Corporate diversification: identifying new businesses systematically in the diversified firm

Technovation 25 (2005) 697–709 www.elsevier.com/locate/technovation

Corporate diversification: identifying new businesses systematically in the diversified firm Eckhard Lichtenthaler* Corporate Planning (UPL), Robert Bosch GmbH, Postfach 106050, 70049 Stuttgart, Germany

Abstract Companies with mature businesses struggle to deliver the growth rates demanded by analysts and shareholders and often opt for diversification. In the years of downsizing and refocusing on core competencies, many companies have lost the ability to generate new businesses. This contribution discusses the process of the systematic identification and assessment of diversification opportunities and its organization within a diversified firm. The article takes a corporate strategy perspective and analyses which inputs are required from corporate strategy and what the role of R&D and other groups within the firm should be in this process. Firstly, different diversification strategies are distinguished and related to the business life cycle and corporate strategies. Secondly, the article describes the process of the systematic identification and assessment of diversification opportunities within a diversified firm. It also describes how the diversification opportunities can be gradually filtered out through increasingly detailed assessments. Thirdly, it shows how the process can be focused by identifying adequate search fields. This systematic approach distinguishes between competence- and market-driven search strategies. It shows how these strategies should differ depending on how related the search is to existing markets and competencies. Fourthly, the article discusses the organization of the process. It describes the coordinating role of corporate planning and the particular roles of R&D, venture funds and other contributors in the process. Finally, a conclusion is drawn and directions for future research are given. q 2004 Elsevier Ltd. All rights reserved. Keywords: Corporate diversification; Entrepreneurship; New business development

1. Introduction Companies with mature businesses struggle to deliver the growth rates demanded by shareholders and analysts and often opt for diversification. Generating new diversification opportunities, however, is a major challenge for them, which often seems to be more difficult than in the past due to the following reasons: † The barriers to entry have increased due to the fact that nearly all new growth markets are global right from the start. In the 1960s and 1970s, when many companies diversified for the last time, many industries were still not global. † The increase of efficiency in R&D and the reduction of long-term research budgets and slack resources have diminished the importance of R&D as a source of important new diversification ideas.

* Tel.: þ49-711-811-7989; fax: þ49-711-811-7991. E-mail address: [email protected] (E. Lichtenthaler). 0166-4972/$ - see front matter q 2004 Elsevier Ltd. All rights reserved. doi:10.1016/j.technovation.2003.12.005

† The core technologies of many companies seem to be increasingly mature. Increasing R&D budgets does not automatically lead to fundamental innovations which enable the generation of new businesses. † Many companies have switched to value-based management and acquisitions of well managed and profitable companies, which were often done in the past, often do not pass the new assessment criteria. An example of such an criteria is a 10% return on the capital employed, which cannot be realized due to missing synergies. † In order to overcome this dilemma, many companies intend to invest in the early stages of business life cycles of future growth markets and have created corporate venture funds. But these venture funds are not a shortterm solution to their empty growth pipeline. To fill the growth gap, they also have to invest in industries in medium positions of their life cycles. † Many companies do not know how to detect future growth markets or even do not know where to start from in order to generate growth opportunities. Often, they have a set of historically grown businesses, which had a common denominator, such as production competencies,

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as a success factor. Today, success factors have changed and synergies among businesses have disappeared. Many companies, therefore, realize that a more holistic approach towards the management of diversification and growth is needed, but they cannot specify what to modify. As a consequence, companies optimize individual elements of the overall process, such as merger and acquisition processes (M&A), venture funds and innovation processes. Furthermore, companies increasingly demand from their R&D not only the development of the technologies needed for the existing businesses, but also the generation of new businesses. R&D management on the other hand often deplores missing input from corporate strategy regarding the question of which kind of businesses to develop. Also ventures funds, M&A groups and existing businesses can generate diversification opportunities in the diversified company and need guidance for their search activities. Corporate strategy, therefore, regularly has to define the routes for corporate diversification. Firstly, it has to communicate a vision and identify core competencies and industries of interest which can guide search routines. Secondly, it should regularly analyze existing diversification initiatives and identify additional diversification opportunities. Such a holistic picture of diversification opportunities is a necessary precondition for effective resource allocation. In most companies, these preconditions for a systematic diversification process do not exist. Diversification opportunities emerge and are assessed on a stand-alone basis and not compared with other diversification opportunities. It is not only the cost of a systematic approach to diversification which stops companies from systematically approaching this process, but also the fact that many companies do not know how to manage this process systematically. Therefore, this contribution describes a systematic approach towards the identification of diversification opportunities.

