Companies have long sought ways to protect themselves from downturns in the economy or from the commercial vagaries which can affect the success of their products. A popular strategy for many years has been that of diversification, which is the adding of new product or service areas to an organization which are different from the ones currently provided. This research considers diversification and the factors which contribute to it, and evaluates the diversification strategy of three leaders in the beverage industry, Coca Cola, PepsiCo and Cadbury Schweppes.
The primary reason for diversification is to lower overall risk by reducing dependence on one or only a few product or service areas (Campbell, Goold, & Alexander, 1995, p. 79). In undertaking diversification, companies seek to insulate themselves if demand for one of the products or services falls significantly.
Some companies choose to diversify in such a way that they offer a completely unrelated product or service, while other companies work within the same general category. In the beverage industry, Cadbury has followed a strategy of diversifying into related product areas while PepsiCo has a vast array of companies, including fast food companies, which are apparently unrelated (other than serving food products) to the manufacture and distribution of beverages and soft drinks. Other companies, such as ITT, have diversified to the point of being conglomerates, with the result that the company had one subsidiary which operates international hotels (ITT Sheraton) and another which manufactures electronic components (ITT Cannon). However, the company reorganized in 1995 and divested some of its unrelated holdings so that it has a related business structure (Ward, 1995, p. 12).
Economic Factors Involved in Diversification
There are several economic factors which help determine what type of diversification is appropriate for a company, and even whether a company sh...