What makes related diversification an attractive strategy is

HA HondaJet. Skip to content Learning Objectives Explain the concept of diversification. Be able to apply the three tests for diversification.

Distinguish related and unrelated diversification. Figure 8. Key Takeaway Diversification strategies involve firmly stepping beyond its existing industries and entering a new value chain. What role, if any, do you think executive pay plays in diversification decisions? Identify a firm that has recently engaged in diversification. Do you find the reasoning to be convincing? Why or why not? Diversification strategies: Involve a firm entering entirely new industries. Previous: Vertical Integration Strategies.

Next: Strategies for Getting Smaller. Share This Book Share on Twitter. What makes related diversification an attractive strategy is. A diversified company's business units exhibit good resource fit when.

Which of the following best illustrates an economy of scope? Conducting a SWOT analysis of each business the company has diversified into. Different businesses are said to be "unrelated" when. The nine-cell attractiveness—strength matrix provides strong logic for. Creating added long-term value for shareholders via diversification requires.

Technological and competitive developments already link many businesses and are creating new possibilities for competitive advantage. In such sectors as financial services, computing, office equipment, entertainment, and health care, interrelationships among previously distinct businesses are perhaps the central concern of strategy. To understand the role of relatedness in corporate strategy, we must give new meaning to this ill-defined idea.

I have identified a good way to start—the value chain. I call them value activities. It is at this level, not in the company as a whole, that the unit achieves competitive advantage.

I group these activities in nine categories. Primary activities create the product or service, deliver and market it, and provide after-sale support.

The categories of primary activities include inbound logistics, operations, outbound logistics, marketing and sales, and service. Support activities provide the inputs and infrastructure that allow the primary activities to take place.

The categories are company infrastructure, human resource management, technology development, and procurement. The value chain defines the two types of interrelationships that may create synergy. The second is the ability to share activities.

Two business units, for example, can share the same sales force or logistics network. The value chain helps expose the last two and most important concepts of corporate strategy. The transfer of skills among business units in the diversified company is the basis for one concept.

While each business unit has a separate value chain, knowledge about how to perform activities is transferred among the units. For example, a toiletries business unit, expert in the marketing of convenience products, transmits ideas on new positioning concepts, promotional techniques, and packaging possibilities to a newly acquired unit that sells cough syrup.

Newly entered industries can benefit from the expertise of existing units and vice versa. These opportunities arise when business units have similar buyers or channels, similar value activities like government relations or procurement, similarities in the broad configuration of the value chain for example, managing a multisite service organization , or the same strategic concept for example, low cost.

Even though the units operate separately, such similarities allow the sharing of knowledge. Of course, some similarities are common; one can imagine them at some level between almost any pair of businesses. Countless companies have fallen into the trap of diversifying too readily because of similarities; mere similarity is not enough.

Transferring skills leads to competitive advantage only if the similarities among businesses meet three conditions:. The activities involved in the businesses are similar enough that sharing expertise is meaningful.

Broad similarities marketing intensiveness, for example, or a common core process technology such as bending metal are not a sufficient basis for diversification. The resulting ability to transfer skills is likely to have little impact on competitive advantage.

The transfer of skills involves activities important to competitive advantage. Transferring skills in peripheral activities such as government relations or real estate in consumer goods units may be beneficial but is not a basis for diversification. The skills transferred represent a significant source of competitive advantage for the receiving unit. The expertise or skills to be transferred are both advanced and proprietary enough to be beyond the capabilities of competitors.

The transfer of skills is an active process that significantly changes the strategy or operations of the receiving unit. The prospect for change must be specific and identifiable. Almost guaranteeing that no shareholder value will be created, too many companies are satisfied with vague prospects or faint hopes that skills will transfer.

The transfer of skills does not happen by accident or by osmosis. The company will have to reassign critical personnel, even on a permanent basis, and the participation and support of high-level management in skills transfer is essential. Many companies have been defeated at skills transfer because they have not provided their business units with any incentives to participate. Transferring skills meets the tests of diversification if the company truly mobilizes proprietary expertise across units.

This makes certain the company can offset the acquisition premium or lower the cost of overcoming entry barriers. The industries the company chooses for diversification must pass the attractiveness test. Even a close fit that reflects opportunities to transfer skills may not overcome poor industry structure. Opportunities to transfer skills, however, may help the company transform the structures of newly entered industries and send them in favorable directions.

The transfer of skills can be one-time or ongoing. If the company exhausts opportunities to infuse new expertise into a unit after the initial postacquisition period, the unit should ultimately be sold. The corporation is no longer creating shareholder value. Few companies have grasped this point, however, and many gradually suffer mediocre returns. Yet a company diversified into well-chosen businesses can transfer skills eventually in many directions.

