IMAGES OF AN UNFOLDING DIVERSIFICATION PROJECT

Scand. J. Mgmt. Vol. 14, No. 4, pp. 351—371, 1998( 1998 Published by Elsevier Science Ltd

All rights reserved. Printed in Great Britain0956—5221/98/$19.00#0.00

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IMAGES OF AN UNFOLDING DIVERSIFICATIONPROJECT*

ROBERT P. BOOD

Faculty of Economics, Department of Business Administration & ManagementSciences, P.O. Box 800, 9700 A» Groningen, ¹he Netherlands

Abstract—This article studies a diversification-project in a medium-sized company from a cognitiveperspective. Using a set of cognitive mapping techniques, it focuses on the images which the managers inthis company have of the evolving diversification project in which they are involved. At the same time, itseeks to explore the organizational learning processes that arise during diversifying. It is suggested thata strict division of activities during the course of a diversification project may hamper organizationallearning, as it excludes the possibility for acquiring shared experiences and thus of creating a commonframe of reference. Consequently, it is argued that organizational learning during a diversificationprocess may benefit from the active involvement (to some extent) of the various parties in each other’sactivities. ( 1998 Published by Elsevier Science Ltd. All rights reserved

Key words: Diversification strategy, cognitive mapping, organizational learning, strategic manage-ment.

INTRODUCTION

This article studies a single diversification project in a medium-sized company froma cognitive perspective. In doing so, it focuses on the images which managers have of thediversification project they are involved in. The background of the study is threefold. First,strategic management researchers have suggested that the experiences of individual firms indiversification should be explored with special attention to internal processes. Second, it isfelt that a cognitive perspective on strategic issues can make a valuable contribution tostrategic management research. Third, as a number of scholars have contended, the processof diversification is essentially a learning process. An examination of case studies froma cognitive perspective offers the opportunity to examine the individual and the organiza-tional learning processes that arise in the course of diversifying.

The article starts with a brief outline of the background to the study. A framework is thenpresented consisting of five interrelated learning areas in which (managers in) a diversifyingcompany may acquire knowledge, and may thus learn. Next, this theoretical frameworkguides the design of the cognitive research methodology employed in the study. Afterintroducing the company studied and its diversification project, the results of the cognitivemapping techniques used are presented and analysed within the context of the theoretical

*The author would like to thank the guest editors of this special issue and two anonymous reviewers for theircareful reading and many suggestions.

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framework. Lastly, the results of the case study are discussed and some tentative con-clusions are drawn which may guide future research on diversification.

STUDYING DIVERSIFICATION FROM A COGNITIVE PERSPECTIVE

Since Igor Ansoff introduced the diversification strategy in 1957 in his framework ofproduct/market strategies, managers and researchers have both adored and despiseddiversification (e.g. Judelson, 1968; Peters and Waterman, 1982). Meanwhile, multitudes ofresearchers have tried to identify the factors that determine the outcomes of diversificationstrategies, which has made diversification one of the most intensively studied themes instrategic management research (Ramanujam and Varadarajan, 1989; Datta et al., 1991).Pioneering was Rumelt’s (1974) study among the largest American industrial companiesover a period of 20 years. Using a newly developed taxonomy of diversification strategies,Rumelt concluded that firms pursuing strategies of ‘‘controlled diversity’’ were mostsuccessful in terms of profitability and growth. Following Rumelt, diversification researchhas predominantly employed large-sample statistical research methodologies above all tostudy the diversification performance nexus. Unfortunately, as the combined results of thisresearch do not offer a coherent picture, there is still no consensus about the impact ofdiversification on performance.

Partly as a result of the considerable variety in the findings of the different studies,diversification research has been criticized for studying diversification after it has takenplace (Kazanjian and Drazin, 1987; Ramanujam and Varadarajan, 1989). As several studieshave shown, factors arising during the process of diversification may have a profoundinfluence on the outcome of a diversification project. Dundas and Richardson (1982), forexample, observed that the poor performance of unrelated diversified firms depends, at leastin part, on how the strategy is implemented. Their observation is illustrated by Miles (1982),who, on basis of a study of diversifying tobacco producers, stresses the decisive influence ofseveral learning processes, in particular the development of the skills and knowledgenecessary to compete in the new domain. In a study of internal corporate venturing,Burgelman (1983) found that managers at the middle level play an important role in thecontinuation and ultimate success of the project in question. As a last example, Jemison andSitkin (1986) explored four factors which may significantly impede the process of acquistion,one of them being the misapplication of management systems in the acquired company (seealso Haspeslagh and Jemison, 1991).

The results of these and other process-oriented studies have led to a growing convictionamong strategic management researchers that the processes in which diversification strat-egies take shape should be the study of more, and more detailed, study (e.g. Kazanjian andDrazin, 1987; Ramanujam and Varadarajan, 1989; Datta et al., 1991). Insight into theseprocesses may yield some deeper explanations of the successes and failures of diversificationattempts. In close connection with this plea, case studies of individual diversificationprojects are proposed as a complement to the present research approaches. Grant et al.(1988, p. 796), for example, argue that insight into the many ‘‘complex and idiosyncraticinteractions involving a large number of firm-specific factors’’ requires the examination ofthe experiences of individual firms.

In addition, case studies make it possible to deal adequately with the inherent multi-dimensionality of strategies. The majority of diversification studies have concentrated on

352 R. P. BOOD

the economic-technical dimension of strategies, embracing aspects such as turnover, profits,industry code and raw materials used. As both Mintzberg (1988) and Ginsberg (1990) havestressed, strategies have a cognitive as well as an economic-technical dimension. Thecognitive dimension encompasses the perspectives of the managers responsible for a par-ticular diversification project, who influence and steer the project. As Mintzberg (1987, p.16) puts it, each strategy reflects ‘‘an ingrained way of perceiving the world’’. By ignoringthis dimension, researchers (often implicitly) have imposed their view of the world upon thediversification projects studied (Ginsberg, 1989). For example, by specifying certain perfor-mance measures they have determined when as well as to what degree these projects weresuccessful.

