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Competence-based Diversification

Article in Long Range Planning · April 1997

DOI: 10.1016/S0024-6301(96)00113-6

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Competence-based Diversification
Vittorio Chiesa and Raffaella Manzini

An Internal Perspective Approach to

Diversification
The process of diversification within firms has
received much attention in the business literature.
Various branches of economic and strategic thinking
have included diversification among the principal
items of their theories, recognizing its influence on
the growth, performance and competitive advantage
of firms. Ramanujam and Varadarajan’ give an inter-
esting and helpful overview on how different streams
of thought have investigated the concept and process
of diversification, pointing out their different per-
spect ives.
In the literature, the process of diversification has
been analysed from two main points of view: 1. a
perspective external to the firm, which focuses on the
markets/businesses/industries entered, the prod-
uctsiservices offered and the clients/geographical
areas served; 2. an internal perspective which focuses
on specific factors within the firm which affect (and
are affected by) the process of diversification, i.e on tive, the intrinsic coherence and continuity of the
the internal determinants and the main internal chan- ‘trajectory’ of diversification followed by firms over
ges implied. In this sense, the attention shifts from time.
the output variables to the input and state variables The article consists of four sections: in the first
of the diversifying firm, seen as a dynamic system,’ section the theoretical basis is put forward; in the
and to the relationships between diversification pro- second section internal determinants and sources of
cess and tangible and intangible resources of the firm. diversification are analysed; the third section shows
In this article, starting from an analysis of the con- the diversification process classification and its use
tributions to the resource-based, competence-based in a dynamic perspective; in the fourth section mana-
and evolutionary theories (which have focused on gerial implications are discussed.
diversification from an internal perspective), a frame-
work for interpreting the diversification process is
proposed. The theoretical basis is provided by a pre- The Theoretical Base of the
vious work of the authors, in which the concept of
competence is analysed.3 A classification is proposed
Framework
of different patterns of diversification, based on the Suggestions from the literature are here integrated in
specific resources and capabilities which are a framework presented in a previous work,3 which
exploited by firms through diversification. The frame- analyses the different levels of competencies existing
work also helps to investigate, in a dynamic perspec- within firms and how they interact with each other in

Pergamon Long Range Planning, Vol. 30, No. 2, pp. 209 to 217, 1997
PII:SOO24-6301(96)00113-6 0 1997 Elsevier Science Ltd. All rights reserved
Printed in Great Britain
0024~6301/97 $17.00+0.00
a dynamic process. This is taken as a starting point
for interpreting the process of diversification.
This model identifies three different levels of com-
petences:

0 The first level of competence refers to the system

view capability of the firm, which is the capability
to envisage the evolution of the characteristics,
boundaries and actors of the competitive context
and to promote and develop management criteria
that coherently match the firm’s expectations. In
this sense, the system view consists of the capa-
bility to foresee the evolution of the firm’s context
(industry foresight) and the capability to view the
firm as a co-ordinated and integrated set of
resources. The system view capability is respon-
sible for four major outputs:

l establishing the firm’s goals; in fact, the system

view capability leads top management to ident-
ify the desired role of the firm in the future and
to establish a consistent set of objectives;
l creating and diffusing the corporate culture and
values within the company;
l identifying the guidelines that support man-
agers in shaping critical procedures in strategic
management, such as those relevant to planning
and control, resource allocation, decision mak-
ing etc.
l guiding the design of the firm’s organization.

0 The second level is that of distinctive capabilities,

which refer to the definition of repeatable patterns described above. This will be helpful for identifying
of action that allow the co-ordinated and inte- the ‘forces’ which stimulate and guide the process of
grated deployment of the firm’s knowledge and diversification within firms, and for distinguishing
resources, aimed at attaining strategic goals. The the different patterns of diversification firms can
practical result of the distinctive capabilities is follow.
the definition of organizational routine? that
allow the firm to exploit its distinctive skills and
knowledge to manage activities coherently with Internal Determinants and Sources
the goals it wants to achieve. Organizational rou- of Diversification
tines can concern any management processes
(new product development, product distribution In this section the relationships between a firm’s capa-
bilities at each level [according to the theoretical
and sales, administrative processes etc.).
framework presented) and the process of diver-
0 The third level of competences refers to the sification are studied.
capacity to embody the distinctive capabilities of At the first level, the system view of the firm allows
the firm into core outputs, i.e. into core it to identify the opportunity for diversification,
components, core products, core production pro- through matching its resources and capabilities
cesses, core services, which are unique and inimi- with the envisaged evolution of the competitive
table, differentiate the firm from competitors, are context.
a source of potential profit and can be used across
At the second level, diversification concerns the
different end products.
possibility to exploit the distinctive capabilities
of the firm, through transferring and/or replicating
The hierarchical architecture of competence is sum-
the organizational routines developed by the firm
marized in Figure 1.
in order to exploit its skills and knowledge.
In the following sections reference is made to the
concept of competence and to the terminology At the third level, diversification is linked to the

