses and Limits," Harvard Business Review,January-February 1982, 58-73.

^̂ Barry Hedley, "Strategy and the 'BusinessPortfolio,' " Long Range Planning, February1977, 9-15; Charles W. Hofer and Dan Schendel,Strategy Formulation: Analytical Concepts (NewYork: West Publishing, 1978).

^ Hamermesh, op. cit., 71.^' Richard A. Bettis and William K. Hall, "The

Business Portfolio Approach—Where It FallsDown in Practice," Long Range Planning, vol.16, no. 2, April 1983, 95-104.

'^ Haspeslagh, op. cif.^ Richard G. Hamermesh and Roderick E.

White, "Manage Beyond Portfolio Analysis,"Harvard Business Review, January-February1984, 103-109.

^ Rosabeth Moss Kanter, When Giants Learnto Dance (London: Simon & Schuster, 1989) 94;Thomas More, "Goodbye, Corporate Staff,"Fortune, December 21, 1987.

^̂ Porter, op. cit.^ David Young and Brigid Sutcliffe, "Value

Gaps—The Raiders, The Market or the

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Managers?" Research Paper, Ashridge StrategicManagement Centre, January 1990.

^ Alfred Rappaport, Creating ShareholderValue: The New Standard for BusinessPerformance (New York, NY: Free Press, 1986);Bernard C. Reimann, Managing for Value(Oxford: Basil Blackwell, 1987).

^ William W. Alberts and James M.McTaggart, "Value Based Strategic InvestmentPlanning," Interfaces, January-February 1984,138-151; see also Enrique R. Arzac, "Do YourBusiness Units Create Shareholder Value?"Harvard Business Review, January-February1986, 121-126.

^ John J. Curran, "Are Stocks Too High?"Fortune, September 28, 1987, 24.

*° Thomas J. Peters and Robert H. Waterman,In Search of Excellence (New York, NY: FreePress, 1982).

*' Bob Hayes and Bill Abernathy, "ManagingOur Way to Economic Decline," HarvardBusiness Review, July-August 1980, 67-77.

^̂ Henry Mintzberg, Mintzberg onManagement (New York, NY: Free Press, 1989),373.

••̂ Michael E. Porter, "General Mills, Inc:Corporate Strategy," HBS Case Study 9-388-123,1988.

*^ Seth Lubove, "Dog with Bone," Fortune,April 13, 1992, 106.

*^ Michael Jensen, "The Eclipse of the PublicCorporation," Harvard Business Review,September-October 1989, 61-74; S. Chatterjee,"Sources of Value in Takeovers: Synergy orRestructuring—Implications for Target andBidder Firms," Strategic Management Journal,vol. 13, no. 4, May 1992, 267-286; S. Bhagat, A.Shleifer, R. Vishny, "Hostile Takeovers in the1980s: The Return to Corporate Specialization,"Brookings Paper on Economic Activity:Microeconomics 1990.

*^ Robert M. Grant, "On 'Dominant Logic,'Relatedness and the Link Between Diversityand Performance," Strategic ManagementJournal, vol. 9, no. 6, November-December 1988,639-642; Robert M. Grant, "Diversification in theFinancial Services Industry," in AndrewCampbell and Kathleen Luchs, StrategicSynergy, (London: Butterworth Heinemann,1992).

*'' There is an extensive literature on thistopic. See Richard P. Rumelt, Strategy,Structure and Economic Performance (Boston,MA: Harvard Business School Press, 1974);Richard P. Rumelt, "Diversification Strategyand Profitability," Strategic ManagementJournal, vol. 3, 1982, 359-369; Richard A. Bettis,"Performance Differences in Related andUnrelated Diversified Firms," StrategicManagement/ournai, vol. 2, 1981, 379-393; KurtH. Christensen and Cynthia A. Montgomery,"Corporate Economic Performance:Diversification Strategy Versus MarketStructure," Strategic Management Journal, vol.2, 1981, 327-343; Gerry Johnson, and HowardThomas, "The Industry Context of Strategy,Structure and Performance: The U.K. BrewingIndustry," Strategic Management Journal, vol.8, 1987, 343-361; Anju Seth, "Value Creation inAcquisitions: A Re-Examination of PerformanceIssues," Strategic Management/ournai, vol. 11,1990,99-115.

*^ Igor Ansoff, Corporate Strategy (New York,NY: McGraw-Hill, 1965).

*^ Michael E. Porter, Competitive Advantage(New York, NY: Free Press, 1985).

^ Kanter, op. cit., 90.^' Friedrich Trautwein, "Merger Motives and

Merger Prescriptions," Strategic ManagementJournal, vol. 11, 1990, 283-295.

