Fundamentals of Management, 8th ed

single-product

strategy

A strategy in which

an organization

manufactures just

one product or

service and sells it in

a single geographic

market

related

diversification

A strategy in which

an organization

operates in several

businesses that are

somehow linked with

one another

Chapter 3: Planning and Strategic Management

7 7

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The Lone Ranger in 2013, Disney was still profitable due to strong theme park revenues

and other hit movies like The Avengers in 2012 and Iron Man 3, Monsters University,

and Frozen in 2013.

Second, by managing several businesses at the same time, an organization can reduce

the overhead costs associated with managing any one business. In other words, if the

normal administrative costs required to operate any business, such as legal services and

accounting, can be spread over a large number of businesses, then the overhead costs per

business will be lower than they would be if each business had to absorb all costs itself.

Thus the overhead costs of businesses in a firm that pursues related diversification are

usually lower than those of similar businesses that are not part of a larger corporation.

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Third, related diversification allows an organization to exploit its strengths and capa-

bilities in more than one business. When organizations do this successfully, they capital-

ize on synergies, which are complementary effects that exist among their businesses.

Synergy exists among a set of businesses when the businesses’ economic value together

is greater than their economic value separately. McDonald’s is using synergy as it diver-

sifies into other restaurant and food businesses. For example, both its McCafe premium

coffee stands in some McDonald’s restaurants and its investments in Pret A Manger, a

European chain of sandwich shops, allow the firm to create new revenue opportunities

while using the firm’s existing strengths in food-product purchasing and distribution.

“Tough Times, Tough Choices” discusses how diversification can also occasionally create

ethical challenges.