The Risky Business of Diversification
Posted: 17 Nov 2009
Date Written: 1979
Abstract
Evaluates the initial performance of corporate new ventures, determines the average length of time needed to achieve profitability, and suggests some guidelines for future management of corporate ventures. Data were gathered in the United States from samples of sixty-eight corporate ventures launched in the late 1960s and early 1970s by the top 200 companies in the Fortune 500 and established businesses in the Profit Impact of Market Strategies (PIMS) project. Interpretation of the quantative analysis was aided by interviews of managers involved in corporate ventures. Results from these samples show that corporate ventures, on average, suffer severe losses through their first four years of operations. However, because both expenses and capital items go up, the key to improving financial statements for these ventures long term is to obtain rapid sales growth with a less than proportionate increase in outlays. A misconception regarding corporate ventures is that initial returns are low because of high capital requirements, but the problem is that the net income is negative. It appears that new ventures need approximately eight years before they reach profitability and a total of ten to twelve years before the return on investment (ROI) of new ventures equals that of mature businesses. Despite the adverse effect that it may have on current financial performance, rapid building of market share is advocated, and therefore large-scale entry is recommended for any company that wishes to achieve growth through corporate new ventures. (SFL)
Keywords: Return on investment, Market share, Startups, Firm performance, Corporate ventures, Financial growth, Risk orientation, Firm diversification, Profit growth
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