By contrast, a cognitive perspective recognizes that managers think purposefully and, asa result, that they may differ substantially in their thinking (cf. Stubbart, 1989). Due todifferences in background, education, profession and experience, people vary both in whatthey see and in how they see it (Neisser, 1976; Weick, 1979). As a consequence of varyingframes of reference people differ in their actions and interpretations (Gioia and Poole, 1984).Differences may be found between companies as well as within the same company. In thecontext of this study, managers may have different ideas about organizing the diversifica-tion project in which they are involved, and may thus also act differently. This, in turn, mayaffect the project’s course and outcome. Consequently, a detailed examination of processesof diversification as seen through the eyes of the participants, and as far as possible fromtheir frames of reference, has the potential to yield new and valuable insights into theultimate success or failure of individual diversification projects. For this reason,we were interested here in gaining some insight into the images which managers had ofthe particular diversification project in which they were involved. As discussed in thenext section, these images embrace several distinct but interrelated areas of managerialknowledge.

LEARNING DURING DIVERSIFICATION

As a number of authors have argued, the process of diversification is essentially a processof (organizational) learning and should be studied as such (amongst others, Normann, 1977;Miles, 1982; Kazanjian and Drazin, 1987; Ginsberg, 1990; Mintzberg, 1990). An under-standing of the organizational learning that occurs is critical also to the understanding ofthe course of a diversification project. Depicting diversification as a process of learningaccords with a cognitive perspective as learning is in its essence a process of cognitivedevelopment (Kolb, 1974; Argyris and Schon, 1978; Hedberg, 1981; Fiol and Lyles, 1985).As they gained experience in the course of diversification, managers learn by acquiring andmodifying managerial knowledge, as a result of which their thinking and perceptionschange. Prior research into diversification in particular and the growth of firms in generalsuggests that this learning occurs in several distinct but closely interrelated areas ofmanagerial knowledge. Figure 1 shows these areas of organizational learning. Although thearrows indicate the dominant direction of the relations that are thought to exist between thefive learning areas these relations are not by any means proven. The framework in Figure1 was used in selecting the research instruments used and in categorizing the data gathered.We did not use the framework to study what has been learnt, nor did we present it to any ofthe managers we interviewed.

IMAGES OF AN UNFOLDING DIVERSIFICATION PROJECT 353

Fig. 1. Areas of learning in a diversification process.

Following both Mintzberg (1988) and Ginsberg (1989), we can say that the heart of thelearning processes arising during diversification seems to lie in the rethinking and recon-ceiving of the business portfolio of the firm. This includes both the conceptualization of anynew business added to the portfolio and the (re)conceptualization of the changed portfolio ofbusinesses as a whole. Businesses may range from products to complete divisions, depend-ing on the size of the firm. Any learning taking place in these areas will be the domain inparticular of the management of the diversifying firm. The following quotation fromMintzberg (1988, p. 55), illustrates the (abstract) character of these processes of conceptual-ization:

‘‘All businesses have popular conceptions. Some are narrow and tangible, such as the paper clip or canoebusiness. Others are broad and vague, such as the so-called transportation or financial services businesses, andthis can range to the ethereal, such as the business of reducing function.

Closely related to the two areas of learning mentioned above is the development of anew ‘‘dominant general management logic’’ (Prahalad and Bettis, 1986). This conceptrelates to the way in which a diversified firm is strategically managed. Prahalad and Bettis

354 R. P. BOOD

(1986, p. 490) define a dominant logic as ‘‘the way in which managers conceptualize thebusiness and make critical resource allocation decisions’’.* It represents process knowledgein the form of the routines and procedures which the management of a diversified firmemploys to manage a diverse set of activities. The different management styles for managinga portfolio of businesses which Goold and Campbell (1987) identified in (successful)diversified companies may be part of a certain dominant logic. The dominant logic offersa managerial explanation of the problems which confront diversified companies, as opposedto the economic explanations many strategic management scholars give central importance.

The greater the strategic variety within a diversified portfolio is, the greater the differencein the dominant logics that may be necessary. As a firm enters a new domain throughdiversification, the strategic variety may grow necessitating the development of a newdominant logic. The routines and procedures which the management currently employs formanaging activities, may not fit. According to Grant (1988) this ‘‘goodness of fit’’ willdepend on the degree to which activities are strategically similar. Examples include similarsizes of capital investment, similar key success factors, similar competitive positions, similarstage in the product life cycle, etc. According to Bettis and Prahalad (1995), the unlearningof an old dominant logic must precede the learning of any new such logics.

A fourth area of learning concerns the organization and operational linkage of thevarious businesses in the portfolio. Before a diversifying firm is able to produce and deliverany new products or services, it has to (re)organize its value chain (cf. Porter, 1985). Thismeans taking decisions on several organizational variables, such as the division of labour,reward systems, information systems, etc. (see e.g. Galbraith and Kazanjian, 1986). Further-more, unless the management wants to keep the new business activity completely separatefrom the other businesses in the portfolio, it has to decide on the organization of theoperational linkages between businesses. This is particularly relevant if the managementsees possibilities for realizing economies of scale or scope or wants to transfer ‘‘know-how’’from one domain to another (Teece, 1980).

Finally, a diversifying firm has to develop such managerial skills, resources and know-ledge as are necessary to compete in the new domain (Miles, 1982; Kazanjian and Drazin,1987). The various operational skills required for producing the new product or offeringa new service have to be mastered. Subsequently, the firm has to compete with the newproduct or service in a market with which it is not familiar and which may be fundamentallydifferent from the markets on which it is currently selling its products. Whereas topmanagement is involved to a greater or less extent with the other four learning areas, this isoften not the case when it comes to the learning in this area. The development of newbusiness skills, largely operational in character, occurs predominantly at lower organiza-tional levels, for example among salesmen and production employees.

