192 Part 2: Strategic Actions: Strategy Formulation
First, the firm may reduce its level of technological change by operating in envi-
ronments that are more certain. This behavior may make the firm risk averse and
thus uninterested in pursuing new product lines that have potential but are not
proven. Alternatively, the firm may constrain its level of activity sharing and forgo
potential benefits of synergy. Either or both decisions may lead to further diversifi-
cation.^100 Operating in environments that are more certain will likely lead to related
diversification into industries which lack less potential^101 , while constraining the level
of activity sharing may produce additional, but unrelated, diversification, where the
firm lacks expertise. Research suggests that a firm using a related diversification
strategy is more careful in bidding for new businesses, whereas a firm pursuing an
unrelated diversification strategy may be more likely to overbid because it is less
likely to have full information about the firm it wants to acquire.^102 However, firms
using either a related or an unrelated diversification strategy must understand the
consequences of paying large premiums.^103 These problems often cause managers
to become more risk averse and focus on achieving short-term returns. When this
occurs, managers are less likely to be concerned about social problems and in mak-
ing long-term investments (e.g., developing innovation). Alternatively, diversified
firms (related and unrelated) can be innovative if the firm pursues these strategies
appropriately.^1046-5b Resources and Diversification
As already discussed, firms may have several value-neutral incentives as well as
value-creating incentives (e.g., the ability to create economies of scope) to diversify.
However, even when incentives to diversify exist, a firm must have the types and levels
of resources and capabilities needed to successfully use a corporate-level diversification
strategy.^105 Although both tangible and intangible resources facilitate diversification,
they vary in their ability to create value. Indeed, the degree to which resources are
valuable, rare, difficult to imitate, and nonsubstitutable (see Chapter 3) influences a
firm’s ability to create value through diversification. For instance, free cash flows are a
tangible financial resource that may be used to diversify the firm. However, compared
with diversification that is grounded in intangible resources, diversification based on
financial resources only is more visible to competitors and thus more imitable and
less likely to create value on a long-term basis.^106 Tangible resources usually include
the plant and equipment necessary to produce a product and tend to be less-flexible
assets. Any excess capacity often can be used only for closely related products, espe-
cially those requiring highly similar manufacturing technologies. For example, large
computer makers such as Dell and Hewlett-Packard have underestimated the demand
for tablet computers. Apple developed a tablet computer, the iPad, and many expect
such tablets to eventually replace the personal computer (PC). In fact, Dell’s and HP’s
sales of their PCs have been declining since the introduction of the iPad. Apple sold 42.4
million iPads in in the last quarter of 2012 and the first quarter of 2013. While Samsung
and other competitors have developed tablets to rival Apple’s iPad and are selling a
considerable number; Dell, HP, Lenovo, and others have responded by making cheaper
tablet-like laptops and iPad like tablets and have stayed in the game without having to
diversify too much.^107
Excess capacity of other tangible resources, such as a sales force, can be used to
diversify more easily. Again, excess capacity in a sales force is more effective with
related diversification because it may be utilized to sell products in similar markets (e.g.,
same customers). The sales force would be more knowledgeable about related product
characteristics, customers, and distribution channels.^108 Tangible resources may create