integration into the company have to be removed or only appropriate means of entering the business have to be found (Roberts and Berry, 1985). Furthermore, entrepreneurship research often does not take a multi-project view of this process. The question as to how diversification opportunities are informally or systematically identified and assessed are hardly treated in literature (Mu¨ller-Stewens, 1990; Trott, 1998; Zahra, 1999; Zahra et al., 1999; Shane, 2000). Even though research on corporate strategy today emphasizes that the success of diversification depends on a clearly defined corporate strategy (Porter, 1987; Goold and Campbell, 1987; Goold et al., 1994; Ringlstetter, 1995; Collis and Montgomery, 1998), there is currently no link to the research on the identification of diversification opportunities. Furthermore, research (Markides and Williamson, 1994; Teece and Pisano, 1994; Sanchez et al., 1996; Teece et al., 1997) discusses how synergies can be found in diversification, but it does not operationalize how existing competencies or the vision of the company can be used to identify new businesses. So there is a lack of research on how diversification opportunities can be identified and assessed systematically and what the inputs are that are required from corporate strategy. This contribution discusses the process of the systematic identification and assessment of diversification opportunities and its organization within a diversified firm. It is based on the experiences of the author in improving the corporate diversification process in a technology-driven, diversified multinational company during the last 2 years and many interviews in companies with similar and very diverse corporate strategies. This article deliberately takes a corporate strategy perspective and analyses what the inputs are that are required from corporate strategy and what the role of R&D should be in this process.

3. Diversification and value-based management 2. Past research and methodology Existing research on diversification discusses mainly the relation of business relatedness on company success from an ex-post point of view (Bu¨hner, 1987; Chang, 1996; Fey, 2000). Furthermore, selected implementation aspects of diversification strategies such as radical innovation processes, new venture processes or M&A processes are discussed (Burgelmann, 1983; Garud and Van de Ven, 1992; Pfister, 1997; Gerybadze, 2000; Chesbrough, 2000; Ahuja and Lampert, 2001; Linz, 2001). These research streams, especially R&D management, often complain about missing inputs from corporate strategy in practice, but never discuss what corporate strategy should deliver. In entrepreneurship research (Bower, 1970; Burgelmann, 1983; Gerybadze, 1997; Markham, 2000), the diversification idea already exists and only the barriers for its

There are many different definitions of the term ‘diversification’ (Penrose, 1959; Ansoff, 1965; Markides, 1995; Fey, 2000). Here, we define diversification pragmatically as an increase in products and markets of a company. This diversification can be related or unrelated to current competencies,1 which cover all areas of the value chain ranging from technology to distribution channels. A company that wants to diversify has several opportunities starting from its current market and competence portfolio (Fig. 1). Acquiring already existing or new competencies for the company’s current markets is not a diversification according to our definition. Nevertheless, 1 Competencies are “complex combinations of tangible and intangible assets, people, and processes that organizations use to transform inputs into outputs. Finely honed competencies can be a source of competitive advantage” (Collis and Montgomery, 1998).

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Fig. 1. Different diversification strategies.

many authors (e.g. Granstrand, 1998) are using the term competence diversification for that process. Entering existing markets which require competencies that the company already possesses is only possible if the company has a major competitive advantage. Such a competence should at best be of a disruptive nature. As disruptions are difficult to anticipate (Christensen, 1997; Adner and Levinthal, 2002), a fundamental competitive advantage should be planned, which finally will or will not be sufficiently large to be disruptive. Depending on the size of the competitive advantage, the industry can be entered by internal or external growth.2 The strategy which can be pursued is, therefore, called disruptive strategy. Entering existing markets without already having the major relevant competencies for this market normally requires external growth. If capital markets are efficient, external growth from a value-based management point of view is only possible if the industry is still fragmented or if there are companies which need restructuring. Such companies can be used as a growth platform for further external and internal growth. This strategy is, therefore, called buy and build strategy. Entering existing markets with new competencies means serving existing or latent customers with a different offering. Such offerings have to be of a disruptive nature. These can be disruptive technologies and also market disruptions. A good example for a market disruption are Chinese consumer goods companies which used their large home market to build scale effects and then entered the world market from 2 As the above classification is of a dichotomic nature, we distinguish only between internal and external growth. Certainly, there are many cases in which alliances and other forms of cooperation are the appropriate modes of entering an industry.