The framework presented above gives rise to two observations. First, because managerslearn as they cumulate experiences, the framework can be depicted as layer above layerabove layer, etc.; Fig. 1 only shows two such layers. Due to conservative forces, knowledgedeveloped in the past on a basis of experience gained in existing businesses, may initiallyconstrain the learning within any of the five learning areas (cf. Piaget, 1937). This may not be

*In a recent update of their original article Bettis and Prahalad (1995) extend the scope of the dominant logic byviewing it as an information filter. This theoretical enlargement diminishes in our opinion the strength of themessage which the concept communicates.


much of a problem if a new business is quite similar to the existing ones, but seriousproblems are likely to arise if there are fundamental differences. For example, due to aninappropriate conceptualization of a new business, managers may be wrong to applyprocedures and routines in the new business, however successful these were in existingbusinesses (cf. Jemison and Sitkin, 1986). The resulting disappointment may launch newcycles of learning, or alternatively, lead to an early disinvestment of the new business if thegap is too large (cf. Miles, 1982).

Second, the framework suggests that managers acquire and develop knowledge in severalrelated albeit distinct areas. As these areas embrace different kinds of knowledge, the imagesmanagers have of their diversification project is multidimensional. For example, theconceptualization of a new business relates to a different kind of knowledge from thatconnected to the development of new business skills. The former may be more abstract andtacit than the latter. As we will show in the next section, the variety of knowledgenecessitates the use of different techniques or methodologies.

RESEARCH METHODOLOGY

As indicated above, our major aim in the present study was to elicit the personal imagespossessed by the individual managers about the evolving diversification project in whichthey were involved. We were especially interested in assessing how perceptions and framesof reference varied among these managers. Besides throwing light on the central issues thatplayed a part in the process of diversification, this would help us to understand managerialdecisions, actions, differences in opinion and misunderstandings. Most importantly, weexpected this would give us a thorough insight into the content and dispersion of thevarious learning processes through the organization in the context of the diversificationproject studied.

In order to elicit the managers’ images, we made use of cognitive mapping to gain insightinto the managers‘‘ personal images. In this our study follows a methodological pathalready recognized years ago. For example, according to Argyris and Schon (1978, p. 17)private images are ‘‘the media of organizational learning’’, while Hedberg (1981, p. 5)conceives learners as ‘‘iteratively mapping their environments’’. Over the last decade cogni-tive mapping has become increasingly recognized as a promising approach to use inmanagerial research (e.g. Stubbart, 1989; Weick, 1990; Eden and Spender, 1998), although ithas its shortcomings. For one thing, we can never be sure in practice what it is we aremapping and, at least as important, we never know what we are not capturing (cf.Laukkanen, 1990). In addition, by mapping individual cognition we miss the social interac-tion between individuals which alongside cognition directs behaviour (Eden, 1992). Bearingthese shortcomings in mind, we can look at a wide range of currently available cognitivemapping techniques for eliciting knowledge and construing cognitive maps (e.g. Axelrod,1976; Huff, 1990). In general, cognitive maps can be construed in direct interaction withrespondents, on a basis of transcribed interviews or using written documents.

Given the wide range available, a cognitive map is a rather generic device in that it maycontain ‘‘all possible types of relations occurring in patterns of concepts’’ (Bougon, 1983, p.177). Huff (1990) places cognitive maps on a continuum ranging from ‘‘maps that assessattention, association and importance of concepts’’ to ‘‘maps that specify schemas, frames

356 R. P. BOOD

and perceptual codes’’. Huff’s continuum illustrates that different kinds of cognitive maprepresent different kinds of knowledge. As the cognitive mapping techniques differ in thekind of cognitive map they produce, each one is only able to capture part of a person’sknowledge base. Because the five managerial learning areas contain different kinds ofknowledge, we chose to employ a combination of different cognitive mapping techniques(see also Bood, 1998). ‘‘Cognitive reality’’ is multi-coloured and just as a painter needsvarious colours and brushes to paint a picuture, we need various cognitive mappingtechniques to paint (construed) reality.

A methodology for mapping knowledge of diversificationPart of the knowledge in each of the five learning areas can be elicited by identifying the

concepts most often used by respondents to define and classify objects and events. Sackman(1991) denotes this kind of knowledge as ‘‘dictionary knowledge’’. It is captured byconstruing the kinds of map which Huff (1990, p. 15) places at one end of her continuum ofcognitive maps: ‘‘maps that assess attention, association and importance of concepts’’. Theaccepted way for construing such maps is by the content analysis of transcribed interviewsor written documents (Erdener and Dunn, 1990; Winterscheid, 1994). The emphasis is onthe frequent use of concepts, the relations between concepts and the context in which theconcepts are used. In this study, separate tape-recorded interviews with all the managerswere transcribed, and together with available internal plans and reports were subjected tocontent analysis.

Furthermore, as hypothesized above, the conceptualization of the new business and the(re)conceptualization of the changed portfolio provide a strong guide to the creation of theknowledge in the other three learning areas. The managerial knowledge related to theseprocesses of conceptualization is deep-rooted, often tacit and comes close to what Sackman(1991) denotes as ‘‘axiomatic knowledge’’: fundamental beliefs or final causes that cannot befurther reduced. Axiomatic knowledge evokes associations with an organization’s culture.Both closely intertwined conceptualization processes can be captured by mapping thedimensions and constructs which managers use in judging and discriminating betweendifferent business activities. For this purpose, we employed Kelly’s (1955) Repertory GridTechnique (RGT) including both a pairwise comparison and a ranking task (Fransella andBannister, 1977; Eden and Jones, 1984; Ginsberg, 1989). The resulting data was analysed bycalculating several indices (cf. Ginsberg, 1989) in combination with weighted multidimen-sional scaling (WMDS) using the WMDS-module available in SPSS 6.0 (Kruskal and Wish, 1991;Young and Harris, 1993). This yields maps ‘‘that show dimensions of categories or cognitivetaxonomies’’ (Huff, 1990, p. 15).

