Diversification
Corporate-level strategy is concerned with the growth and survival of the firm. In the case where a firm operates in only one industry, growth must occur through a properly implemented business-level strategy, i.e. low-cost, or differentiation, or best-cost. It follows that all growth within a single industry is governed by the effectiveness of a firm’s business-level strategy.
Many firms, and the majority of Fortune 500 firms, have operations and generate revenue in more than one industry. “Diversification and diversified” are the terms used to describe the latter situation. Corporate-level strategy principally focuses on the growth of the firm through diversification. Stated differently, corporate-level strategy is concerned with the growth of the firm through the effective management of businesses operating in different industries. Underlying corporate-level strategy is the assumption that the firm’s portfolio of diverse “business units or divisions” have been, and continue to be, carefully evaluated on the basis of their potential for market leadership and their industry’s potential for growth.
Diversification means we are looking at businesses, under common ownership, that operate in separate industries. The rationale for undertaking diversification is that the firm’s native industry lacks growth potential and/or the firm needs to escape an industry that is in decline. There is one key to successful diversification: the business units operating in separate industries, must be worth more under common ownership, than if they were operated as “private” businesses. Thus, to justify diversification, management must be able to achieve some form of synergy across the diversified businesses.
Achieving synergy across separate businesses is difficult and problematic. A firm is most likely to achieve synergy when the diversified businesses are similar, either in the processes required to produce the products of separate industries...