Strategies of related diversification

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REV: APRIL 11, 2005


Strategies of Related Diversification
Which businesses should a firm expand into? This question of corporate scope is central to corporate strategy. Flawed scope decisions can have severe consequences, and the trauma experienced by many companies as a result of mistaken decisions to expand scope is often large.
What leads to such mistakes? Where do managers go wrong? And, what might be a sensible logic by which to approach the question of scope expansion? This note examines these questions and the logic of the scope decision in those instances where the target business is ostensibly related in some way to a company’s existing ones.
A decision logic that might inform a firm’s choice to expand scope is summarized in exhibit 1 and described in detail below. This logic builds on the conceptual framework of the course, and highlights the principle of alignment—between a company’s choice of scope and its other strategic choices. Specifically, firms that expand scope successfully do so not only based on sound arguments for “relatedness,” but also effect organizational changes that can realize the benefits from such expansions, and make sensible decisions around the question of ownership (i.e., where the boundaries of the firm should be drawn in such expansions).
Exhibit 1 identifies a series of questions that are useful to ask when evaluating any scope expansion. In addition to its prescriptive use