176 Part 2: Strategic Actions: Strategy Formulation
firms are classified into related and unrelated categories. A firm is related through its
diversification when its businesses share several links. For example, businesses may share
product markets (goods or services), technologies, or distribution channels. The more
links among businesses, the more “constrained” is the level of diversification. “Unrelated”
refers to the absence of direct links between businesses.6-1a Low Levels of Diversification
A firm pursuing a low level of diversification uses either a single- or a dominant-business,
corporate-level diversification strategy. A single-business diversification strategy is a cor-
porate-level strategy wherein the firm generates 95 percent or more of its sales revenue
from its core business area.^15 For example, McIlhenny Company, headquartered on Avery
Island in Louisiana and producer of Tabasco brand, has maintained is focus on its family’s
hot sauce products for seven generations. On its website, the following quote is provided
about its products: “Back in 1868, Edmund McIlhenny experimented with pepper seeds
from Mexico (or somewhere in Central America) to create his own style of Louisiana hot
sauce—our Original Red Sauce. Since then we’ve continued this tradition of exploration
and experimentation, and today McIlhenny Company crafts seven unique and distinct
flavors of sauce, each with its own variety of deliciousness. From mild to wild, there’s
something for everyone!”^16 Historically McIlhenny has used a single-business strategy
while operating in relatively few product markets. Recently, it has begun to partner with
other firms so that the Tabasco taste can be found in jelly bean candies (Jelly Belly brand),
Hot & Spicy Cheez-It snack crackers (Sunshine brand), jerky (Slim Jim brand), and even
Tabasco flavored canned meat (Spam brand).Figure 6.1 Levels and Types of DiversificationLow Levels of Diversification
Single business: 95% or more of revenue comes from a
single business.Dominant business: Between 70% and 95% of revenue
comes from a single business.Moderate to High Levels of Diversification
Related constrained: Less than 70% of revenue comes
from the dominant business, and
all businesses share product,
technological, and distribution
linkages.Related linked Less than 70% of revenue comes from
(mixed related and the dominant business, and there are
unrelated): only limited links between businesses.Very High Levels of Diversification
Unrelated: Less than 70% of revenue comes from
the dominant business, and there are
no common links between businesses.ACA
BABCABCABSource: Adapted from R. P. Rumelt, 1974, Strategy, Structure and Economic Performance, Boston: Harvard Business School.