Strategic Management the Ultimate Justification

Strategic Management

The ultimate justification for diversifying a single-business company is that it will add value to the shareholders. It does this by providing multiple revenue streams, and reducing the overall risk that the organization faces Diversification adds value to the organization when it creates synergies, such that the combined performance of the company will be enhanced through the diversification.

I do not believe that Coca-Cola is diversified. Coke is heavily dependent on soft drinks, but within that category does enjoy strong geographic diversification and some product diversification as well. if, however, the company's core soft drink brands were to falter, there is little doubt that the value of the company's stock will diminish as a result.

A successful diversification for Coca-Cola needs to satisfy three criteria. It must be in an attractive industry, there must be a relatively low cost of entry and the firm must be better-off. Coke's main rival, Pepsi, is in the snack foods business and also was once in the fast food business, both of which represent the kind of diversification that would add value to Coca-Cola. Another good option for Coke is to diversify into the logistics and distribution business. One of the most important key success factors for Coke is that it excels at distribution, getting its products into every retail outlet possible. This business is attractive because there are a lot of consumer products that would love to have Coke's distribution capabilities. An industry with pent-up demand is usually attractive. The cost of entry is relatively low, since it would build on the company's existing distribution infrastructure. Lastly, this diversification would make the company better off. Coke knows how to make money with its channels, and it knows that many companies would pay a premium for access to these channels. That the new operation would not stretch the company's capabilities makes it all the more attractive.

2. Response #1 -- Your case about Citi raises an interesting question about diversification. Companies in the financial services industry generally must diversify within that industry because it is what they know. Is if possible, feasible or even reasonable for a company like Citi to diversify outside of financial services? Would that add value? Could its competencies be applied to another business? I was wondering that about my own company because it is not easy to excel in multiple businesses and yet that is sort of essential to being properly diversified.