their low labor cost production sites. This strategy is therefore called disruptive strategy. Entering new markets can normally be realized in a very early stage through internal growth if the company has already the major competencies necessary in these markets. The strategy which can be pursued is therefore called pioneering strategy. Entering new markets, where competencies are needed that other companies already possess but that the company in question is lacking, normally requires external growth because building the competencies internally demands too much time. This strategy is therefore called buy and build strategy. New markets that necessitate new competencies are normally emerging markets. These markets can usually be entered through internal growth or by small acquisitions. The strategy which can be pursued is therefore called pioneering strategy. If one relates the different diversification strategies to the life cycle of businesses and industries, it becomes apparent that the diversification strategies each have only a relevance for certain parts of the business life cycle. Pioneering strategies are particularly relevant for the early stages of the business life cycle. Buy and build strategies make sense in medium stages of the business life cycle. Disruptive strategies focus on the later stages of a business life cycle. Also the time frame of the strategies differs. Pioneering strategies often have a longterm view. Buy and build strategies often have a medium-term view whereas disruptive strategies require a medium- to long-term view (Fig. 2). Every company has to make the decision on how to build its diversification-based growth pipeline. On which stages

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Fig. 2. The business life cycle and different diversification strategies.

of the life cycle the growth strategy will be focussed depends on several factors. Firstly, the specificity of the competencies limits the search field of a company. Technology-driven companies, such as Sony, have rather specific competencies rooted in technology and innovation. These competencies can be applied only to a limited amount of applications. With increasing distance to the core business and competencies, these companies are increasingly risk averse and tend to enter new businesses only in more mature stages of their life cycle (Fig. 3). Companies like GE with more generic competencies, such as process efficiency (e.g. six sigma) or recruitment of excellent managers, can apply them to a much broader spectrum of businesses. These companies focus on more mature businesses because only in these stages, the process competencies generate sufficient value. Companies like Emerson Electric or financial investment companies have very specific competencies limited to M&A, restructuring and portfolio management. In order to generate value, they have to sell the acquired companies after restructuring or when there is a buyer willing to pay a sufficiently high price. There are currently only few companies, which actively try to disrupt existing industries. Traditionally, R&D focused on generating radical innovations for existing businesses or followed pioneering strategies. Disruptive strategies need a much more business-oriented approach than pioneering strategies. Shifts in success factors have to be monitored or actively generated. As internal growth is not sufficient, internal activities have to be combined with external growth. Often neither corporate R&D or corporate ventures

Fig. 3. The specificity of competencies and their perceived reach concerning the business life cycle and the distance to the current business portfolio.

provide a sufficient critical mass to enter an industry. Therefore, corporate planning, M&A, R&D and corporate venture funds have to be tightly coordinated for the generation and implementation of disruptive diversification strategies. The above-discussed differences in corporate competencies are the result of clearly defined corporate strategies and long learning processes. As a result, these competence profiles cannot be changed quickly. Furthermore, trying to build them equally leads to an inhomogeneous competence portfolio and an insufficient leverage of competencies. Secondly, choosing the style of diversification also depends on the current growth pipeline and the future growth targets. Some companies have very specific competencies which can be successfully applied only within its given businesses. Other companies do not have a clear parenting advantage for its businesses. These companies often do not have the sufficient competencies for any of the diversification strategies (Fig. 4). Many high-tech companies with mature, but technology-intensive businesses do not have the sensors to identify businesses in their emergence. In the growth stage of businesses, they often identify them, but classify them as being too risky compared to existing and profitable businesses. In the maturity stage, the businesses are perceived as very attractive, because the industry profitability is high compared to the existing businesses. The impending commoditisation and the declining growth rates are ignored and therefore companies enter the industry through external growth. Due to the lack of sufficient synergies, such acquisitions often do not make sense. The companies therefore often have to rebuild their corporate strategies, especially developing a clear parenting advantage for its businesses.

