Learning Objectives

Explain the ide of diversification.Be may be to apply the 3 tests for diversification.Distinguish related and unrelated diversification.

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Firms utilizing diversification strategies<1> get in entirely brand-new industries. While upright integration involves a for sure moving right into a new part the a worth chain that it is currently within, diversification calls for moving right into an entirely new value chain. Many firms achieve this through a mergers or an acquisition, while others broaden into brand-new industries there is no the involvement of another firm.

Three Tests for Diversification

A suggest diversification relocate should pass 3 tests or it must be rubbish (Porter, 1987).

How attractive is the sector that a certain is considering entering? unless the sector has strong profit potential, beginning it might be very risky.How lot will it cost to enter the industry? Executives have to be certain that your firm can recoup the costs that it absorbs in order come diversify. The median drug developed by a significant pharmaceutical agency and authorized by government prices at least $4 billion and also as much as $11 billion.Will the brand-new unit and also the certain be better off? uneven one side or the other gains a vain advantage, diversification have to be avoided. In the case of developing new drugs, the expenses may never be completely recovered.

Related Diversification

Related diversification<2> occurs as soon as a for sure moves right into a new industry the has important similarities v the this firm existing industry or business lines (Figure 8.11 “The Sweet Fragrance the Success: The Brands that “Make Up” the Lauder Empire”). Due to the fact that Google is in the details business, in 2014 the purchased Titan Aerospace, a an equipment of solar-powered drones, an example of associated diversification. Some firms that communicate in connected diversification target to develop and also exploit a core competency<3> come become an ext successful. A core competency is a skill set that is challenging for competitors to imitate, deserve to be leveraged in various businesses, and contributes to the benefits took pleasure in by customers within each organization (Prahalad & Hamel, 1990). For example, Newell Rubbermaid is experienced at identifying underperforming brands and integrating them into their three company groups: (1) home and family, (2) office products, and (3) tools, hardware, and also commercial products.

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Figure 8.11: The Sweet Fragrance the Success: The Brands that “Make Up” the Lauder Empire

Honda Motor agency provides a an excellent example the leveraging a core competency through related diversification. Although Honda is ideal known because that its cars and also trucks, the agency actually started out in the motorcycle business. Through completing in this business, Honda occurred a unique capacity to build small and reputable engines. When executives decided to diversify right into the vehicle industry, Honda succeeded in part because it leveraged this capability within its new business. Honda also applied that is engine-building skills in the all-terrain vehicle, lawn mower, and watercraft motor industries. Many recently, Honda has arisen an energy-efficient six-passenger HA-420 HondaJet aircraft, i m sorry is undergoing FAA approval.

Figure 8.12: Honda VFR 800A5 Motorcycle

Sometimes the benefits of related diversification that executives expect to enjoy are never ever achieved. Estée Lauder provided to distribute Sean john Fragrance, yet divested chin of the product line. The course, Sean john is P. Diddy, amongst other aliases. That still continues to market fragrances, the recent called, ns Am King.

Unrelated Diversification

Why would certainly a soft-drink company buy a movie studio? It’s hard to imagine the reasonable behind together a move, however Coca-Cola did just this once it purchased Columbia photos in 1982 because that $750 million. This is a good example of unrelated diversification,<4> i m sorry occurs when a certain enters an market that lacks any important similarities v the firm’s existing sector or industries (Figure 8.13 “Unrelated Diversification at Berkshire Hathaway”). Luckily for Coca-Cola, its invest paid off—Columbia was marketed to Sony because that $3.4 billion simply seven year later.

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Figure 8.13: Unrelated Diversification at Berkshire Hathaway

Most unrelated diversification efforts, however, perform not have actually happy endings. Harley-Davidson, because that example, once tried to offer Harley-branded bottled water. Starbucks tried come diversify into offering Starbucks-branded furniture. Such initiatives are an extremely expensive, both in direct prices such together marketing and indirect costs such together executive time. However, these efforts were disasters. Return Harley-Davidson and also Starbucks both reap iconic brands, this strategic resources merely did no transfer properly to the bottled water and also furniture businesses.

Lighter firm Zippo is right now trying to avoid this scenario. According to CEO Geoffrey Booth, the Zippo is viewed by consumers as a “rugged, durable, make in America, iconic” brand (AP News, 2011). This brand has fueled eighty year of success because that the firm. But with fewer smokers, the future that the lighter business is bleak. Zippo executives intend to sell about 12 million lighters this year, which is a 50 percent decrease from Zippo’s sales levels in the 1990s. This downward tendency is most likely to proceed as cigarette smoking becomes less and less attractive in countless countries. To save their company, Zippo executives want to diversify.

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Figure 8.14: The to trust of Zippo’s products is depicted by this lighter, which quiet works despite being make in 1968.

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In particular, Zippo desires to monitor a route blazed through Eddie Bauer and Victorinox Swiss army Brands Inc. The rough outdoors image of Eddie Bauer’s garments brand has been used successfully to market sport utility vehicles made by Ford. The high-quality image of Swiss army knives has actually been used to sell Swiss Army–branded luggage and watches. As of march 2011, Zippo was analyzing a wide range of sectors where their brand could be leveraged, consisting of watches, clothing, wallets, pens, liquor flasks, the end hand warmers, playing cards, gas grills, and cologne. Make the efforts to figure out i m sorry of these diversification options could be winners, such together the Eddie Bauer-edition Ford Explorer, and also which would be losers, such as Harley-branded bottled water, is a key difficulty facing Zippo executives.