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Keywords
Competitive advantage, Business expansion scheme, Diversification, Sustainable development
Abstract
This article investigates the issue of diversification around the core business, namely concentric diversification. There have been many diversification failures reported over the last few decades. Little guidance has been available to firms who plan to diversity in order to grow. The literature relating to competitive advantage, sustainable competitive advantage, and concentric diversification is reviewed. A process is then presented to help managers make sound strategic diversification decisions, thus reducing the risk of failure.
Introduction
Sustaining business growth is one of the key challenges to the business leader. Diversification is one of a few answers to this problem. Researchers, however, claim that most companies struggle to diversify profitably (Bishop, 1995; Porter, 1996; Zook, 2001a). Zook (2001a) points out that 90 percent of companies' efforts to diversify outside of their core business have failed over the past decade. His research shows that diversification around the core business (concentric diversification) has a higher success rate than other approaches to diversification.
According to Porter (1996), companies erode their competitive advantage through poor diversification strategies. Thus, diversification often results in the decay of the very competitive advantage that made the business successful in the first place. It would seem reasonable to expect that, if a firm was able to maintain or manage its competitive advantage while diversifying, it would result in successful diversification. Recent studies have shown that diversification effects on performance remain inconclusive (Mukherji, 1998).
The objective of this article is to develop a conceptual model or process for improved business performance achieved by effective concentric diversification. In addition, the link between concentric diversification and sustainable competitive advantage is explored.
Achieving a sustainable competitive advantage
Businesses succeed when they possess some advantage relative to their competitors. Gaining this competitive advantage is the objective of strategy (Porter, 1996; Day, 1984, 1994). Corporations which gain competitive advantage in their industries usually adopt specific strategies including innovation, improved processes, higher quality, lower cost and marketing in order to achieve this goal.
Porter (1980) offers three generic strategies of cost, differentiation, and focus that may be used to gain competitive advantage. Companies may use any one or combination of these strategies to gain a competitive advantage. Businesses that are...