Competence-based Diversification
 opportunity to exploit the core outputs of the firm Obviously, decisions concerning the why, where,
for different (new) products and services. what and how of diversification are critically inter-
related to each other. Factors stimulating the process
System View Capability of diversification are usually strictly linked to the
The relevance of managerial resources is greatly choice of the specific business to be entered. For
emphasized in diversification literature. Managerial example, most firms in the tobacco industry decided
capabilities are seen, on the one hand, as the real root to diversify their activities in order to invest available
of the diversification process (since they allow the financial resources and reduce their risks (conse-
recognition and the exploitation of diversification quently, they chose to diversify into the food industry
opportunities) and, on the other, as a resource itself which is characterized by a relatively low risk); Gil-
that new and existing businesses may share. lette and Bit, in order to deploy their distribution
The role of the ‘dominant logic’ of corporate man- channels, invested in the reciprocal core business
agement, as the engine of diversification, has been areas, exploiting the similarities existing in the dis-
dealt with by various authors.5,6 The dominant logic tribution and marketing logic of the two businesses.
is defined as “a mind set or a world view or con- As mentioned above, managerial capabilities can
ceptualization of the business and the administrative also be shared among different businesses,6~7~g~‘0 and
tools to accomplish goals”, and may be seen “as a may represent the actual source of synergies and
shared cognitive map (or set of schema)“.6 The sch- advantage. This occurs when the same dominant logic
ema characterizing the dominant logic of the firm can be deployed in different business areas. But cul-
guides top management in allocating resources among ture and management principles can affect the per-
businesses, in formulating the business units’ stra- formance of a diversification process in both ways:
tegies and co-ordinating them and, hence, in guiding there is a positive influence if real managerial syn-
the process of diversification. ergies are actually identified and exploited and if the
The management of Salomon, for example, led managerial culture and values coherently match those
diversification into new business areas which showed required by the new activities. There is a negative
similarities in terms of competitive structure and key influence if this ‘fit’ does not exist, or if the man-
success factors. Salomon diversified from ski bind- agement does not recognize the need for diversity and
ings t.o ski boots to cross-country ski equipment, does not suggest the necessary modification for the
which were comparable in terms of intensity of com- organizational routines and structure. For example,
petition, market fragmentation, geographical market in the early 1980s Ciba-Geigy acquired Reckitt &
and innovation dynamics. This allowed Salomon to Colman, a company producing healthcare consumer
apply the same managerial strategy, based on product products, thinking that the managerial logic schema
innovation, aggressive marketing and sales at a world- and culture of over-the-counter pharmaceuticals were
wide level, to all these businesses.’ also adequate for managing the new business; but this
The system view capability of the firm determines was not the case, diversification failed and Reckitt &
the rchy of diversification, i.e. the motivations that Colman was sold after few years.
stimulate firms to enter new businesses. As a matter
of fact, it provides stimuli to diversification, sug- Distinctive Capabilities
gesting the most attractive opportunities according to Diversification may relate to the exploitation of a
the envisaged evolution of the competitive arena and firm’s distinctive capabilities, i.e. to the replication
to the desired role of the firm within this context. In of its organizational routines. As stated above, organ-
this sense, managerial capabilities also influence the izational routines can be defined as patterns of inter-
where of diversification, i.e. the new business or con- actions which allow the firm to deploy its distinctive
text to be entered. Obviously, decisions concerning skills and knowledge in a co-ordinated and integrated
the direction of diversification are substantially way; in other words, they represent ways of solving
linked to the evaluation of the distinctive competenc- particular problems in order to attain a better per-
ies, resources and capabilities actually possessed (or formance with respect to competitors.4 The exploi-
still desired) by the firm. This means that the system tation of organizational routines as a source of
view also identifies the what of diversification, i.e. diversification itself has been rather neglected in the
the critical resources and capabilities that can be literature. Few authors recognize that the advantage
exploited in the new businesses. Ideas for competence that can be attained through the replication of organ-
and resource leverage, indeed, frequently come from izational routines is particularly relevant since they
the system view capability of the firm.8 Finally, the involve a strong tacit dimension, related to the associ-
system view gives also basic insights concerning the ated skills and knowledge that are not (or cannot be)
how of diversification, providing some guidelines for codified.“,” On the other hand, the exploitation of
shaping the organizational structure of the firm coher- intangible resources for diversification has been stud-
ently with the objectives, direction and scope of ied in the literature, particularly by the resource-
diversification. based, competence-based and evolutionary theorists.

