Chapter 6: Corporate-Level Strategy 191may exist between diversification and performance.^95 Although low performance can
be an incentive to diversify, firms that are more broadly diversified compared to their
competitors may have overall lower performance.Uncertain Future Cash Flows
As a firm’s product line matures or is threatened, diversification may be an important
defensive strategy.^96 Small firms and companies in mature or maturing industries some-
times find it necessary to diversify for long-term survival.^97
Diversifying into other product markets or into other businesses can reduce the
uncertainty about a firm’s future cash flows. Alcoa, the largest U.S. aluminum pro-
ducer, has been pursuing a “multi-material” diversification strategy driven by the
highly competitive nature of its basic commodity business.^98 Alcoa has been diver-
sifying into other metals beside aluminum while simultaneously moving into a
variety of end product industries. In 2015, for example, it announced that it would
acquire RTI International Metals, Inc., which is one of the largest titanium produc-
ers for the aerospace industry. Alcoa’s CEO, Klaus Kleinfield, noted that the deal
“increases our position substantially in titanium and high-tech machinery” with
“almost no overlap” with Alcoa’s current business.^99 In 2014, it bought Firth Rixson
Limited and Germany’s TITAL, which make titanium and aluminum casting for jet
engines and airframes. However, 40 percent of its revenue still comes from mining
and smelting raw aluminum, the price of which has suffered because of lower demand
and associated excess capacity and foreign competition, especially from Chinese
producers.
Synergy and Firm Risk Reduction
Diversified firms pursuing economies of scope often have investments that are too
inflexible to realize synergy among business units. As a result, a number of prob-
lems may arise. Synergy exists when the value created by business units working
together exceeds the value that those same units create working independently.
However, as a firm increases its relatedness among business units, it also increases
its risk of corporate failure because synergy produces joint interdependence among
businesses that constrains the firm’s flexibility to respond. This threat may force two
basic decisions.Synergy exists when the
value created by business
units working together
exceeds the value that those
same units create working
independently.Even with some of these new approaches, health critics
are challenging some of the advertising for “healthy prod-
ucts” which have a lot of sugar but are classified as “juices.”
Often these products have as much sugar as standard soft
drinks. As such, diversification away from falling sales is not
an easy approach because you have to build up growth
in new areas that are more risky but also, when mistakes
are made, can damage the overall company brand equity.
Nonetheless, the diversification approach is often taken
when there are risks and uncertainty around the future
success of your main product line.Sources: M. Chahal, 2015, Coca-Cola’s strategy: Heritage with ‘digital backbone’,
Marketing Week, http://www.marketingweek.com, March 11; D. Cimilluca, D. Mattioli, &
A. Gasparro, 2015, Brazil’s 3G in serious talks for Kraft, Wall Street Journal,
http://www.wsj.com, March 25, A1, A6; M. Esterl, 2015; Soft drinks hit 10th year of
decline, Wall Street Journal, http://www.wsj.com, March 27; M. Esterl, 2015, What is
Coke CEO’s solution for lost fizz? More soda: Despite changing consumer taste,
Muhtar Kent pushes strategy to sell more cola, Wall Street Journal, http://www.wsj.
com, March 19; B. Geier, 2015, Coke’s plan to save Coke is to sell more Coke,
Fortune, http://www.fortune.com, March 19; A. Brones, 2014, Americans are drinking
less soda, but we’re still addicted to sugar, Care2, http://www.care2.com, April 15;
S. Sharf, 2014, Coca-Cola profit declines 14%, future growth plan fails to
impress, Forbes, http://www.forbes.com, October 21; C. Suddath & D. Stanford,
2014, Coke confronts its big fat problem, Bloomberg BusinessWeek,
http://www.bloombergbusinessweek.com, July 31.