4. The search process for diversification opportunities The search process for diversification opportunities is a knowledge generation process (Nonaka and Takeuchi, 1995) with the input of information on current trends and company strategy and competencies into well-assessed business ideas. Fig. 5 shows the process and its individual steps. The systematic or informal identification of business ideas can be the result of a monitoring of trends and business opportunities in the environment of the company or the generation of ideas. The search activities, especially the systematic ones, need strategic guidance through clearly defined visions, strategies and competencies on business and corporate level. This prior knowledge is a necessary prerequisite (Cohen and Levinthal, 1990). Otherwise, many opportunities can be missed out and it will be very difficult to focus the search. The search can be framed by the corporate vision, competencies and businesses. Such building blocks of a corporate strategy can all serve as a starting point to define search fields (Fig. 6).

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Fig. 4. The business life cycle and perceived lack of competencies in companies without a clear cut corporate strategy.

Based on these clearly defined or perceived search fields, a focused search can be started in a second step. If the search fields are only broadly defined, it can be necessary to make another step which is not included in the process segmentation. The search fields then serve as a starting point to define business areas of further interest. Within these business areas, different business ideas can be identified (Fig. 6). A diverse set of information sources should be used in order to break up existing cognitive structures. Often the search realized informally or within certain units, such as R&D, is not sufficient. A very systematic approach is necessary. In the third step, the generated business idea has to be validated. Often business ideas are not yet formulated as a business proposition. In the case of engineers, the idea often describes only a technology and not yet a business model around the technology. This validation requires businessoriented strategic thinking. In the fourth step, the business idea has to be assessed roughly concerning its market attractiveness and the achievable competitive position. Information on fundamental industry characteristics, such

as market size, growth, success factors and rentability can often be easily gathered. If the company has closely analyzed its competencies, it should be easy to assess possible synergies. It is the objective of this rough assessment to filter out as quickly as possible business candidates which are not feasible. In the fifth step, a detailed assessment of the business idea which has passed the preceding filters has to be made. Particularly suited for such an analysis is Porter’s (1980) five forces framework. A necessary prerequisite from topmanagement for the assessments are the minimal size, growth rate, etc. the business ideas have to fulfill. If the idea passes these requirements, synergies have to be calculated in the case of an acquisition or a business plan has to be written in case of internal growth. These assessments have to be realized in a quality that allows the making of decisions on the business idea. Finally, the business ideas can be positioned in a portfolio. As such detailed assessments take a lot of time, only a few ideas can be assessed in that way. Therefore, the first four process steps

Fig. 5. The search process for diversification opportunities as a filter process.

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Fig. 6. Defining search fields on different fields of aggregation.

have to be performed very carefully. The definition of a vision, the strategies and the competencies as a guideline for the identification and rough assessment of business ideas is therefore of utmost importance. The definition of the search fields fundamentally influences the overall quality of the search process.

5. Framing the search: defining search fields systematically How broad a search can be carried out depends on the amount of money which can be spent for it. In many cases, the search can be restricted by clear indication from topmanagement about the type of markets or competencies the ideas should be related to. Within these restrictions, a search can be performed. Novartis, for example, used the umbrella life sciences to search for new businesses. BASF defines itself as a chemical company and therefore new businesses have to be related to chemistry. Hilti uses its direct distribution channel in the construction industry as a platform to generate new businesses. In many other cases, especially in heavily diversified companies with many different search directions for diversification opportunities, a more systematic approach to the definition of search fields is necessary. In the following, we present such a systematic approach. We distinguish between a competence-driven and a market-driven search and between a directed search, the so-called inside-out perspective, and an undirected search, the so-called outside-in perspective. This distinction leads to four different search strategies which are discussed in the following (Fig. 7).