Long Range Planning Vol. 30 April 1997

In the resource-based theory, diversification is explai- resources and excess capacity (such as the embodi-
ned with the need to broaden the exploitation of exist- ment of a component in multiple products, the use of
ing and already deployed intangible resources (such a production process to manufacture different prod-
as technical knowledge, organizational skills etc.) to UCtS)*‘0,‘3,14 With respect to the traditional view, the
enhance their application potentia1.10a13 In the com- competence-based theory emphasizes that the poten-
petence based theory, competence is defined as “a tial of core outputs as a source of additional profits
bundle of skills and technologies”8 and a firm’s suc- lies in their uniqueness and capacity to create value
cess is linked to its capability to recognize and exploit for the customer. Their exploitation is not related to
the opportunities provided by its unique and dis- their ‘quantity’, i.e. to an excess capacity, but to their
tinctive competencies into a variety of applications. intrinsic and inimitable value.
The evolutionary perspectivell emphasizes that the
‘tacitness’ (or the non-codified base) of skills and
knowledge, which is the ultimate source of com- The Diversification Process
petitive advantage, can be reinforced through their How each level of competence relates to the process
continuous application. In fact, skill is defined as a of diversification is discussed in this section. So far,
“capability for a smooth sequence of co-ordinated the literature on diversification mainly studied the
behaviour that is ordinarily effective relative to its exploitation of the firm’s core output and tangible
objectives”, which means that its intrinsic value can resources; significant attention has been paid also to
be sustained by its use and embodiment in different the deployment of intangible resources and to the
applications. Therefore, the diversification based on guiding role of managerial capabilities. But whether
intangible resources cannot be explained with the and how organizational routines may be exploited for
presence of unused resources and excess capacity; on diversification has not been dealt with.
the contrary, it is the availability of used resources In our view, a deeper understanding of how diver-
which, providing the basis for new applications, sification relates to the use or change of a firm’s organ-
stimulates firms to enter new businesses. In this izational routines is needed, especially to what extent
sense, diversification based on intangible resources a diversification process which is based on the use of
can be linked to the concept of ‘stretch’ and ‘lever- existing tangible and/or intangible resources can also
age ’ ,a i.e. to the need, for successful firms, to stretch rely upon the use of the associated existing organ-
intangible resources in order to obtain their maximum izational routine, and whether a diversification pro-
performance and to leverage them into different busi- cess requires the use of organizational routines
nesses in order to exploit their potential. (which can be themselves a source of diversification)
Other intangible resources such as brand, image, and the use or change in the associated resources.‘“.”
goodwill etc. can be a source of diversification. This As a matter of fact, different indications come from
is typical, for example, for fashion companies which the analysis of diversification cases. The separation
exploit their brand for perfumes, stationeries and fur- of Japanese firms into the USA and UK is an example
nishing accessories. The exploitation of these intan- of joint replication of resources and routines: plants,
gible resources should be carefully managed. Marks manufacturing technologies and also organizational
& Spencer tried to expand in the USA, relying on its routines for managing production processes have
brand image. However in the USA the St Michael been transferred to the new countries; similarly, most
brand was not associated with a success and quality public utility companies diversify from energy to
image as it is in UK as the result of long tradition. water and gas distribution exploiting both their physi-
Hence, its exploitation abroad required efforts to pro- cal infrastructure and their routines for managing a
mote Marks & Spencer’s image. Appropriate organ- complex network.
izational routines had to be developed to create and But other examples show that routines/resources
manage a key complementary asset to penetrate the may be distinctively exploited for diversification.
US market. When Canon decided to enter the US market for per-
sonal copiers, it exploited existing technological
Core Output resources (production processes and technologies),
In the competence-based theory, the exploitation of but changed the organizational routines for managing
core outputs is a way to leverage a firm’s com- the distribution system in order adapt it to the pec-
petencies: firms realize a variety of (new) end prod- uliar characteristics of the new market.
ucts through the use of their core products/ The next section puts forward a classification in
processes/services. In other words, diversification is which peculiar patterns of diversification are defined
the result of the use of existing physical assets and according to the roles of resources and organizational
tangible resources to generate different products. This routines (existing within the firm). It is based on the
is the traditional interpretation of diversification, analysis of the preliminary results of five case studies
which is focused on the sharing and transfer of tan- carried out by the authors and four examples taken
gible resources and on the exploitation of unused from the literature.

