Strategic Management Concepts for Professionals
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By HARKONNEN

Management Tools
1. Discuss the concept of related diversification as a means to achieve organizational growth. How is value created through the leveraging of core competencies, sharing activities, pooling negotiating power, and/or vertical integration in the firm?
Related diversification enables a firm to benefit from horizontal relationships across different businesses in the diversified corporation by leveraging core competencies and sharing activities. This enables a corporation to benefit from economies of scope. Economies of scope refers to cost savings from leveraging core competencies or sharing related activities among businesses in the corporation. A firm can also enjoy greater revenues if two businesses attain higher levels of sales growth combined than either company could attain independently (Dess, et al, 2007). A word of caution is in order, however:
Jones and Hill argue that related diversification implies all three types of task interdependencies - reciprocal, sequential and pooled, whereas unrelated diversification implies only pooled interdependencies. Because it is more difficult to monitor highly interdependent tasks when employees can act opportunistically, coordination costs are the highest for related diversifiers and lowest for unrelated diversifiers. Hill, Hitt and Hoskisson (1992) propose that to benefit from economies of scope, firms need to establish cooperative relationships among business units, rather than resort to standard financial controls or market-based disciplines. Nayyar (1992) argues that such relationships are costly and difficult to sustain ( Zhou, 2007).
Leveraging Core Competencies
Japanese companies pioneered the concept of diversification. For example, the Yamaha Corporation started out as a musical instrument manufacturer (pianos and organs). For many consumers Yamaha is famous for its