A company which is active in some segments of industry automation, such as robots or pneumatics, could analyze different segments within industry automation, for example, components, systems, module, machinery and service businesses for different industries, e.g. automotive, and for different process steps, e.g. production and packaging. In order to get a complete picture of the market, it is particularly helpful to segment the market into a number of functions. In the field of industry automation, one could define many functions which have to be performed in a factory (Fig. 8). Main functions could be light, air, electricity, production, etc. Each function should be divided into subfunctions, such as illumination or dimming. This functional analysis allows to identify a diverse set of technological solutions and often business models for the same function. Long-term market and technology trends should be analyzed and integrated into a scenario. Such a global scenario for industry automation serves to identify very broad industry trends. This global scenario should be used to segment the market in a future-oriented way. For smaller segments, detailed industry analyses should be carried out. Through a continuous interaction between detailed analyses and a refining of the global scenario, starting points for all three strategy types of diversification can be identified.

5.1. Strategy 1: market-driven inside-out search The market-driven inside-out search strategy tries to identify diversification opportunities within the markets broadly defined in the vision or mission of a company.

Fig. 7. Inside-out and outside-in search strategies for the identification of diversification opportunities.

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Fig. 8. Function-based segmentation of markets.

5.2. Strategy 2: competence-driven inside-out search The competence-driven inside-out search takes the current and future competencies as a starting point for the search. It tries to define the function of the competence and to identify new applications of it. The competencies have to be defined in a broad manner and should provide a competitive advantage within the new application. Only if a competitive advantage can be achieved, there is a chance of generating value by entering a market. Not only technological competencies but also non-technological competencies, such as logistics or distribution processes, can be used as a platform for competence leveraging. Hilti, for example, uses its distribution and customer interface management competencies to generate new businesses. Hilti continuously analyses the needs of employees on construction sites. It gets feed-back from its distribution employees and also has a dedicated team called ‘application research’ in corporate R&D. In this way Hilti has generated new businesses, such as the laser distance measurement.

It acquired the technology from Leica Geosystems, a company focused on distance measurement for land surveying. Infineon, in contrast, uses its technological competencies in the field of semiconductors to become a supplier of biochips for the pharmaceutical industry (Fig. 9). In order to be able to identify systematically possibilities for competence leveraging, the functional analysis is again a very useful tool. The function of the competency should be identified, and possible applications can be easily identified in that way. Ideally, several of the company’s competencies should be used as a growth platform. The ideas generated for pioneering strategies, buy and build strategies and disruptive strategies can be very diverse. Nevertheless, all ideas have to pass the assessments discussed within the search process. 5.3. Strategy 3: market-driven outside-in search The market-driven outside-in search tries to identify attractive markets outside the market domains currently

Fig. 9. Function-based analysis of application fields of competencies.

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defined within the vision or mission of the company and tries to assess the achievable competitive position. Ideally, one would segment the market as in the inside-out search and build scenarios. But as there is a tremendous number of industries to analyze, it is useful to apply heuristics to cut down the industries to be analyzed in detail. One way to get a complete picture of all industries, is to use industry classification, such as the SIC code. There are reports available which analyze more than 170 industry classes in an aggregate way. They allow to determine industry fragmentation and even market size and growth. Using the rough assessment approach by analyzing general industry characteristics and necessary competencies, many industries can be excluded very quickly. As the industry classifications are based on existing and not on future industries, this analysis allows mainly to identify industries with a certain fit to the own company. Opportunities for entering can only be found in the case of very fragmented industries, which can be consolidated. In order to get a view of future industries, the analysis should be complemented by long-term megatrends. There are many different sources for such trends ranging from governmental foresight studies, such as Delphi, to the books of futurists. Furthermore, experts from different industries or universities can be interviewed on industries of the future. Some of these trends are of a very fundamental nature, such as changes in population; others are much more specific. These trends have to be clustered depending on their specificity. Finally, they should be related to specific industries. For industries identified as relevant in the industry classification-based analysis, detailed scenarios should be developed. Within these industry scenarios, opportunities, such as disruptive trends, can be identified. Only if the trends are very specific, new business opportunities can be identified directly, in all other cases, scenarios have to be built (Fig. 10). Industries and business ideas of potential interest have to be assessed in detail. As there are normally no industry experts within the own company, external market research institutes as well consultants and investment banks may be used to get information on industries which allows at least to