Competence-based Diversification
 2. Deploying existing resources and developing new
organizational routines is the case of resource-
based diversification: the exploitation of existing
assets in new businesses forces firms to change
their routines. In the 198Os, for example, J & M
Airframes reacted to the decline in demand for its
Tempest (the successful low-level heavy bomber
launched in the late 1950s) by taking sub-
contracted work from other major aerospace manu-
facturers. The technological resources and
capabilities required by the new activities were
the same used for the Tempest. But the shift from
selling a single product to a restricted set of cus-
tomers to managing a variety of products and cli-
ents put a strain on the workforce and the
organizational structure. In particular, it required
new and more flexible organizational routines, e.g.
for the planning and control system, for managing
incentives for employees (which were motivated
before by the product they were working on), for
managing relations with customers. The diver-
Diversification Trajectories sification process in J & M thus forced the firm to
modify certain organizational routines, even
Diversification Patterns though the resources used were almost unchanged.
In this section, a classification is proposed to identify
Other common examples relate to the creation of
different patterns of diversification where organ-
new products through the deployment of the core
izational routines and resources can either be rep-
products of the firm: if these new end products
licated or need to be developed. A matrix can be built
enter markets or industries or geographical areas
considering two critical dimensions: the use of exist-
with substantially different characteristics from
ing resources and the use of existing organizational
those traditionally served, their organization and
routines. We can thus map diversification patterns
management could require some change.
within such a matrix (see Figure 2).
3. Entering new businesses can require firms to inno-
Four main categories can be identified which are
vate both their resources, complementing existing
conceptually relevant:
with new ones, and their distinctive organizational
1. Firms can diversify into new activities in which routines (unrelated diversification). This is prob-
they replicate existing organizational routines, but ably the most common way to diversification.
which require the development/acquisition of new Rarely, does entering a new business allow exact
complementing resources (routine-based diver- replications of routines or resources: usually, there
sification). The new activities require some new is a gap in both resources and routines between
resources and complementary assets to be added what the firm already possesses and what it needs
to the existing ones, but the routines through for diversification. For example, when Benetton,
which they were managed keep their effectiveness. at the end of the 198Os, decided to enter the US
Sony provides an interesting example of routine- clothing market, it was forced to develop a US-
based diversification. Its strategy is focused on style for shops (innovating resources) and also for
some diversified groups of products, of which the managing sub-contractors (innovating organ-
technologies are quite different: TVs, VCRs, elec- izational routines), whose philosophy was com-
tronic cameras, miniaturized audio products etc. pletely different from European ones. An extreme
Sony’s ability relies on its ‘agility’ in moving case of unrelated diversification is where only fin-
quickly into different technologies for large con- ancial resources are transferred (or shared).
sumer products. Sony’s distinctive competence is 4. Entering new businesses through deploying both
related to the organizational routines and the spec- existing resources and organizational routines, is
ific procedures it has developed to manage new a replication-based process of diversification. This
technologies and the mass market for technological is probably the safest way to diversify. In order
products successfully. The process of diver- to ensure the success of diversification, it is only
sification within Sony is guided by a product orien- necessary to check the applicability of the
tation strategy and is based upon its ability to resources and organizational routines in the new
acquire or master whatever technology is needed competitive context. But the process of perfect rep-
to attain the product objectives. lication, without any enhancement or expansion,

