strategic-management

investment. Pursuing unrelated diversification entails being on the hunt to acquire
companies whose assets are undervalued, or companies that are financially distressed, or
companies that have high growth prospects but are short on investment capital. An obvious
drawback of unrelated diversification is that the parent firm must have an excellent top
management team that plans, organizes, motivates, delegates, and controls effectively. It is
much more difficult to manage businesses in many industries than in a single industry.
However, some firms are successful pursuing unrelated diversification, such as Walt
Disney, which owns ABC, and General Electric, which owns NBC.
Many more firms have failed at unrelated diversification than have succeeded due to
immense management challenges. However, unrelated diversification can be good, as it is
for Cendant Corp., which owns the real-estate firm Century 21, the car-rental agency Avis,
the travel-booking sites Orbitz and Flairview Travel, and the hotel brands Days Inn and
Howard Johnson.
In what can be considered an unrelated diversification strategy, Dell Inc. recently began
producing smart phones, which are similar to Apple’s iPhone and Research in Motion’s
Web browsing phones. Dell has continued to lose market share with a 13.7 percent share of
the personal computer, down from 14.6 percent.
San Diego–based Qualcomm Inc. recently diversified beyond cell phones into desktop
hardware. The company’s strategy is to bring Web access to places in the world that have
cell phone networks but do not have Internet access because it is impractical or unaffordable.
Qualcomm is test marketing its new device called Kayak. The company expects Intel
to be its main competitor in this new product area.
IBM in 2009 entered the water management business with the creation of new
desalination-membrane technology that removes arsenic and boron salts from contaminated
groundwater. The company expects to license the technology rather than build
desalination plants itself. But IBM has begun installing systems of water sensors and
software to monitor water pipes, reservoirs, rivers, and harbors. It is all part of IBM’s
2009 Big Green Innovations Initiative. The firm has always been known as Big Blue.
Cisco Systems diversified in 2009 by jumping into the fiercely competitive computer
server market, placing it in direct competition for the first time with its longtime partners
Hewlett-Packard and IBM. Before this strategic move, Cisco was primarily in the router
and switch business, which directs Internet traffic. This new Cisco strategy highlights the
fact that data centers are becoming a new battleground as large customers manage Internet
traffic and energy costs escalate. Michael Corrado at IBM says it is not unusual for tech
companies to be both partners and competitors. However, HP’s Jim Ganthier says, “HP is
delivering today what Cisco is promising tomorrow.” 15
French aerospace manufacturer Safran SA recently diversified further away from jet
propulsion into maintenance and service operations by buying 81 percent of General Electric
Company’s Homeland Protection division for $580 million in cash. This new division of
Safran focuses on explosive and narcotics detection. GE and Safran have worked together for
more than 30 years, including a joint venture that produces the CFM commercial-jet engine.
Ten guidelines for when unrelated diversification may be an especially effective
strategy are: 16
• When revenues derived from an organization’s current products or services would
increase significantly by adding the new, unrelated products.
• When an organization competes in a highly competitive and/or a no-growth industry,
as indicated by low industry profit margins and returns.
• When an organization’s present channels of distribution can be used to market the
new products to current customers.
• When the new products have countercyclical sales patterns compared to an organization’s
present products.
• When an organization’s basic industry is experiencing declining annual sales and profits.
• When an organization has the capital and managerial talent needed to compete
successfully in a new industry.
• When an organization has the opportunity to purchase an unrelated business that is
an attractive investment opportunity.
CHAPTER 5 • STRATEGIES IN ACTION 145