When a firm chooses to diversify, it faces a decision as to how related the new business(es) is(are) to the existing businesses of the firm. When Charles Bluhdorn was CEO of a company called Gulf+Western in the 1950s, he diversified into a host of industries: motion pictures (Paramount Pictures, the makers of The Godfather, Chinatown, and other movies), clothing, cigars, zinc mines, auto parts, and sugar, among others! In contrast, a company such as Cooper Industries is more careful in diversifying into related industries. Five types of diversification:
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Limited Corporate Diversification
A single-business firm is technically not diversified because it gets 95 percent or more of its total revenues from one business. Delta Airlines is an example of a single-business firm. Its annual report states that in each of the last four fiscal years, passenger revenues accounted for 92 percent of total revenues, while cargo revenues provided the rest (Delta Airlines Annual Report).
A dominant-business firm is different in that it has moved beyond a complete focus on one business by obtaining revenues from other businesses. However, as the definition indicates that it is still largely dependent upon one industry. Important Point: While single-business and dominant-business firms are listed as two of the five types of diversification, these firms are not leveraging their resources and capabilities beyond a single product or market.
Related Corporate Diversification
When multiple lines of business are linked in a firm, the firm is pursuing a strategy of related diversification. Such a firm is conscious of leveraging its resources and capabilities beyond a single product or market into those businesses that are related to their current activities. Related diversification can happen in two ways:
Related-constrained – when all the businesses in which a firm operates share a significant number of inputs, production technologies, distribution channels, similar customers, etc.
Related-linked – when the different businesses that a single firm pursues are linked on only a couple of dimensions, or if different sets of businesses are linked along very different dimensions.
Examples help in understanding the critical difference between related-constrained and related-linked types of diversification.
Bic, the French Company, produces products such as disposable razors, cigarette lighters, and pens. The company pursues a related-constrained diversification strategy because all their products share significant commonalities in the areas of plastic injection molding, retail distribution, and brand name.
Newell Rubbermaid is a good example of a related-linked firm. After Newell Company acquired Rubbermaid, the company is organized into five segments: cleaning and organization; home and family; home fashions; office products; and, tools and hardware. All five segments share common distribution channels – supermarkets (such as Wal-Mart) and office supply stores (Staples, Office Depot, etc.). The products are sold under various brand names (Sharpie, Levolor) and do not typically share common technology or inputs across segments.
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The Disney example in the text is an interesting one and show how firms evolve on the diversification path. Disney was a related-constrained firm till about the early 1990s. The company had evolved from a single-business to a dominant-business to a diversified firm under the leadership of Michael Eisner and his predecessors. When Disney started making movies for mature audiences and acquired ABC television, it moved into a more related-linked mode.
Unrelated Corporate Diversification
An unrelated diversified firm (called a conglomerate) owns businesses in its portfolio that share few, if any, common attributes. The management approach in such firms is...