The development of a new dominant management logic and the development of newmanagerial business skills both reflect the development of process knowledge (Grant, 1988),i.e. knowledge about the way certain things are done or should be done in the eyes of thebeholder. While such knowledge may be partially fundamental in nature and deeply rootedin the organization, and can thus be typified as axiomatic knowledge, the greater part canbe characterized as what Sackman (1991) describes as ‘‘directory knowledge’’ and ‘‘recipeknowledge’’. Directory knowledge contains information on how things are done, whilerecipe knowledge reflects information about how things should preferably be done. Where-as directory knowledge is descriptive in nature, recipe knowledge has a stronger prescriptivecharacter. Huff (1990, p. 16) speaks of ‘‘maps that show influence, causality and systemdynamics’’. In the present study, the software package COPE (Eden et al., 1992) was used for


construing maps of this kind. As we have pointed out elsewhere, CMAP2 (see e.g. Laukkanen,1990) may be used as an alternative to COPE (Bood, 1998). The goal of mapping this type ofknowledge is to (re)construe the theories-in-use that inform the respondents’ decisions andactions. As an additional benefit, the cognitive maps construed with the help of COPE alsoelucidate (part of) the argumentation behind the conceptualization processes.

Finally, learning with respect to the arrangement of the value chain and the design oforganizational structures reflects the development of both ‘‘axiomatic knowledge’’and ‘‘directory knowledge’’. On the one hand, this learning area is closely connectedwith both conceptualization processes, on the other it is linked to the development of thenew dominant logic(s) and the managerial business skills. We assume that the knowledgewith respect to this learning area will be captured while the preceding techniques are beingused.

The mapping processAs can easily be imagined, the employment of three different cognitive mapping tech-

niques in one study can become irritating and laborious for the respondents, thus alsobecoming counterproductive (see e.g. Brown, 1992). Cognitive mapping is a fairly intimateprocess and is probably most fruitful when respondents feel comfortable and free to talk,rather than being hindered by the (number of) techniques employed by the researcher. Forthis reason, the combination of interviews and cognitive mapping techniques was chosen insuch a way that the time demanded of the respondents was minimized. On the other hand,using different cognitive mapping techniques can be productive, as each technique presentsthe respondent with a different contextual setting. This may stimulate conversation andthus the elicitation of knowledge in general. Moreover, it offers some interesting possibilitiesfor validation, both by the respondents themselves and as a result of cross-methodtriangulation. Validation is a necessary requirement in the process of cognitive mapping,mindful of Weick’s (1979, p. 155) saying, ‘‘How can I know what I think until I see whatI say’’ (Eden, 1992). On a basis of these considerations the three cognitive mappingtechniques were combined in the following manner:

1. The cognitive mapping process with each individual manager started with one or twoopen and unstructured interviews in which some general issues and the backgroundand progress of the diversification project were discussed. The managers were asked totell their story, using some general catchwords, such as strategy, goals, importantevents and developments, and customers. Incidentally, they were probed for theclarification of details. The interviews (tape-recorded and transcribed) were sub-sequently content analyzed together with some available internal plans and reports.

2. Using COPE, cognitive maps were construed in direct interaction with the respondentsin two interview sessions. In between the results from the first session were organizedand arranged into several submaps around emergent themes (cf. Eden and Simpson,1989). The submaps were sent to the respondents before the second interview so thatthey could examine them carefully. During this phase use was made of the informationfrom the preceding interviews.

3. The last COPE-session was also used as a starting-point for the application of RGT.Confronting the respondents with triads of businesses from the company’s portfolio,constructs were elicited (cf. Ginsberg, 1989). In addition, the results of both precedingphases were studied for the same purpose. Next, a questionnaire was mailed to the

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respondents in which they were asked first to compare the product groups of the firmpairwise in terms of similarity and then to rank them against the set of elicitedconstructs.

A DIVERSIFYING WHOLESALER

The company studied is a specialized, medium-sized wholesaler which buys and sellsa related range of products all over the world. Most of their products are used in theagricultural sector, although some of the products traded are also sold to industrialcompanies. The products, classified by the company into eight product groups, are for thelarger part purchased centrally. The company’s main product group accounts for approx-imately 60—70% of their turnover and has the largest market share in its market (niche) inEurope. The company owns a handful of trading companies that operate as profit-centres inthe Netherlands, Germany, Great Britain and France. Most of these companies wereacquired in recent years after the company had sold its only (wholly owned) productionfacility. In addition, it has a joint venture with a company in the United States. In total, thecompany employs nearly 80 people. The company is quite successful and well organizedadministratively. Every year sales budgets are set up by the head office, for each profit centreas well as for each product group. Two years ago a strategic marketing plan was written inwhich an ambitious objective was formulated, implying a growth in turnover of more than10% each year, coupled with a list of potential European candidates for takeover. Note-worthy, the company seems to have reached this objective to date.

With the purpose of reducing its dependency on the European agricultural sector, themanagement decided three years ago to take over and further develop a small Dutchcompany which sold a limited range of products to a few countries in Latin America.Although it concerned a product which is related to the other products sold and which isproduced by some of the company’s current suppliers, the company had not sold thisparticular product until then, nor did it export to countries in Latin America. The newproduct group can be regarded as a diversification, as both the products traded and thegeographical area are new to the company. Most importantly, however, the managementregards it as a new and partially unfamiliar business. Currently, the new business is stillconsidered to be in its start-up phase, and management has not yet taken a final go/no-godecision. At the moment they have some doubts about the potential of this new businessactivity. To date any profits have come mainly from other products sold in Latin America.The major part of the investment in the new business concerns the price paid for thecompany acquired, the salaries of the sales manager responsible for the new business and hisadministrative assistant and his travel expenses. Investment in stocks is limited as nearly allproducts are sold to order.

From the moment of acquisition onwards, the activities related to the new business havebeen carried out almost entirely by a single sales manager. After (re)organizing theadministration, a relatively small job as it was the only asset taken over, this sales managertravelled twice to Latin America with the former director of the acquired company. In thefirst four years he developed the new business by setting up a small network of agents inseveral new countries in both South and Middle America. The majority of the customers arewholesalers and large industrial companies. He visits these agents and his main customersa few times a year. During these visits he tries to acquire new large customers in cooperation


with his agents. The sales manager was specially hired for this job after completing hisstudies at an agricultural college, which included practical training in this company. Duringthe first year he combined his job with a UK-based MBA-course in marketing paid for bythe company. It is important to note that the sales manager is able to make quitea convincing appearance.

