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Published: 11 February 2019

A new playbook determining success strategies of diversified companies

Professor Ansgar Richter, Professor of Strategy and Dean of Surrey Business School was part of a research project centring on how high-performance organisations are defying expectations about the demise of the multi-business enterprise; which has been featured in the most recent MIT Sloan Management Review article: A New Playbook for Diversified Companies.

Access the full piece here, by Ulrich Pidun, Director of The Boston Consulting Group, Germany, Professor Ansgar Richter, Professor of Strategy and Dean of Surrey Business School, Monika Schommer, Senior Product Owner at Booking.com, UK, and Amit Karna, Professor of Strategy, Indian Institute of Management Ahmedabad, India.

With both finance and strategy experts recognising that a little diversification can be a good thing, they have argued for years that higher levels of diversification are detrimental to performance and value creation. If that was so, why do many firms continue to be highly diversified?

Many private equity groups and conglomerates are thriving in multiple lines of business, resonating with recent research. Clearly, there is a richer story to explore here. That is why this research project explored two lines of inquiry: to examine the relationship between diversification and corporate performance, through a meta-analysis of five decades’ worth of empirical research; and to identify factors that account for successful diversification, using case studies of more than 30 large, diversified corporations in a range of industries that have consistently outperformed their more focused competitors.

The team found that high levels of diversification aren’t necessarily bad for performance, and that diversified companies are not a dying breed. The research further suggests that certain types of diversification strategies continue to enhance companies’ operating performance and capital market valuations.

If diversification strategies no longer harm performance across the board, when do they pay off? The research indicates that companies tend to reap the rewards of diversification when they take three specific steps: Limiting the number of business models in the portfolio, tailoring the corporate parenting strategy to the needs of the businesses concerned, and allocating resources based on clear portfolio roles.

 

Find out more about our research in the Department of Strategy and International Business at Surrey Business School