Strategic Management: Formulation and Implementation

Strategic Fit

Strategic fits among related businesses offer the competitive advantage potential of (a) lower costs or (b) efficient transfer of key skills, technological expertise, or managerial know-how.

The key to cost-sharing and skills transfer opportunities is diversification into business with strategic fit. Thompson and Strickland identified three types of strategic fit:

Market-Related Fits
A variety of cost-saving opportunities (or economies of scope) can arise from market-related strategic fit: using a single sales force for all related products rather than separate sales forces for each business, advertising related products rather than separate sales forces for each business, advertising related products in the same ads and brochures, using the same brand names, coordinating delivery and shipping, combining after-sale service and repair organizations, coordinating order precessing and billing, using common promotional tie-ins (cents-off couponing, free samples and trail offers, seasonal specials, and the like), and combining dealer networks. In addition, market related fit can generate opportunities to transfer selling skills, promotional skills, advertising skills, and product differentiation skills from one business to another. Moreover, a company's brand name and reputation in one product can often be transferred to other products.
Operating Fit
Different businesses have operating fit when there is potential for cost-sharing or skills transfer in procuring materials, conducting R&D, developing technology, manufacturing components, assembling finished goods, or performing administrative support functions. Operating fit presents cost-saving opportunities; some derive from the economies of combining activities into a larger-scale operation (economies of scale) and some derive from the ability to eliminate costs by doing things together rather than independently (economies of scope).
Management Fit
Management fit exists when managerial skills and abilities can be transfer from one corporation or industry to solving problems in another. Transfers of managerial expertise can occur anywhere in the activity-cost chain.

In general, diversifying firms prefer to pursue a strategy of related diversification because it entails opportunities for synergy, and involves less risk than unrelated diversification.

In spite of marked preference for related diversification, firms are often forced into a strategy of unrelated diversification because: