strategic-management

144 PART 2 • STRATEGY FORMULATION
to the slumping airline industry. United Technologies now owns British electronic-security
company Chubb PLC, as well as Otis Elevator Company and Carrier air conditioning to
reduce its dependence on the volatile airline industry. United Technologies also owns UTC
Fire & Security, Pratt & Whitney, Hamilton Sundstrand, and Sikorsky Black Hawk
Helicopters. However, almost of all of the company’s divisions expect a drop in sales in
2009, and so the firm is laying off thousands of employees. Only the Sikorsky division is
expected to be profitable in 2009.
Hamish Maxwell, Philip Morris’s former CEO, says, “We want to become a
consumer-products company.” Diversification makes sense for Philip Morris because
cigarette consumption is declining, product liability suits are a risk, and some investors
reject tobacco stocks on principle.
Related Diversification
Google’s stated strategy is to organize all the world’s information into searchable form,
diversifying the firm beyond its roots as a Web search engine that sells advertising. The
maker of jam, peanut butter, and Crisco oils, J. M. Smuckers Co. recently completed the
acquisition of Procter & Gamble’s Folger’s coffee business for $2.65 billion, which nearly
doubled Smuckers’s annual sales. Smuckers continues to strive to acquire related food and
consumer brand businesses as it pursues related diversification.
When Merck & Co. acquired rival Schering-Plough Corp for $41.1 billion in 2009,
that acquisition brought to Merck three new, related businesses. The three new areas of
business are biotech, consumer health, and animal health. In addition, the acquisition
brought to Merck an expanded presence in Brazil, China, and other emerging markets.
Based in Baltimore, the sports apparel maker Under Armour pursued related diversification
in 2009 when it introduced athletic “running” shoes for the first time. This strategy
broadened Under Armour’s appeal from boys and young men to women, older
consumers, and more casual athletes. The athletic footwear business is dominated by
Nike and Adidas, but Under Armour uses sophisticated design software, new manufacturing
techniques, the latest in material engineering, and robust information technology
systems to produce all its products. Under Armour’s 2009 sales are expected to increase
20 percent to $900 million.
In a related diversification move in 2009, Tyson Foods entered the dog food business,
selling refrigerated pet food targeted to consumers who give their pets everything from
clothes and car seats to cemetery graves. Prior to this move by Tyson, meatpacking companies
has been content to sell scraps such as chicken fat and by-products to makers of
canned and dry pet food. Scott Morris of Freshpet Company in Secaucus, New Jersey, says
this move by Tyson will change the fact that “pet food today looks the same as it did 30
years ago.”
Six guidelines for when related diversification may be an effective strategy are as
follows. 14
• When an organization competes in a no-growth or a slow-growth industry.
• When adding new, but related, products would significantly enhance the sales of
current products.
• When new, but related, products could be offered at highly competitive prices.
• When new, but related, products have seasonal sales levels that counterbalance an
organization’s existing peaks and valleys.
• When an organization’s products are currently in the declining stage of the product’s
life cycle.
• When an organization has a strong management team.
Unrelated Diversification
An unrelated diversification strategy favors capitalizing on a portfolio of businesses that
are capable of delivering excellent financial performance in their respective industries,
rather than striving to capitalize on value chain strategic fits among the businesses. Firms
that employ unrelated diversification continually search across different industries for
companies that can be acquired for a deal and yet have potential to provide a high return on