Strategic Management: Formulation and Implementation

Implementing Diversification Strategies

A central concept to understanding and proposing diversification strategies is relatedness. A range of diversification strategies-from highly related to highly unrelated -can be observed.

Pitts and Hopkins (1982) have conducted an extensive literature review and summary on this topic. As they suggested, "the first tasks facing a researcher wishing to measure a firm's diversity therefore, is to identify its individual businesses".

In this review of strategic diversity, Pitts and Hopkins cite three primary approaches:

* The first, resource independence, sees a business as discrete from others of the corporation if the "resources involved are separate from those supporting the firm's other activities."

* The least-employed approach, due to data collection difficulties, defines businesses in terms of market discreteness.

* Finally, businesses can be defined in terms of product differences, viewing each product offering as a separate business.

Pitts and Hopkins here note two primary approaches to the measurement of diversity: (1) the first is based upon the number of businesses in which the firm is positioned; (2) the second approach is termed strategic and assesses diversity by either the relatedness of various businesses or the firm's historical growth pattern.

Rumelt developed, as a variation of Wrigley's (1970) scheme, a typology -single business, dominant business, related business, and unrelated business -according to the degree of strategic interdependence across businesses as well as "the proportion of a firm's revenues that can be attributed to its largest single business in a given year". Nathanson (1980) has developed a system that captures both product and market diversity.