Do you have the resources and capabilities to diversify?

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Why resources and capabilities are important for diversification

When considering diversification it is easy to think with a market orientation – considering the new product areas that the company will be operating within. It is important however to also consider the resources that enable the diversification – how the new resources that are needed will integrate with the existing resources of the company. 

Resources are needed to actually capitalize on the opportunity

Unless the diversification is in an area very aligned with the current capabilities of the company, it is likely that new resources will need to be developed. This may range from more development and operations focused capabilities through marketing sales experience – essentially all activities involved throughout the supply chain – including the overall design, manufacturing, distribution, and sales of the good – may need to be developed or re-learned to allow you to effectively compete in the new area. 

Shared resources may be needed to achieve synergies

It is also important to actively consider the resources of the firm when considering diversification because shared resources is a fundamental way that companies achieve cost-saving synergies through diversification. Without considering the underlying resources, and how they can be better utilized across the new business area, the firm is much less likely to pass the better-off-test associated – whether it makes sense that one firm is doing both sets of activities (i.e., within a diversified firm) as opposed to the activities being undertaken by two separate businesses.

Approaches for developing missing resources

When considering diversification decisions, the build – borrow – buy framework can be useful in determining whether it makes sense to build the necessary resources internally, borrow them by partnering with another firm, or buy them by acquiring another company. 

  • Build: Internal development of the resources. This avoids issues of partnering or the challenges of having to integrate another firm, however, does introduce its own issues associated with whether the desired resource is close enough to your existing capabilities to allow you to effectively develop it yourself. 
  • Borrow: If it is not feasible to develop a resource internally, strategic partnerships are another approach. This is dependent on another firm being able or willing to share their resources with you but can be a way of quickly gaining access to the resources that you need. 
  • Buy: The final approach to gaining necessary resources for the acquisition is to buy them from others – acquiring another company, and integrating it with your firm.

Final thoughts: Are you the best-placed company?

When considering diversification, it is useful to consider if you are the best-placed company to pursue the opportunity. Ultimately, if another firm is much better placed than you are, and they were to decide to enter the market also, then you would face an uphill battle in competing with them. It is not just about whether the opportunity is an attractive one, but whether you are well placed to be able to capitalize on it.