The More, the Better?

To diversify your business activities or not. It's a tough decision. Carly Fiorina faced an uphill battle defending her controversial decision to acquire Compaq in 2002, after Hewlett-Packard announced an operating loss of $208 million for the third quarter, which mostly came from the troubled business server and storage unit.

Now the Chinese-based Lenovo — previously known as Legend — Asia's largest computer maker, says it has decided to retreat from new areas and focus on its core PC business.

In an interview with Michael Useem for Knowledge@Wharton, Lenovo Chairman Liu Chuangzhi said the company's decision three years ago to foray into IT services and the contract manufacturing of motherboards didn't pay off. Lenovo only had revenues of $3.8 billion, half of its target. The soft tech market was harsher than expected, and foreign competition had cut into Lenovo's market share in China, Liu said.

One argument for diversification is that gains from one area help to cushion against risks in another, while opponents claim that spreading across the board threatens to stretch resources thin. Do you think stories of HP and Lenovo offer any lessons? Have you ever had to make a decision to diversify your business activities? What did you do — and how did it work?

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  • Jim Snyder

    To look at expansion/acquisition as an immediate contribution to the bottom line of the venture is myopic.

    Companies who stay focused on existing core competencies and stay "too close" to their customers will not see the next wave/curve of change.

    Key elements of success result from teasing apart the features of an acquired venture into two parts:

    *Contributions to enhancing performance of existing products/offerings extending the curve of existing offerings
    *New "product architecture" that may establish new footholds in a new market (new curve) in unrecognized or underserved markets.

    Let the competencies that contribute to performance enter into the company structure.

    Keep the new architecture elements as separate ventures supported with key resources.

    If an acquisition does not offer both elements to the acquirer, then there is risk of maintaining to much closeness to existing companies and losing competitive advantage.

  • sachin

    i personally think that an individual resembles the aspirations of a company, in the sense that he wants to be where he sees greener pastures than his own backyard(going beyond his core competence).now, it is dependent entirely on the intensity of the individual's or company's desire to add value , rather than generating a cash-cow for, the focus should be to identify the uniqueness of ur value proposition rather than being A ME-TOO GUY.
    SO MY TAKE ON THIS:IDENTIFY(VALUE),& execute being customer-centric.

  • Phil Reichert

    I think most CEOs do it for the ego trip and/or to make the business plan show growth (adding to the stock value).

    It is a very dangerous strategy to move into new markets, especially if you don't add value in the new marketplace. Some will succeed and most will fail.

    It is usually (long-term view) cheaper for a shareholder to buy shares in dominant companies in both markets than it is to buy a share in a company that is proposing a high-risk expansion.