Levels of diversification in corporate level strategy

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. Porter, M. From competitive advantage to corporate strategy. Harvard Business Review , 65 3 , — Prahalad, C. The core competencies of the corporation. Harvard Business Review , 86 1 , 79— Skip to content Learning Objectives Explain the concept of diversification.

Be able to apply the three tests for diversification. Distinguish related and unrelated diversification. Three Tests for Diversification A proposed diversification move should pass three tests or it should be rejected Porter, How attractive is the industry that a firm is considering entering?

Diversification strategy

Unless the industry has strong profit potential, entering it may be very risky. How much will it cost to enter the industry? Executives need to be sure that their firm can recoup the expenses that it absorbs in order to diversify. When Philip Morris bought 7Up in the late s, it paid four times what 7Up was actually worth. Making up these costs proved to be impossible and 7Up was sold in Will the new unit and the firm be better off? Unless one side or the other gains a competitive advantage, diversification should be avoided.

In the case of Philip Morris and 7Up, for example, neither side benefited significantly from joining together. Unrelated Diversification Table 8. They maintain capital strength at exceptionally high levels, which gives them an advantage even a cave man could understand. Their apparel businesses include well-known names such as Fruit of the Loom and Justin Brands.

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FlightSafety International Inc. Retail holdings include a number of furniture businesses such as R. Key Takeaway Diversification strategies involve firmly stepping beyond its existing industries and entering a new value chain. Single Business: A. Related Constrained: A B C. Unrelated: A C B. Though the U. The difference between sharing activities and transferring competencies is based on how the resources are jointly used to create economies of scope. Activity sharing requires sharing strategic control over business units. Activity sharing may create risk because business-unit ties create links between outcomes.

Provides intangible resources resource intangibility that are difficult for competitors to understand and imitate. A transferred intangible resource gives the unit receiving it an immediate competitive advantage over its rivals. Vertical Integration Backward integration—a firm produces its own inputs.

Forward integration—a firm operates its own distribution system for delivering its outputs. Based on investments inside or outside the firm Create value through two types of financial economies: Efficient internal capital allocations Purchase of other corporations and the restructuring their assets. Conglomerates have a fairly short life cycle because financial economies are more easily duplicated by competitors than are gains from operational and corporate relatedness.

Resource allocation decisions may become complex, so success often requires: Focus on mature, low-technology businesses.

Focus on businesses not reliant on a client orientation. Mergers in the s and s thus tended to be unrelated. Relaxation of antitrust enforcement results in more and larger horizontal mergers. Early antitrust concerns seem to be emerging and mergers now more closely scrutinized. Anti-trust Legislation. Treated capital gains as ordinary income. Thus created incentive for shareholders to prefer dividends to acquisition investments. Tax Laws. Low performance acts as incentive for diversification. Firms plagued by poor performance often take higher risks diversification is risky.

Low Performance. Product line is threatened. Firm is small and is in mature or maturing industry.

A firm may become risk averse and constrain its level of activity sharing. A firm may reduce level of technological change by operating in more certain environments. Managerial Motives to Diversify Managerial risk reduction Desire for increased compensation.

CONGLOMERATE DIVERSIFICATION

All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. All rights reserved. The factor listed. Chapter 7. BA — Winter Term C. Petersen, Ph.