The new business is organizationally positioned within the profit centre located atthe company’s head office. The sales manager is counselled by and reports to themanager who is responsible for sales at this profit centre, further referred to as the ‘‘groupmanager’’. Next to selling in the area around the head office, this profit centre sells tocountries, regions and customers not covered by any of the trading companies. In addition,the group manager is responsible for the central purchase of several product groups.Starting as a sales employee he has been working with the company for almost 25 years.Two years ago, the group manager travelled once with the sales manager to two LatinAmerican countries.

In addition to the sales and group managers, we interviewed one member of thecompany’s three-headed management according to the format laid out in the foregoingsection. Although formally referred to as the financial director, the director in questionis also largely responsible for the marketing activities of the company. Moreover, hewrote the company’s strategic marketing plan two years ago. His main training was atthe polytechnic level in marketing and, to a lesser extent, finance. Now in his mid-30’s, hehas been with the company for five years; before that he had worked with a largemultinational company in the same industry as a product manager. Together with hisbrother, who had set up the US-activities, he joined head-office shortly before their fatherretired and left the company which he had founded. They are headed by a German managerwith a strong background in management accounting. None of the directors activelyparticipated in the new business activity at an operational level. The director we interviewedseemed most committed to starting up new activities and introducing new products into themarket.

COMPOSING THE MANAGERS’ IMAGES

Interviewing the sales manager, the group manager and the director according to theformat laid out above, resulted in three series of cognitive maps. Comparison of these mapsshows several major differences between the three managers, indicating some fundamentaldifferences in their perceptions. To a certain extent, they differ in the attention they pay toeach the five knowledge areas separately, as well as in the knowledge they possess anddevelop within these areas. Taken together, the differences are not equally large between allthree of them. It seems justified to draw a dividing-line between the ‘‘management-at-home’’(director and group manager) on the one hand and the ‘‘sales manager-out-there’’ on theother. Table 1 summarizes the content of the five knowledge areas for each manager. As wewill elucidate after discussing the learning areas, the parts in bold indicate the area(s) towhich each manager gives most emphasis. Note that the complexity of the cognitive maps asconstrued with the three mapping techniques cannot be fully reflected in table format norfully reproduced verbally. Important differences are therefore described throughout thediscussion of the results and illustrated with reference to the relevant maps whenever itdeemed necessary.

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Table 1. Managers’ images of their diversification project

Knowledge area Director Group manager Sales manager

Conceptualization of ‘‘Just another business’’ Perhaps a way to reduce Product from a ‘‘technolo-new business and one way to reduce agricultural dependence gical point of view’’ not a big

agricultural dependence but product ‘‘nothing difference but great oppor-new, nothing fancy’’ tunity to open up really new

markets

(Re)conceptualization Supply a complete range Supply variety of related Reduce dependence onof the portfolio of products in various products with high steadily declining European

(European) countries so contribution margin to agricultural marketsas to reduce agricultural agricultural and industral towards high growthdependence, increase sector (preferably in markets, for example, inturnover and exploit Europe) Latin-Americaeconomies of scale inpurchasing

(Development of) Decentralized, profes- Emphasis on budgets Dominance of marketingdominant logic sional organization and realizing (high) over budgeting, emphasis

managed on basis of contribution margins on organizational flexibilitybudgets complementedby long-term plans

and top-managementcommitment

Design value chain Appointing and Monitoring the contribu- Establishing network ofmonitoring sales manager tion margins which the agentsfrom a distance sales manager realizes

Development of — Mentally dealing with Opening up and developingbusiness skills new models of payment new markets, getting to

know the markets, itscustomers and their localculture

Processes of conceptualizationWhen it comes to the way the three managers conceptualize the company’s portfolio and

the newly added Latin American business, we find both agreement and disagreement. Onthe one hand, in terms of physical characteristics they all consider the new product to be anordinary product. ‘‘Nothing new, nothing fancy’’ as the group manager expressed it. Hisobservation is supported by the frame diversity scores calculated on a basis of the rankingtask (cf. Ginsberg, 1989). The scores for all three managers are close to 0.30, indicating thateach one regards the products in the portfolio as very similar. The solutions obtained withWMDS, based on the pairwise comparison of product groups, point in the same direction(stress"0.16 for the three-dimensional solution). In addition, the fairly low weirdnessindices of 0.26 and below, indicate that the three managers differ only slightly in theirconceptualization of the entire portfolio of products (cf. Young and Harris, 1993).

On the other hand, however, the managers differ crucially in their conceptualization ofthe new business in its entirety, which includes both the new product and the newgeographical area. The director and group manager on the one hand, and the sales manageron the other, clearly frame the new business differently. The former consider it as one ofa number of possible ways of reducing the company’s dependence on a limited range ofagricultural products which are fairly sensitive to seasonal influences. Using almost thesame words as the group manager, the director plainly expresses this view:

‘‘If you look at our portfolio in terms of products, [product X] occupies a very important place. [Product X]accounts for 70, maybe even 80 per cent,2 of our turnover. Well, that’s a risk, only something has got to


happen to [product X] and you lose 70 per cent of your turnover. That risk is simply too big. So we are lookingfor new products. We try to find products that fit in with the package we have2 [This new business] is just onepossibility that turned up.’’

However, they seem to prefer different ways of reducing this dependency, notably byincreasing industrial sales and enlarging the firm’s geographical scope in Europe. Bothroutes offer the possibility of supplying a familiar kind of customer who requires andappreciates high levels of services, and who in exchange for this pays promptly. In addition,these routes are considered to be easier ways of increasing turnover while exploitingeconomies of scale (director) and selling products with a higher contribution margin (groupmanager).