Long Range Planning Vol. 30 April 1997

 Box 1

New The Canon Case

The proposed framework can be used to describe the

diversification process at Canon in the last 50years.
Figure 4 shows the critical trajectory which Canon
followed.
Canon’s process of diversification is mainly routine-
Existing based, since most innovations concern the firm’s
tangible and intangible resources, while most
organizational routines have been replicated. The
’ Existing New coherence of Canon’s trajectory is shown: existing skills
Routines I. I and technologies have usually been integrated with the
new ones, in order to realize new applications.
Diversification in the synchroreader business is an
example of a diversification which has not generated
further developments (entering this business required
the development of specific routines for the
professional business which were unsuccessful and not
coherent with the firm’s development pattern).

cannot find new applications indefinitely. Just as

the newly-based diversification is the most
The proposed framework could thus be used for
common, the replication-based is probably the
‘mapping’ the patterns of diversification, in order to
least common. In cases like J & M, the planned
understand, ex ante and ex post, the success of a long-
process of diversification was probably conceived
term diversification process. In the further steps of
as based on the total replication of existing
our research we will analyse if the success of diver-
resources and routines, but experience showed
sification patterns is related to their coherence, i.e. to
that this was not possible. Managing a new set of
the continuity in the accumulation, leveraging and
clients and a variety of products, in fact, required
exploitation of new resources and capabilitiesS8
innovations in some organizational routines.

Trends in Diversification
Managerial Implications
The four cases help define the different categories of The framework proposed is a first attempt for an
diversification. In the long run, indeed, the overall internal-oriented analysis of the diversification
process of diversification followed by firms is not con- process. In our view, it helps to conceptualize and
fined within a single category. In a dynamic view, real interpret the process of diversification and, secondly,
patterns of diversification probably follow complex it provides a managerial tool.
trajectories, consisting of a combination of various From a conceptual point of view, the framework
single processes of diversification, each one belong- puts in relation the path of diversification with the
ing to a specific category. The global trajectory of a internal ‘forces’ which stimulate, guide and constrain
firm’s diversification is shown in Figure 3. the process of diversification. The internal per-
The dynamic view of the diversification’s trajectory spective approach taken helps to give a coherent
clearly qualifies the continuity and the coherence of meaning to the concept of ‘related diversification’.
the firm’s behaviour. Some critical trajectories can be Most authors describe related diversification referring
identified in which the creation of the new resources to its output, precisely to product/service/ market
and routines required for diversification is con- similarities;’ in our framework, related diversification
tinuous and coherent over time (see Figure 3). Each means the opportunity to replicate the resources
branch represents a peculiar direction of diver- and/or the organizational routines already possessed
sification taken by the firm. It is possible to identify by the firm.
to what extent the new resources/routines acquired According to competence-based theory, the frame-
for a new activity have been re-used for other (new) work proposed gives relevance not only to the final
applications. A branch which is outside of a critical desired state of the diversified firm (the position of its
trajectory represents a non-coherent accumulation of activities and businesses), but also to the trajectory
resources and competencies, i.e. a process which followed to realize this objective, pointing into evi-
did not make a contribution to the creation of dence that each step has concrete and relevant impli-
new competencies and capabilities. An example cations for the firm’s organization and resources. The
of a firm’s trajectory of diversification is analysed in literature on competence-based competition emphas-
Box 1. izes that firms’ success, in very dynamic competitive

Competence-based Diversification
 1990s
Office automation

New

Laser printers,
,.......,,.....,.,....,,,....
colour printers

Resources 1960s

opiers, auto focusin

camera, home VCRs
electronic calculators

/ Cameras, video ’
cameras, TV lenses, * .
.: :, ’
micrographic : :
.................. equipment j *
L . . b
:
.. Existing i i i ; j New
.. : .:
..
..

0
.. : Routines i ;
New products ..
.. . : #
introduced .. , :.
.. : :
..
..
New skills/
technologies

Main replicated
organizational
routines

Main abandoned
organizational
routines

contexts depends upon the continuity and coherence
of their behaviour over time. This continuity relates
to the process of accumulation of knowledge and
capabilities, which in a dynamic context represent
a more stable source of competitive advantage than
products and technologies. The entry of Sony into the
VCR business represents a good example of successful
coherence and continuity. According to its mission
(oriented towards a ‘mix of electronic and mechanic
engineering for the mass market’) Sony started work-
ing on the VCR in the late 195Os, when the mass
market was still unthinkable. In spite of the early
unprofitable entry into the mass market for VCRs and
the subsequent lost battle for the distribution of the
Betamax system, Sony’s management still promoted
and promotes investment in this business. This was
explained by the relevance attributed to the skills and
knowledge that Sony was developing in this area,
which actually allow Sony to keep pace with the most
relevant innovations in audio and video systems.