analyze their fundamental attractiveness. In order to make a decision, a detailed industry analysis has to be carried out. The parallel analysis of the industry classification and the megatrends as well as the detailed analysis of individual segments and industries allows to identify starting points for pioneering buy and build, and disruptive strategies. 5.4. Strategy 4: competence-driven outside-in search The competence-driven outside-in search tries to identify competencies which are currently not within the competency portfolio of the company but which have the potential to serve as a platform to enter new markets. In the case of technological competencies, patent classifications can be used to get an aggregate, but complete picture of existing technologies. This picture should be complemented by an analysis of technological megatrends. Furthermore, external experts can be interviewed regularly. Non-technological competencies are also of major importance for diversification. Using Porters value chain (Porter, 1985), trends within primary and secondary activities of the value chain can be analyzed. Typical processes may be new distribution forms, such as the Internet, or processes such as logistics. The applications should be at best searched for systematically like in the search with a competence-driven inside-out perspective. In order to limit the time required, it makes sense to search only for applications in a limited number of markets, for example, only in the ones identified in the search based on an industry classification (Fig. 11). All these competencies may be opportunities for pioneering disruptive and buy and build strategies. But it must be stated that entering a new market based only on one competence is not enough to meet success factors. The external competence should be combinable with existing competencies. Entering a new technology area, which has the potential for multiple applications, such as biotechnology, demands to have already some competencies in the application field. This was the case when Sulzer medical entered biotech, which it used mainly for applications in medical technology, such as substituting implants through regenerating joints. But biotechnology was seen

Fig. 10. Identification of search fields for the market-driven outside-in search.

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Fig. 11. Identification of search fields for the competence-driven outside-in search.

as a platform for further growth, due to its multiple applications. If there is no synergy with existing competencies and markets, then normally external growth or alliances are necessary.

6. Organization of the search process for diversification opportunities The search process for diversification opportunities can be coordinated in structural, hybrid or informal forms. Structural forms of coordination delegate certain tasks of the process through hierarchical order. Hybrid coordination forms are project-based approaches to the search process. Informal coordination forms build on individual entrepreneurial activities. Literature strongly emphasizes the importance of entrepreneurs and promoters and claims an entrepreneurial culture, such as at 3M, as a prerequisite for an effective search process. This creates a stronger internal flow of ideas at 3M, but even at 3M, the search process needs guidance from corporate strategy and formal assessment of opportunities. Therefore, in all companies, the three forms of coordination exist in parallel. As already outlined, there is a need for coordination through corporate planning. It has to define regularly interesting search fields by using new trends and search results by others in the organization. Nevertheless, starting from a given search field, the organization of the process differs depending on the different stages of the business life cycle. Searching for diversification opportunities in different stages of the life cycle of a business requires different mindsets and networks. A buy and build strategy requires intense interaction with investment banks and industry specialists, whereas a pioneering strategy requires intense interaction with science and lead customers. Furthermore, the focus of the search, either inside-out or outside-in, has an influence on the organization. An insideout search can be more easily organized as a participative process, because the necessary prior knowledge about the new business often exists at least partly within the company. In the case of an outside-in search, the knowledge normally does not exist within the company. Therefore, companies

