There are two general types of diversification strategies: related and unrelated.

Businesses are said to

be related when their value chains posses competitively valuable cross-business strategic fits; businesses
are said to be unrelated when their value chains are so dissimilar that no competitively valuable cross-
business relationships exist.12 Most companies favor related diversification strategies in order to
capitalize on synergies as follows: • Transferring competitively valuable expertise, technological know-
how, or other capabilities from one business to another. • Combining the related activities of separate
businesses into a single operation to achieve lower costs. • Exploiting common use of a well-known
brand name. • Cross-business collaboration to create competitively valuable resource strengths and
capabilities.13 Diversification strategies are becoming less popular as organizations are finding it more
difficult to manage diverse business activities. In the 1960s and 1970s, the trend was to diversify so as
not to be dependent on any single industry, but the 1980s saw a general reversal of that thinking.
Diversification is now on the retreat. Michael Porter, of the Harvard Business School, says,
“Management found it couldn’t manage the beast.” Hence businesses are selling, or closing, less
profitable divisions to focus on core businesses. The greatest risk of being in a single industry is having
all of the firm’s eggs in one basket. Although many firms are successful operating in a single industry,
new technologies, new products, or fast-shifting buyer preferences can decimate a particular business.
For example, digital cameras are decimating the film and film processing industry, and cell phones have
permanently altered the long-distance telephone calling industry. Diversification must do more than
simply spread business risk across different industries, however, because shareholders could accomplish
this by simply purchasing equity in different firms across different industries or by investing in mutual
funds. Diversification makes sense only to the extent the strategy adds more to shareholder value than
what shareholders could accomplish acting individually. Thus, the chosen industry for diversification
must be attractive enough to yield consistently high returns on investment and offer potential across the
operating divisions for synergies greater than those entities could achieve alone. A few companies
today, however, pride themselves on being conglomerates, from small firms such as Pentair Inc., and
Blount International to huge companies such as Textron, Allied Signal, Emerson Electric, General Electric,
Viacom, and Samsung. Conglomerates prove that focus and diversity are not always mutually exclusive.
Many strategists contend that firms should “stick to the knitting” and not stray too far from the firms’
basic areas of competence. However, diversification is still sometimes an appropriate strategy, especially
when the company is competing in an unattractive industry. For example, United Technologies is
diversifying away from its core aviation business due 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