Long Range Planning Vol. 30 April 1997

 Hence, the proposed framework seems to be
adequate to visualize and monitor the continuity and
coherence of the diversification process, since it
points out the dynamic changes of tangible and intan- Basis of Impact on company’s
gible resources and of routines. diversification organization
The framework can also be used to describe and
analyse the process of internationalization of firms, Replication None
viewed as a diversification process aimed at changing Routine LOW
Resource High
the location of their activities and/or markets. The
Unrelated Very high
process of internationalization, indeed, poses again
the problem of exploiting, adapting or innovating
existing resources and routines for a different com-
petitive arena. tine-based version. Changing or creating organ-
The proposed framework may be a helpful tool for izational routines, indeed, may have a high impact
executives in managing diversification. The use of the on the firm’s organization, since this implies chan-
model is two-fold: ges in the ‘patterns of interactions’ among firm’s
employees and/or functional units. According to
0 It may be used for an initial analysis of the the search for continuity and coherence in the
decisions related to diversification. From this firm’s behaviour, a prospective analysis of diver-
point of view, it constrains firms to consider the sification opportunities should be focused on the
implied changes and innovations required for common traits between the current and the new
both resources and organizational routines. We activities in terms of both resources and routines.
have already emphasized the relevance of both Then, the impact of these opportunities on the
dimensions of the ‘space of diversification’ and firm’s structure and organization should be evalu-
the consequences of missing the analysis of one ated.
dimension. Furthermore, it should be noted that 0 The framework allows a retrospective analysis,
different categories of diversification have a pec- aimed at understanding the reasons for success or
uliar impact on the firm’s organization, which failure of diversification. Analysing the direction
should obviously be considered for a successful a firm has followed helps to establish whether, in
implementation of a diversification strategy. As the planning phase, the implications of the chosen
summarized in Table 1, each category implies moves have been undervalued or misunderstood.
changes in the organizational structure of the firm: The case of Marks & Spencer is such an example.
the unrelated diversification clearly requires the Such an analysis can also indicate which cor-
most radical changes, while the replication-based rective actions should be taken when managing an
diversification does not really involve modi- ongoing process of diversification, since it indi-
fications. Table 1 shows that the resource-based cates required changes in resources and organ-
diversification has a greater impact than the rou- izational routines.

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Long Range Planning Vol. 30 April 1997

 is seen as a necessity, even though the CEO will need a team whose members share
his sense of mission. The CEO's problem in this context can include internal
rivalries, inadequate capability and fragmentation.
The decision on future strategic direction is the most complex of all problems but
underlying this are the questions of interpersonal relationships, personal agendas
and fear. There are four possible ownership attitudes to the problem--mature
involvement, decision not to take responsibility, frustration caused by decisions
taken elsewhere and detachment. Case studies were used to explore these ideas.
The first was a small financial services organization. The CEO felt he was a 'one-
man band' and results showed that his style actively discouraged other executives
from putting forward their ideas. In the second case, an accountancy organization,
the sense of increasing frustration at the top of the organization was due to the
perceived intransigence of the partners. In such a firm professionals join to practise
their profession, not to manage an organization. The third case was that of an
international subsidiary of a company in information technology. Competitors were
seen as aggressive and particular emphasis was given to making money and fighting
the competition. Issues included understanding the real strategy and the true loyalty
of the managing director. Today, managers still have short-term targets and top
management is still frustrated.
In any business organization, many discretionary-oriented roles exist. A general
manager's role may have greater discretionary than prescriptive content but this
would be less than that of the CEO. Discretionary roles allow the emergence of
process and content perspectives from their role incumbents. In all three case
studies the first step to ownership was feedback. Indeed the first step to improving
the felt level of ownership by senior managers is to understand the nature of the
blockages to ownership, and the second is to do something to improve the situation.
Content-driven feedback is direct and open and pays more attention to getting the
top team together. The content/process issue, as it precludes concern with the 'I',
focuses on improving the 'we' feeling of a strongly involved team, holding a deep
belief in an internalized and owned sense of strategy.