have to delegate this task to specialists and get support from external experts. In the following, the organizational implementation inside a company are described depending on the diversification strategy and the search perspective. Trying to identify diversification opportunities for a pioneering strategy from an inside-out perspective should be coordinated by corporate planning. For the coordination of more detailed analyses, corporate planning can be supported by R&D planning and business planning as well as VC funds (Fig. 12). But as in-depth knowledge on markets and new applications of competencies exist within the company, relevant employees should be included as much as possible. Project teams allow to include the most appropriate persons for a limited amount of time. As informal search activities are very important, the planning specialists should define communication routines for informally identified diversification opportunities.3 Overall, the company should be understood as a multi-brained system (Tsoukas, 1996; Orton and Weick, 1990). Trying to identify diversification opportunities for a pioneering strategy from an outside-in perspective needs even stronger coordination by corporate planning. Hardly any employees have the relevant prior knowledge in order to be able to identify diversification opportunities. Therefore, the search activities have to be delegated to members of corporate planning and for selected search fields to R&D management, VC funds and business unit planning. Trying to identify diversification opportunities for a buy and build strategy from an inside-out perspective should be coordinated by corporate planning. For the coordination of more detailed analyses, corporate planning can be supported by M&A teams and business unit planning. But as in depthknowledge on markets and new applications of competencies exist within the company, relevant employees should be included as much as possible. Project-based and informal coordination forms should again be used as much as possible. Trying to identify diversification opportunities for a buy and build strategy from an outside-in perspective should be 3 As in Nelson and Winter (1982), routines are understood as the implicit or explicit organizational ability to perform certain processes.

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Fig. 12. Organization of the search process depending on the diversification strategy and the perspective of the search.

carried out by corporate planning. For more detailed analyses, corporate planning can be supported by M&A teams and business unit planning. As there is hardly any knowledge on external competencies and markets within the company, these tasks have to be delegated to specialists. Motivating employees to participate in such teams as an add-on to their normal work is often difficult. Trying to identify diversification opportunities for a disruptive strategy from an inside-out perspective should be coordinated by corporate planning. On the one hand, in-depth knowledge on the existing industry is needed, and on the other hand, in-depth knowledge on the own, potentially disruptive competencies is necessary. Project teams made up of planning specialists and competence specialists are therefore best suited to come up with potentially disruptive ideas. Trying to identify diversification opportunities for a disruptive strategy from an outside-in perspective should be done by corporate planning. As both knowledge on the existing industries as well as potentially disruptive competencies are not within the company, corporate planning teams should draw heavily on other planning specialists, external industry experts, external venture capitalists and consultants. The organization of the process may differ between companies because the corporate strategies and along with it the focus on different stages of the business life cycle and underlying diversification strategies will be different. But as there are only few companies which exactly adhere to one of the generic corporate strategy types, most companies will have to be able to perform several of the above diversification strategies in parallel. Besides taking into consideration the above-discussed differences in organizing the process, it is important to take a process view of the organization and to select task performers for each process step (Fig. 13). If this is not

done, companies tend to optimize only selected elements of the overall process, such as M&A or VC funds. The definition of search fields for diversification opportunities should be coordinated by corporate planning. Together with top-management, it should set the framework for the search and generation of opportunities. This framework can be a clearly defined vision, an openly articulated diversification strategy and the identification of core competencies. Together with a company culture which rewards such initiatives, it guides informal, hybrid and other structurally coordinated initiatives within the company. For some strategies, especially pioneering and disruptive strategies, it is useful to define even more narrowly the framework, here called search field. If such search fields do not exist, there is a risk of losing focus. Especially corporate venture funds risk the generation of many small businesses in diverse industries which do not have the critical size for a strategic business unit within a large diversified firm. The identification of business ideas can be realized in a focused way starting from the frameworks or search fields mentioned above. VC funds can search internally and externally for opportunities. M&A teams can systematically start to look for opportunities based on such search fields. R&D can generate innovations with a pioneering or disruptive strategy in mind. Particularly helpful for these strategies is a systematic technology intelligence process as well as a systematic lead application research in R&D (Lichtenthaler, 2000). Hilti, for example, has generated such an application-driven search for new businesses in corporate R&D. The business units can generate systematically new business ideas starting from their core competencies. Another possibility are cross-functional projects teams which can be made up of corporate and business unit teams. One way to get the informal search process for diversification opportunities started is a business plan competition. This may initiate the necessary cultural change

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Fig. 13. Tasks and task performers of the search process for diversification opportunities.