If corporate management conceives of its role in this way and creates appropriate organizational mechanisms to facilitate cross-unit interchange, the opportunities to share expertise will be meaningful. By using both acquisitions and internal development, companies can build a transfer-of-skills strategy. The presence of a strong base of skills sometimes creates the possibility for internal entry instead of the acquisition of a going concern.

Successful diversifiers that employ the concept of skills transfer may, however, often acquire a company in the target industry as a beachhead and then build on it with their internal expertise. By doing so, they can reduce some of the risks of internal entry and speed up the process.

Two companies that have diversified using the transfer-of-skills concept are 3M and Pepsico. The fourth concept of corporate strategy is based on sharing activities in the value chains among business units. McKesson, a leading distribution company, will handle such diverse lines as pharmaceuticals and liquor through superwarehouses. The ability to share activities is a potent basis for corporate strategy because sharing often enhances competitive advantage by lowering cost or raising differentiation.

But not all sharing leads to competitive advantage, and companies can encounter deep organizational resistance to even beneficial sharing possibilities. These hard truths have led many companies to reject synergy prematurely and retreat to the false simplicity of portfolio management.

A cost-benefit analysis of prospective sharing opportunities can determine whether synergy is possible. Sharing can lower costs if it achieves economies of scale, boosts the efficiency of utilization, or helps a company move more rapidly down the learning curve. Sharing can also enhance the potential for differentiation. A shared order-processing system, for instance, may allow new features and services that a buyer will value.

Sharing can also reduce the cost of differentiation. A shared service network, for example, may make more advanced, remote servicing technology economically feasible. Often, sharing will allow an activity to be wholly reconfigured in ways that can dramatically raise competitive advantage.

Sharing must involve activities that are significant to competitive advantage, not just any activity. Conversely, diversification based on the opportunities to share only corporate overhead is rarely, if ever, appropriate. Sharing activities inevitably involves costs that the benefits must outweigh. One cost is the greater coordination required to manage a shared activity.

More important is the need to compromise the design or performance of an activity so that it can be shared. A salesperson handling the products of two business units, for example, must operate in a way that is usually not what either unit would choose were it independent.

Many companies have only superficially identified their potential for sharing. Companies also merge activities without consideration of whether they are sensitive to economies of scale. When they are not, the coordination costs kill the benefits.

Companies compound such errors by not identifying costs of sharing in advance, when steps can be taken to minimize them. Costs of compromise can frequently be mitigated by redesigning the activity for sharing. The shared salesperson, for example, can be provided with a remote computer terminal to boost productivity and provide more customer information. Jamming business units together without such thinking exacerbates the costs of sharing. Despite such pitfalls, opportunities to gain advantage from sharing activities have proliferated because of momentous developments in technology, deregulation, and competition.

The infusion of electronics and information systems into many industries creates new opportunities to link businesses. The corporate strategy of sharing can involve both acquisition and internal development. Internal development is often possible because the corporation can bring to bear clear resources in launching a new unit. Start-ups are less difficult to integrate than acquisitions.

Companies using the shared-activities concept can also make acquisitions as beachhead landings into a new industry and then integrate the units through sharing with other units. The fields into which each has diversified are a cluster of tightly related units.

Marriott illustrates both successes and failures in sharing activities over time. Marriott began in the restaurant business in Washington, D. Because its customers often ordered takeouts on the way to the national airport, Marriott eventually entered airline catering.

From there, it jumped into food service management for institutions. Marriott then began broadening its base of family restaurants and entered the hotel industry.

More recently, it has moved into restaurants, snack bars, and merchandise shops in airport terminals and into gourmet restaurants.

In addition, Marriott has branched out from its hotel business into cruise ships, theme parks, wholesale travel agencies, budget motels, and retirement centers.

Marriott shares a number of important activities across units. A shared procurement and distribution system for food serves all Marriott units through nine regional procurement centers. Marriott also has a fully integrated real estate unit that brings corporatewide power to bear on site acquisitions as well as on the designing and building of all Marriott locations. Start-ups or small acquisitions are used for initial entry, depending on how close the opportunities for sharing are.

To expand its geographic base, Marriott acquires companies and then disposes of the parts that do not fit. Marriott has largely failed in diversifying into gourmet restaurants, theme parks, cruise ships, and wholesale travel agencies.

In the first three businesses, Marriott discovered it could not transfer skills despite apparent similarities. Standardized menus did not work well in gourmet restaurants. Running cruise ships and theme parks was based more on entertainment and pizzazz than the carefully disciplined management of hotels and mid-price restaurants.

The wholesale travel agencies were ill fated from the start because Marriott had to compete with an important customer for its hotels and had no proprietary skills or opportunities to share with which to add value. Following the shared-activities model requires an organizational context in which business unit collaboration is encouraged and reinforced. Herper, M. Mack, E. 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— Wikipedia Organization. HA HondaJet. Figure 8. If I believe in something, I sell it and I sell it hard. Skin Care and hair care products. Below we illustrate some of the products that make up the Lauder empire. 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 on array of compomes.