At any given time, businesses are happily buying other unrelated businesses to diversify their risks and raise their growth rates - while other businesses are unhappily flogging the disappointments that have resulted from following a similar strategy in the past.
Probably the numbers are about equal. The success rate will never improve, because of the inherent difficulties of mastering a business of which you know nothing. That isn't only true of acquisitions - it also applies to so-called organic diversifications that you've started yourself.
Listen to an expert like Fred Buggie of Strategic Innovations International, and the first lesson to be learnt is that successful diversification springs from your existing strengths, not from those you buy in. Firms that propose to make a complete break from their present abilities are asking for trouble - and deserve it.
The reasons were made perfectly clear by one of Sir John Harvey-Jones's trouble-shooting visits. This small sub-contractor, Velden Engineering, indulged in golf carts and adjustable beds. These couldn't have been much further removed from its main activity, making small components to order for other engineers.
The golf carts look quite nifty, but not the firm. First, it has no experience or capacity in marketing. Second, it had no experience or facility in efficient series production of assembled products. Third, conducting the first stage of a Buggie investigation - assessing the existing strengths of the would-be diversifier - would be deeply depressing.
The company makes far too many products far too inefficiently. As the trouble-shooter pointed out with some force, using obsolete, slow and labour-intensive machines because they're cheap destroys productivity and damages quality. Despite (or because of) buying cheap machinery, Velden's profits are exiguous.
You can't hope to diversify successfully from a weak base. Any new enterprise will divert time, attention and money from the main business. The first step in diversifying, therefore, is paradoxical - making sure that the base activities are being run as efficiently, productively and profitably as possible.
But what if your inventory of strengths, honestly compiled, does come up with a more encouraging platform? The world is full of possibilities. It isn't just a question of making a choice. Before reaching that stage, management must establish a list of alternatives, potentially valuable uses and extensions of the firm's true talents.
That doesn't mean extensions of your existing product line (which account for most so-called 'new' products). When Mercedes-Benz moved down in size and price to compete against BMW, it wasn't truly diversifying. The current venture into micro-cars, though, does take the company into genuinely new territory.
Its deep knowledge of cars and engineering (and its equally deep purse) are key strengths. But because the micro-car market is so different, Merc has sensibly allied itself with Swatch, which knows far more about low-cost production, miniaturisation and mass marketing.
Like Merc, true diversifiers of any size need outside help. Buggie recommends that, having established what the firm is good (and bad) at, you set down the criteria (product characteristics, return on investment, sales volume, share of market, etc) that the new line of business should satisfy. Then you look outside as well as inside.
Beecham wouldn't now be part of SmithKline Beecham, a global health-care giant, if it hadn't turned to Ernst Chain, the great penicillin pioneer, for advice on where to direct its research. That counsel led to fermentation chemistry and the money-spinning synthetic penicillins. Buggie calls his equivalent use of outsider expertise a 'brain bank' .
First, you need to brainstorm as many ideas as possible in a highly organised session, preferably held away from the firm, with a leader from inside and an outside facilitator. The session needs from five to seven people, drawn from different backgrounds. And you use 'brain bank' experts, recruited from universities, the trade press or wherever, to help the insiders screen ideas and test their technical and economic feasibility.
That will generate a short-list. Then you go through the same process all over again, until you arrive at the single diversification which best satisfies your original criteria. The procedure sounds painstaking and time-consuming. So it is. That's why most diversifiers (see Velden) instead operate on hunch and hope. And that's why they fail.
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