and make many employees articulate their already existing business ideas. In all these search activities, it is necessary to use external market researchers in order to break up the internal dominant logic. Unique knowledge, however, can hardly be gained from the large consulting companies or market research institutes. It often makes more sense to let chairs at different business schools assess different industries. The validation of the business ideas should be participative. It should be performed by the groups which have identified the business ideas. In the case of planning specialists, this should not be a problem. But many business ideas articulated are not yet formulated as a business opportunity. Engineers, for example, often see technologies as business opportunities even though they are not disruptive and therefore do not allow entry into an industry. Managers from business units often suggest entry into a very mature industry by acquiring successful companies which finally cannot be done due to a lack of synergies. For them, a network of strategically trained managers should be created which can help to formulate business opportunities. Furthermore, teams may be built regularly in order to validate ideas. The rough assessment of the business ideas should also be participative. Often, engineers or product managers do not have the necessary methodological knowledge and the routine to make such rough assessments. In order to enhance the ability of the overall organization to carry out the rough assessments, it makes sense to train lower and middle management in strategic analysis. As it is not possible to train quickly a major part of lower and middle management, several nodes within the organization have to be created which can organize such rough assessments. Particularly suited are specialists of corporate planning, venture funds, business unit planning and R&D planning. If there is a large flow of ideas, further nodes should be created in order not to flood them. If the business idea was generated

by a dedicated project team or some planning specialists, the rough assessment should also be done by them. The detailed analysis of the business idea should be ideally participative. Often engineers or product managers neither have the time nor the necessary methodological knowledge and the routine to do such rigorous assessments and to formulate business plans. Therefore, several nodes within the organization should be created which can organize such detailed analyses. Particularly suited are specialists of corporate planning, venture funds, business unit planning and R&D planning. Furthermore, qualified members of lower and middle management should be included in the assessment. Finally, the search for diversification process should lead to better decisions on diversification. Therefore, not only the information is relevant, it also has to be communicated to decision-makers. Decision-making bodies for diversification decisions should be created, otherwise there is a risk that diversification initiatives from different actors within the company do not get heard. These decision-making bodies should have budgets to allocate the necessary resources. If resources have to be reallocated every time and if further new structures are first to be created to implement the decisions, then a possible time advantage in realizing the business opportunity might get lost. Such dedicated decision-making bodies can be venture funds, diversification boards on corporate level or business unit level, corporate financed R&D resource allocation processes. Whether there are dedicated decision-making structures or not, the size of the investments normally necessitate the inclusion of top-management.

7. Conclusion In the 1960s and early 1970s, diversification was en vogue in industry and academia. After the failure of many

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companies in diversification, it was seen as value destruction in the 1980s and 1990s. In the late 1990s, academia developed a more refined view of diversification. The success of diversification depends among other factors on a clearly defined corporate strategy. Today, after years of refocusing on core businesses, many companies have to diversify, because they cannot fulfill the growth expectations of shareholders and analysts with their mature businesses. In literature, however, there are hardly any remarks on diversification from a management perspective in a holistic form. This contribution made a first step to fill these research gaps. Firstly, three generic diversification strategies were distinguished and related to the life cycle of businesses. Different forms of corporate strategies and their use of the different diversification strategies were discussed. Secondly, a pragmatic process model for the search of diversification opportunities was developed. Along the process steps, the tasks of the process were laid out and the inputs from corporate strategy were emphasized. As there are many areas to search for diversification opportunities, four different search perspectives were presented, which can help to limit the search. Thirdly, differences in the organization of the process were discussed depending on the diversification strategy chosen and the search perspective. In discussing the three forms of coordination of the process in parallel, this contribution went strongly beyond existing research, which is focused either on the description of promoters or on the activity of corporate VC funds. The coordinating role of corporate planning in the search process for diversification opportunities was emphasized. This contribution was based mainly on the experiences of the author in improving the diversification process in a technology-driven diversified company. It further built on discussions with several companies with similar and very diverse corporate strategies. Future research should go beyond this action-based and exploratory research and analyze the search process for diversification opportunities of a large number of diversified companies.

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Eckhard Lichtenthaler received a Master’s Diploma in Industrial Engineering from the University of Karlsruhe, Germany, and a Master’s Degree in Business Administration from the University of Toulouse I, France. He has a PhD in technology and innovation management from the Swiss Federal Institute of Technology Zurich (ETHZ), where he is also a lecturer. He is manager in the corporate planning department of Robert Bosch GmbH, where he is occupied with portfolio optimization, identification of new businesses and reengineering of technology and innovation management processes.