FREE online courses on Corporate Strategies - Diversification Strategies - Resources and Diversification

 

In addition to having incentives to diversify, a company also must possess the correct mix of resources--tangible, intangible, or financial--that make diversification feasible.

 

However, remember that resources create value when they are rare and mobile. In other words, resources that are not rare, valuable, costly to imitate, and nonsubstitutable, can be more easily duplicated (or acquired) by competitors.  Thus, it may not be possible to create value using such resources.

 

The excess capacity of tangible resources may be used to justify diversification, especially when the company sees opportunities for activity sharing.  However, value-creation may be possible only in related diversification. Plant and equipment (used to manufacture products) are generally less flexible because they generally can be used only to produce closely related or similar products (products that are manufactured or produced using similar manufacturing technologies). The excess capacity available from a company's sales force also may be more effective with related diversification because it can be used to sell similar products (because a sales force's knowledge and skills will be more relevant in dealing with similar product characteristics, customers, and distribution channels).

 

However, remember that using tangible resources also creates interrelationships through its activity linkages in production, marketing, procurement, and technology and that these interdependencies often reduce company flexibility and may, in fact, increase the risk of failure. Ideally, a company's intangible resources--because they are less visible and less understood by competitors--should be used to facilitate and create value from diversification.