Wikimedia Commons — public domain. Companies must convince consumers to buy these products through marketing activities such as branding and advertising. Honda also applied its engine-building skills in the all-terrain vehicle, lawn mower, and boat motor industries. The core competencies of the corporation. Art and Science 1.

A related diversification strategy involves building the company around businesses: A. with strategic fit with respect to key value chain activities and competitive assets. B. that are highly independent, proficient, and efficient operating firms.

8.4 Diversification Strategies

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Firms using diversification strategies Involve a firm entering entirely new industries. While vertical integration involves a firm moving into a new part of a value chain that it is already is within, diversification requires moving into new value chains. Many firms accomplish this through a merger or an acquisition, while others expand into new industries without the involvement of another firm. A proposed diversification move should pass three tests or it should be rejected. From competitive advantage to corporate strategy.

Harvard Business Review , 65 3 , — Some firms that engage in related diversification aim to develop and exploit a core competency A skill set that is difficult for competitors to imitate, can be leveraged in different businesses, and contributes to the benefits enjoyed by customers within each business. A core competency is a skill set that is difficult for competitors to imitate, can be leveraged in different businesses, and contributes to the benefits enjoyed by customers within each business.

The core competencies of the corporation. Harvard Business Review , 86 1 , 79— For example, Newell Rubbermaid is skilled at identifying underperforming brands and integrating them into their three business groups: Images courtesy of Betsy Weber, http: Honda Motor Company provides a good example of leveraging a core competency through related diversification. Although Honda is best known for its cars and trucks, the company actually started out in the motorcycle business.

Through competing in this business, Honda developed a unique ability to build small and reliable engines. When executives decided to diversify into the automobile industry, Honda was successful in part because it leveraged this ability within its new business. Honda also applied its engine-building skills in the all-terrain vehicle, lawn mower, and boat motor industries.

Image courtesy of Wikimedia, http: Sometimes the benefits of related diversification that executives hope to enjoy are never achieved. Both soft drinks and cigarettes are products that consumers do not need. Companies must convince consumers to buy these products through marketing activities such as branding and advertising.

Thus, on the surface, the acquisition of 7Up by Philip Morris seemed to offer the potential for Philip Morris to take its existing marketing skills and apply them within a new industry. Unfortunately, the possible benefits to 7Up never materialized. Why would a soft-drink company buy a movie studio? Most unrelated diversification efforts, however, do not have happy endings.

Harley-Davidson, for example, once tried to sell Harley-branded bottled water. Starbucks tried to diversify into offering Starbucks-branded furniture. Both efforts were disasters. Although Harley-Davidson and Starbucks both enjoy iconic brands, these strategic resources simply did not transfer effectively to the bottled water and furniture businesses. Lighter firm Zippo is currently trying to avoid this scenario.

This brand has fueled eighty years of success for the firm. But the future of the lighter business is bleak. Through competing in this business, Honda developed a unique ability to build small and reliable engines. When executives decided to diversify into the automobile industry, Honda was successful in part because it leveraged this ability within its new business. Honda also applied its engine-building skills in the all-terrain vehicle, lawn mower, and boat motor industries.

Wikimedia Commons — public domain. Sometimes the benefits of related diversification that executives hope to enjoy are never achieved. Both soft drinks and cigarettes are products that consumers do not need. Companies must convince consumers to buy these products through marketing activities such as branding and advertising.

Thus, on the surface, the acquisition of 7Up by Philip Morris seemed to offer the potential for Philip Morris to take its existing marketing skills and apply them within a new industry. Unfortunately, the possible benefits to 7Up never materialized. By building a portfolio of stocks, an investor can minimize the chances of suffering a huge loss. Some executives take a similar approach. Rather than trying to develop synergy across businesses, they seek greater financial stability for their firms by owning an array of companies.

Below we illustrate some of the different groups in their very diversified portfolio of firms. Shareholders were all on board for the purchase of the Burlington Northern Santa Fe Corporation in Why would a soft-drink company buy a movie studio? Most unrelated diversification efforts, however, do not have happy endings. Harley-Davidson, for example, once tried to sell Harley-branded bottled water. Starbucks tried to diversify into offering Starbucks-branded furniture.

Both efforts were disasters. Although Harley-Davidson and Starbucks both enjoy iconic brands, these strategic resources simply did not transfer effectively to the bottled water and furniture businesses.

Lighter firm Zippo is currently trying to avoid this scenario. This brand has fueled eighty years of success for the firm. But the future of the lighter business is bleak. This downward trend is likely to continue as smoking becomes less and less attractive in many countries. To save their company, Zippo executives want to diversify. The high-quality image of Swiss Army knives has been used to sell Swiss Army—branded luggage and watches.

As of March , Zippo was examining a wide variety of markets where their brand could be leveraged, including watches, clothing, wallets, pens, liquor flasks, outdoor hand warmers, playing cards, gas grills, and cologne. Trying to figure out which of these diversification options would be winners, such as the Eddie Bauer-edition Ford Explorer, and which would be losers, such as Harley-branded bottled water, was a key challenge facing Zippo executives.

Not much, but that did not stop Globodyne from buying each of these companies in its quest for synergy in the movie In Good Company. Synergy is created when two or more businesses produce benefits together that could not be produced separately. While Duryea was confident that a cross-promotional strategy between his advertising division and the other units within the Globodyne universe was a slam-dunk, Waterman employee Dan Foreman saw little congruence between advertisements in Sports America on the one hand and cell phones and breakfast cereals on the other.

Seeing little value in owning a failing publishing company, Globodyne promptly sold the division to another conglomerate. After the sale, the executives that had been rewarded for the initial purchase of Waterman Publishing, including Duryea, were fired. From competitive advantage to corporate strategy. Harvard Business Review , 65 3 , — The core competencies of the corporation. Harvard Business Review , 86 1 , 79— This is a derivative of Mastering Strategic Management by a publisher who has requested that they and the original author not receive attribution, which was originally released and is used under CC BY-NC-SA.

For uses beyond those covered by law or the Creative Commons license, permission to reuse should be sought directly from the copyright owner. Learning Objectives Explain the concept of diversification.

Related Diversification

involves building the company around business where there is good strategic fit across corresponding value chain activities. strategic fit exist whenever one or more activities constituting the value chains of different business are sufficiently similar to present opportunties for cross business . A related diversification strategy involves building the company around businesses whose value chains possess competitively valuable strategic fits. 1. Figure , Related Businesses Possess Related Value Chain Activities and Competitively Valuable Strategic Fits, looks at related businesses and strategic fits%(28). A related diversification strategy involves building the company around businesses: A. with strategic fit with respect to key value chain activities and competitive assets. B. that are highly independent, proficient, and efficient operating firms%(87).