Corporate Diversification
TYPES OF CORPORATE DIVERSIFICATION
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: Single-business
160 Part II Dominant-business Related-constrained Related-linked Unrelated
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
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: Single-business
160 Part II Dominant-business Related-constrained Related-linked Unrelated
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