209 Competence-based Diversification

Vittorio Chiesa and Raffaella Manzini
Using an analysis of the works on resource-based, competence-based and
evolutionary theories, a framework for interpreting the diversification process is
suggested. Different levels of competencies exist. One is the 'system view capability'
of the firm, a second is that of distinctive capabilities, and the third refers to the
capacity to embody the distinctive capabilities of the firm into core outputs. The
system view allows it to identify the opportunity for diversification through
matching resources and capabilities. The second level exploits distinctive
capabilities and the third links diversification to the opportunity to exploit the core
outputs of the firm for new products or services.
The literature emphasizes managerial resources as the real root of the
diversification process. The dominant logic guides top management in resource
allocation, an example being Salomon, the ski makers. The system view determines
the 'why' of diversification but also has to take into account the 'where', 'who' and
'how'. In addition managerial capabilities can be shared among different businesses
and may represent the actual source of synergies. Diversification can also relate to
the exploitation of a firm's distinctive capabilities. However, the exploitation of
organizational routines as a source of diversification itself has been rather neglected.
The resource-based theory defines diversification as the need to broaden the use of
existing intangible resources. Competence is defined as a 'bundle of skills and
technologies' in the competence-based theory whereas the evolutionary perspective

Executive Summaries
 stresses that the skills base can be reinforced through continuous application.
Brand, image, goodwill are also sources of diversification.
The exploitation of core outputs is a way to leverage a firm's competencies as
companies realize a range of new products through the use of their core
products/processes/services. However, a deeper understanding of how
diversification relates to the use of change of a firm's organizational routines is also
needed. When Canon entered the US market for personal copiers it exploited
existing technological resources but changed the organizational routines.
A matrix can be built using two dimensions--the use of existing resources and
the use of existing organizational routines. Firms can diversify into new activities
in which they replicate existing organizational routines but which need new
complementing resources. Or in resource-based diversification, they can deploy
existing resources and develop new organizational routines. Entering new
businesses can require firms to innovate both their resources and organizational
routines or they can replicate both. The pathways can be identified. By using such
a matrix, the process of diversification can be conceptualized and interpreted while
at the same time providing a management tool. The framework proposed may be
used for an initial analysis of the decisions related to diversification or it can allow
a retrospective analysis aimed at understanding the reasons for success or failure
of diversification. A further use is the indication it gives of what corrective actions
should be taken in the future in changes in resources and organizational routines.

page Newspapers: the Slow Walk to Multimedia

Alfonso H. Molina
The ultimate vision of multimedia in the newspaper industry is that of the
'personalized multimedia newspaper'. The first manifestations were in the early
1980s. Today the foundations of a widespread learning process in the direction of
the 'multimedia newspaper' have been laid. One of the driving forces is the
perception of threats and opportunities.
Newspaper corporations are experimenting with services which have a range of
combinations of technology, distribution and delivery concepts, media mixes and
degrees of interactivity and personalisation. The three-dimensional 'evolutionary
space' defined by the axes of multimedianess, personalization and interactivity
highlight the main thrust. A dominant feature is the largely incremental activities
of established newspaper companies. Electronic editions of newspapers are being
generated for transmission or delivery. Use is made of PCs and CD-ROMs. Among
on-line services, the Internet has emerged as a clear favourite for newspapers
engaged in multimedia news editions. Profits are not yet being made as the industry
has yet to determine the most effective ways to become commercially viable. There
are also some more specialized ventures, such as that targeting teleworkers and
combining broadcasting and CD-ROMs to deliver text and graphics on a
m o n t h l y / d a i l y basis.
The movement to Internet will continue and 'multimedianess', personalization
and interactivity should increase in sophistication in the m e d i u m and long term.
More advanced forms of selecting, personalization and interactivity are being
implemented by some newspapers. The Knight-Ridders's Mercury Center was one
of the first to allow readers to contact editors through e-mail. Others are exploiting
the interactive potential of TV. A critical element in the competitive challenge is
the user-friendly, on-screen navigation and display of information. Knight-Ridder
has been experimenting with a PC newspaper format version of its transport and
trade daily 'Journal of Commerce'. Behind the user interface are, of course, the key
factor of quantity, quality and appeal. News is likely to be only part of the range of
choices offered.

Long Range Planning Vol. 30 April 1997