The sales manager’s conceptualization of the new business clearly deviates from that ofthese managers. His different conceptualization springs from, and also affects, the content ofthe other learning areas. Although the sales manager states that he does not have a fullpicture of every product group the company sells, he has a clear idea of what the company’sportfolio should look like. Basically, he considers the new business as not merely sellinga new product, but primarily as a great opportunity for opening up entirely new geographi-cal markets for selling the company’s entire range of products. In his view, the companyshould invest heavily now so as to share the benefits in the future that are sure to come.Investment is necessary in order to become acquainted with the fundamentally differentway of doing business in Latin America. The following quotation vividly illustrates thedifferences relative to two other managers:

‘‘[They say] if we want to grow, we can better grow in our existing markets, not recognizing that this is extremelydangerous because it’s an agricultural market, one that drops, declines,2 , Why do you want to grow ina market that is plummeting? Why do you want to grow there? You don’t want to, you want to grow somewhereelse. And this is a growth market. Take any country in South America,2 if you talk about Chile, Costa Rica orPanama, or even Guatemala, these are all countries with between 6 and 10 and sometimes even 15 per centgrowth a year. That’s enormous.’’

Dominant logicThe different conceptualizations of the new business extend to ideas about how the

portfolio of businesses should be managed, i.e. the dominant logic. The group manager’semphasis on contribution margins and budgets seems to reflect the core of the company’sonly dominant logic. The importance he attaches to contribution margin is evident from thecognitive maps construed with COPE. The concepts with the five highest domain scores allstress the importance of contribution margins. Concepts with high domain scores havea large number of linkages with other concepts in their immediate domain and are supposedto be most central in cognitive terms (Eden et al., 1992). Margin-related concepts alsoconstitute the heart of the company’s goal system as construed by the group manager. As heputs it uncomplicatedly:

‘‘There’s nothing clever about increasing turnover. I can drive off somewehere to I don’t know where, and I’llsurely sell something, but if I there’s no money in it - no! Margin is also important if we are talking aboutcontinuity, if you don’t make a few hundred thousand for instance, you can’t grow any more, can you?’’

In line with this, budgets and contribution margins are by far the most importantmanagement instrument in the company. On a basis of detailed sales budgets (which

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together constitute an impressive document) the various trading companies are given a fairdegree of freedom. The main exception is purchasing, which is largely done centrally byhead office. The director advocates supplementing these with long-term plans with a plan-ning horizon of three to five years. In addition, he stresses the importance of havinga ‘‘professional organization’’, ‘‘offering a complete range of products’’ and ‘‘being a goodservice partner’’. These marketing-oriented constructs seem to fit very well with thetraditional emphasis on contribution margins. The director expects these constructs to addvalue to the company’s offerings, enlarging contribution margins and distinguishing thecompany from the small traders active in the industry.

Facing the company’s single, general dominant management logic, the sales managercriticizes three of its elements. First, he argues for the dominance of marketing overbudgeting. Although recognizing the importance of budgets, he sees strong marketing skillsas indispensable for entering and opening up new markets, which is a prerequisite forcontinuity in the long term. Second, emerging as a central issue in the COPE-maps, he makesa strong case for organizational flexibility. Flexibility is required for meeting changes inmarket requirements. This point is related to the first as, in his view, firms led by marketingoriented managers are by definition more flexible than those with a controller at the top.His desire to see flexible organization stems from his observation of the rigidity within thecompany. In this context he makes the following comment with respect to the managers ofthe various profit centres:

‘‘2 each one is so strong in his speciality and in his market, you can’t fool them. That is rigidity, if anything is!And that’s dangerous, it’s a really big danger to the company — rigidity2. And they dont listen to each other,because that means — well — attacking someone else means exposing your own position to scrutiny. Very bad.But just because these managers are so strong, the company is going so well.’’

Finally, it emerges from the cognitive maps construed using COPE, that the sales manageris (implicitly) criticizing the decentralized organization as he pleads for more top-manage-ment commitment. Amongst other things, on various occasions during the interviews hestates that the group manager and one or two of the directors should have visited someLatin American countries with him more often. We will return to this point when we cometo discuss the results, as it entails some important learning implications. The three points ofcriticism seem to arise fairly directly from the sales manager’s own experiences in thecontext of the diversification project, and they are related to the two learning areas we willnow discuss.

Value chain and business skillsBehind the company’s general dominant management logic lurks the image of a trust-

worthy customer who orders regularly and usually pays the price asked without muchdiscussion. Moreover, the stereotypical customer has been with the company for manyyears or is at least already aware of the company’s (good) reputation. Both the ‘‘manage-ment-at-home’’ and the ‘‘sales-manager-out-there’’ acknowledge that the ‘‘average’’ cus-tomers in Latin America differ fundamentally from their European counterparts. The salesmanager puts it as follows:

‘‘[Look at] the customers, it’s a completely different market. Apart from some agricultural firms, a lot ofcompanies operate on the periphery of the agricultural market2 So, it’s not only geographically remote, it’s


a completely different market, as far as the customers are concerned, a different type of company and soa different type of purchaser and so on.’’

Whereas the director and, albeit to a lesser extent, the group manager seem to have somereservations about the average Latin American customer, the sales manager claims thatgetting to know the market and its customers requires all the attention it can get. Theimportance of market-related issues also emerges from a content analysis of the interviewswith the sales manager, whereby ‘‘market’’ emerged as the most salient noun; he used itroughly twice as often as the group manager and even three times as often as the director.According to Winterscheid (1994) nouns have a grammatical function in representingconcepts. Figure 2 shows the different contexts in which ‘‘market’’ was used by therespondent and throws some light on its meaning. The preponderance of preparatoryactivities — notably ‘‘entering the market’’, ‘‘developing market(s)’’ and ‘‘getting to knowthe market’’ — clearly suggests that he sees the creation of a strong base as his mostimportant task at this stage in the diversification project. More particularly, the COPE-mapsshow that he considers extensive knowledge of the local culture and the development ofa network of local agents who will have to sell the company’s products in Latin America, asabsolutely vital.