^̂ Vasudevan Ramanujam and P.Varadarajan, "Research on CorporateDiversification: A Synthesis," StrategicManagement Journal, vol. 10, 1989, 523-551;Andrew Campbell and Kathleen Luchs,Strategic Synergy (London: ButterworthHeinemann, 1992).

^ Richard Reed and George A. Luffman,"Diversification: the Growing Confusion,"Strategic Management Journal, vol. 7, 1986, 34.

** S. Chatterjee, "Sources of Value inTakeovers: Synergy or Restructuring," StrategicManagement/ournai, vol. 13, no. 4, May 1992,267-286.

'^ Porter, op. cit.^ Kanter, op. cit." Christopher A. Bartlett and Sumantra

Ghoshal, Managing Across Borders: TheTransnational Solution (Harvard BusinessSchool Press, 1989).

^ Michael Goold and Andrew Campbell,Strategies and Styles (Oxford: Basil BlackwellLtd., 1987).

'^ C.K. Prahalad, and Gary Hamel, "The CoreCompetence of the Corporation," HarvardBusiness Review, May-June 1990, 79-91; GaryHamel and C.K. Prahalad, "Strategic Intent,"Harvard Business Review, May-June 1989, 63-76.

^ Hiroyuki Itami, Mobilizing Invisible Assets(Harvard University Press, 1987).

^' Philippe Haspeslagh and David B. Jemison,Managing Acquisitions (New York, NY: FreePress, 1991), 23.

^̂ Robert M. Grant, "The Resource-BasedTheory of Competitive Advantage: Implicationsfor Strategy Formulation," CaliforniaManagement Review, Spring 1991, 114-135;Andrew Campbell, "Building Core Skills," inAndrew Campbell and Kathleen Luchs,Strategic Synergy (London: ButterworthHeinemann; 1992); George Stalk, Philip Evans,Laurence E. Shulman, "Competing onCapabilities," Harvard Business Review,March/April 1992, 57-69.

^̂ Walter Kiechel, "Corporate Strategy for the1990s," Fortune, February 29, 1988, 20.

" Robert D. Hof and John J. Keller, "Behindthe Scenes at the Fall of Rolm," Business Week,July 10, 1989, 82-84.

=̂ C.K. Prahalad and R.A. Bettis, "TheDominant Logic: A New Linkage BetweenDiversity and Performance," StrategicManagement Journal, vol. 7, 1986, 495.

^ Patricia Winters, "Crush Fails to Fit onP&G Shelf," Advertising Age, July 10, 1989.

^' Prahalad and Bettis, op. cit., 490.^ Goold and Campbell, op. cit.®̂ Andrew Campbell, Marion Devine, and

David Young, A Sense of Mission (London:Hutchinson, 1990), 242.

'"Barron's, May 20, 1991.^' F.J. Aguilar, "Groen: A Dover Industries

Company," HBS Case 9-388-055, 1988.'^ Michael Goold and Andrew Campbell,

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"Brief Case: From Corporate Strategy to Ghoshal, Managing Across Boideis: TheParenting Advantage," Long Range Planning, Tiansnational Solution (Harvard Businessvol. 24, no. 1, February 1991, 115-117. School Press, 1989), 166.

''^ Goold and Campbell, op. cit. '^ Michael Goold and Andrew Campbell,'* C.K. Prahalad and Yves L. Doz, The "Corporate Strategy and Parenting Skills,"

Muifinafiona/ Mission (London: Free Press, Research Report, Ashridge Strategic1987), 261. Management Centre, 1991.

'^ Christopher A. Bartlett and Sumantra

About the Authors Michael Goold is a founding director and fellow of the Ashridge Strategic Management Centre,London, England. His research interests cover the management of multi-business companies. Priorto establishing the Centre, he was a senior fellow in the Centre for Business Strategy at the LondonBusiness School where he undertook the research into the role of the corporate headquarters inmanaging diversified companies that led to the publication, with Andrew Campbell, of Strategiesand Styles (Blackwells, 1987). He has extensive consulting experience with senior management. Hewas a vice president of The Boston Consulting Group and continues to consult with a variety ofclients, in addition to his research and teaching responsibilities. He holds a B.A. with first classhonors in PPE from Merton College, Oxford, and an M.B.A. from the Stanford Business School,California.

Kathleen Sommers Luchs is an associate at Ashridge Strategic Management Centre, London,England. She has a Ph.D. from Yale University and has been a lecturer in history at Yale andHarvard Universities. She received an M.B.A. from London Business School in 1987 and is co-author,with Andrew Campbell, of Strategic Synergy (1992), a book on synergy issues.

For permission to reproduce ttiis article, contact: Academy of Management, P.O. Box 209, Ada, OH 45810

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