The attention to which both the other managers pay to these learning areas contrastsrather sharply with the sales manager’s (rich) knowledge base. In line with manage-ment’s dominant logic, especially their ideas about decentralization and the delegation of

Fig. 2. Contexts of ‘‘market’’ as used by the sales manager.

364 R. P. BOOD

responsibilities, the director mainly restricts this area of attention to monitoring the salesmanager’s activities. The director is not actively involved with any of the operationalaspects of the new business. As the group manager stands closer to the sales manager, hisrole seems to be a bit larger but has essentially the same character. It is important to notethat the group manager shares few of the sales manager’s concerns and interests. For onething, he does not pay much attention to market-related issues. Moreover, analysis of thecontexts in which he uses the word ‘‘market’’ shows that in nearly 40 per cent of theinstances he talks about it in a negative way, stressing that margins are more importantthan market share; in about as many of cases he uses ‘‘market’’ to refer to the market-placein general. The main skill the group manager has developed is that of mentally dealing withseveral new modes of payment by accepting what he calls ‘‘weird things’’.

In sum, there is a clear division of labour with regard to the operational side of thediversification project. Operational activities and concerns clearly include the sales man-ager’s job, there is no doubt about that. On the other hand, the group manager puts mostemphasis on the existing dominant logic, something which his position in the organizationgoes some way to explain. The group manager stands in the middle of the dominant logic:he monitors several budgets and is monitored by central management on basis of a budget.Finally, the director’s main concerns and interests are related to both the processes ofconceptualization. For example, his goal system construed from the COPE-maps is by far themost extensive and complex. Moreover, in half the cases the director uses the word‘‘market’’ he is talking about it in strategic terms, notably in connection with marketdevelopment. As in the case of the group manager, this accords with his organizationalposition. The shaded areas in Table 1 reflect the learning areas emphasized by the individualmanagers.

ORGANIZATIONAL LEARNING THROUGH ACTIVE INVOLVEMENT

The present case study offers some deeper insights into the nature of the organizationallearning processes which (may) arise in the course of a diversification project. In particular itraises some important issues connected with the division of activities among variousparticipants in the project. On basis of the images we elicited, using the results of variouscognitive mapping exercises, we found a clear spread in the managerial (learning) efforts ofthe three managers we interviewed. Each manager highlights one or two different learningareas, intentionally leaving the rest largely to others. As managerial specialization is closelylinked to organizational roles and levels, this does not come as a surprise in itself. However,the division of activities which it comprises seems to have a profound influence on thelearning processes that occur in the context of this evolving diversification project. Moreparticularly, the present case study suggests that the activity division within a diversificationproject induces a mental segmentation which, in turn, may severely hamper organizationallearning.

Organizational learning is predominantly a social process during which organizationalmembers exchange and create knowledge (Duncan and Weiss, 1979; Nonaka, 1994). Severalauthors stress the importance of dialogue for this purpose. Schon (1983), for instance,characterizes it as ‘‘organizational inquiry’’ while Van der Heijden and Eden (1998) refer toit as ‘‘strategic conversations’’. The latter argue that ‘‘learning requires an effective process


of conversation, through which strategic cognitions can be compared, challenged andnegotiated’’. However, as Nonaka (1994) points out, dialogue only allows for the exchangeof explicit knowledge. Following Polanyi (1967), we can say that the greater part of ourknowledge (the part of the iceberg under the water) consists of tacit knowledge that cannotbe verbalized. The exchange and creation of tacit knowledge, with its roots in action,commitment and involvement, requires shared experiences. Any organizational learningstarts from individual experience, but if this experience is not shared with others it remainsindividual:

‘‘The key to acquiring tacit knowledge is experience. Without some form of shared experience, it is extremelydifficult for people to share each others’ thinking processes. The mere transfer of information will often makelittle sense if it is abstracted from embedded emotions and nuanced contexts that are associated with sharedexperiences.’’ (Nonaka, 1994, p. 19)

Moreover, as shared experiences thus induces organizational learning, and as learningchanges perspectives (see e.g. Hedberg, 1981; Fiol and Lyles, 1985), the shared experienceswill facilitate the creation of common perspectives (cf. Nonaka, 1994). This could explainsome of the differences we found between the ‘‘management-at-home’’ on the one hand andthe ‘‘sales-manager-out-there’’ on the other. It is illustrated in particular by the deviantimages which the two sides have of Latin American customers. The sales manager’s image ofhis customers is detailed and based on his personal experiences of them. By contrast, thedirector’s and the group manager’s images are more general and seem, to a larger extent, tobe the result of a mental construction, taking the trustworthy European customer as itsopposite pole. Their ‘‘experiences’’ are based mainly on what they have ‘‘seen’’ of the theLatin American customers on paper. As a consequence, the mental construction largelycentres around uncertainty about payments. According to the sales manager these twomanagers would feel much less uncertain if they travelled with him to Latin America moreoften and met these new customers in person:

‘‘They only have concerns: does it work with payments, what if this or that happens, all uncertainties. I was theremyself, for three, four, five months I was actually there so you can visualize it, that’s how you get a picture of it. Itwas two years before [the group manager] went with me to [two countries], not much really. [2] if I tell him[now], listen, I‘ve got a customer so-and-so, who wants to buy this or that, but he can’t open an AC but he cando a 50 per cent downpayment and the rest against documents, what do you think? ‘Ah’, he then says, ‘that’sa possibility!’, because he has got an idea with it too.2 But no-one ever went with me to Costa Rica, where wenow have a turnover of [x] million, or to Guatemala, also a turnover of [x], or to Chile.’’

This specific comment springs from and illustrates the sales manager’s general desire formore top-management commitment. Recall we noted the same thing above, as one of hiscomments on management’s dominant logic. Figure 3 shows part of the sales manager’scognitive map around this theme as construed with the help of COPE, distilled from the salesmanager’s cognitive maps. Recognition of the importance of shared experiences for organ-izational learning, as indicated by Nonaka (1994), puts this wish into a somewhat differentperspective. A close examination of this map shows that he is not so much pleading forcommitment as for active involvement in the diversification project on the part of topmanagement. At the moment the sales manager finds it extremely hard to communicate hisLatin American experiences and feels misunderstood by the ‘‘management-at-home’’. As isalso evident from the interviews, he ‘‘knows more than he can tell’’ (cf. Polanyi, 1967). More

366 R. P. BOOD

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active top-management involvement would considerably reduce the need to explain hisactions and justify his choices all the time, as such involvement would create a tangiblecontext for the exchange of his largely tacit knowledge about Latin American customersand markets. The Latin American customers would then ‘‘explain’’ themselves, in their owncultural setting. As a result, the sales managers contends, the other managers would alsorecognize the ‘‘gigantic’’ growth potential of this new market.

The diverging images of the Latin American customers seem to underlie several otherdifferences between the ‘‘management-at-home’’ and the sales manager. For one thing, therecognition that management needs another general dominant management logic to dealeffectively with its Latin American business appears to come mainly from below. So, it is nottop management which employs the dominant logic but the sales manager upon whom thislogic is imposed who first experiences the shortcomings of the present dominant logics mostfiercely. In terms of Fig. 1, he is one ‘‘layer’’ ahead of both the other managers. As we notedin the preceding section, he articulates three points of criticism quite sharply. This findingadds to the still limited stock of knowledge on the development of dominant logics;Prahalad and Bettis (1986, p. 498) had to keep their discussion on the way the cognitivestructures of organizations change, still ‘‘largely speculative’’.

The suggestion that the trigger for developing a new dominant logic coming from lowerorganizational levels has a number of interesting implications for the interpretation of someof the results of earlier diversification research. First of all, it helps to explain why dominantlogics may restrict the ability of the organization to learn what Bettis and Prahalad (1995)observed. It also illustrates how the dominance of top managers’ ideas can all too easilyprevent unlearning (Nystrom and Starbuck, 1984). Top managers may simply feel no urgeto change the logic(s) they employ yet, and indeed they may never feel such an urge at all.This last potentially offers an explanation as to why diversification projects sometimescome to an early standstill. Lastly, it throws further light on the importance of politicalcapability among middle-level managers to the success of internal ventures which do notbelong to the mainstream of corporate activities in diversified firms (Burgelman, 1983). Thiscapability may well be crucial to successfully fight the dominant logic imposed by topmanagement.

Thus, a strict division of activities in a diversification project, resulting from stickingclosely to (informal) organizational roles, formal job descriptions or task-related procedures(see e.g. Jemison and Sitkin, 1986), may preclude the possibility of acquiring sharedexperiences. This in turn may interfere with the processes of organizational learning. Aseach of the three managers found themselves at a different place between the familiar andthe unfamiliar they appear to have difficulty in understanding each other. An importantimplication of this conclusion is connected with the discussion of structural differentiationlaunched by Ansoff and Brandenburg (1971) and further developed by, amongst others,Burgelman (1984) and Kazanjian and Drazin (1987). According to the latter, and keeping inwith ideas about exploiting potential synergies, diversifying companies should preferablykeep separate what is different and integrate what is familiar. Burgelman (1984) furtherpoints out the strategic importance of a new business to a company.

The present case study extends this discussion by suggesting that a certain minimumdegree of integration may be required to make room for the sharing of experiences that isnecessary to organizational learning. In relation to the five learning areas distinguishedhere, this implies that every participant should intentionally concentrate part of his or herattention on each of these five areas. A certain amount of active involvement ensures that

368 R. P. BOOD

the participants develop a common frame of reference with respect to the familiar businessactivities and to the unfamiliar new business. Such a common frame of reference is necessaryfor exchanging and creating organizational knowledge to compete successfully in the newbusiness (cf. Nonaka, 1994). In other words, the sales manager’s arguments for top-manage-ment commitment amounts to pulling down the walls of task segmentation (within reason),so as to erase the mental segmentation. However, as Fiol (1984) has pointed out, too muchintegration can also be disadvantageous, as collective learning may benefit from simulta-neous agreement and disagreement between organizational members.

CONCLUDING REMARKS

The present study is one of the first to explore corporate diversification from a cognitiveperspective, thereby meeting earlier calls for conceptualizing the process of diversifying asa process of organizational learning. To gain a deeper insight into the various knowledgeareas which managers (may) enter during the course of a diversification project, weemployed several cognitive mapping techniques. Taken together, the cognitive maps weobtained offered a detailed view from the inside of the managers’ images and ideas about theevolving diversification project. Analysis of these images suggested that a lack of sharedexperiences seriously reduced the possibilities for organizational learning, although this is ofcourse not the same as saying that this particular project would have been more successful ifthere had been more shared experiences and better opportunities for learning. Analysis ofthe cognitive maps also helped us towards a deeper understanding of the differences in viewsof the managers interviewed. Although this article only examined one diversificationproject, we believe it shows that cognitive mapping does offer a promising direction forstrategic management research as Stubbart (1989), amongst others, has suggested. In ourview cognitive mapping represents a valuable methodology for gaining insight into thethinking of managers at different organizational levels about such things as organizing their(diversified) organization and conceptualizing its strategy.

However, the three cognitive mapping techniques we employed in this study havesomewhat different merits. We found content analysis and cognitive mapping using COPE

more useful than RGT. The fact that both RGT itself (Eden and Jones, 1984) andmultidimensional scaling (Reger, 1990) have been accused of being atheoretical, mayexplain some of our difficulties in interpreting its results. Content analysis, in contrast, quiteeasily enables the identification of concepts which may not be immediately obvious to theresearcher, and offers the possibility of systematically comparing varying interpretations ofthese concepts among respondents. Further, we found cognitive mapping using COPE to beindispensable when it came to eliciting (strategic) thoughts. If it is assumed that nounsrepresent concepts (cf. Winterscheid, 1994) connected by verbs suggesting causality (cf.McArthur, 1972), then a combination of the two kinds of mapping technique may even yielda more powerful methodology.

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Documents

IMAGES OF AN UNFOLDING DIVERSIFICATION PROJECT