A framework for concentric diversification through sustainable competitive advantage

Rasoava Rijamampianina Graduate School of Business Administration, University of the Witwatersrand, Johannesburg, Wits, South Africa Russell Abratt H. Wayne Huizenga School of Business and Entrepreneurship, Nova Southeastern University, Ft Lauderdale, Florida, USA Yumiko February Graduate School of Business Administration, University of the Witwatersrand, Johannesburg, Wits, South Africa
Keywords
Competitive advantage, Business expansion scheme, Diversification, Sustainable development

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.

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 diversify 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.

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 able to create a competitive advantage by using one or more of these strategies will experience above-average profitability within their industry. Businesses that use both cost and differentiation strategies to achieve competitive advantage usually realize the highest levels of profitability within their industry (Porter, 1979; Pearce and Robinson, 2000). However, even if businesses are able to gain competitive advantage and achieve higher levels of profitability, rivals are usually quick to copy their strategies or even improve on their initiatives, and thus result in a loss of competitive advantage (Ghemawat, 1986; Reed and DeFillippi; 1990; Porter, 1996; Markides, 1997; Zook, 2001a; Zook and Allen, 2001). Ghemawat (1986) found that competitors secure detailed information on 70 percent of all new products within a year of their development.

Competitive advantage
In examining the literature a number of descriptions of competitive advantage emerge. Day (1984) and Porter (1987) see competitive advantage as the objective of strategy, arguing that superior performance will automatically result from a competitive advantage. Reed and DeFillippi (1990) suggest that competitive advantage can be derived
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Achieving a sustainable competitive advantage

Management Decision 41/4 [2003] 362-371 # MCB UP Limited [ISSN 0025-1747] [DOI 10.1108/00251740310472031]

Businesses succeed when they possess some advantage relative to their competitors. Gaining this competitive advantage is the
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from numerous sources and that strategy manipulates the sources of advantage under the firm's control in order to generate a competitive advantage.

Sustainable competitive advantage

When a firm has achieved a competitive advantage and successfully raises the barriers preventing imitation by competitors it thereby ``resists erosion by competitor behaviour'' and achieves sustainable competitive advantage (Porter, 1987). Preventing imitation, however, does not last forever. Thus the firm's ability to delay this eventuality is essential in order to derive the maximum benefit from any competitive advantage (Reed and DeFillippi, 1990; Porter, 1996; Pearce and Robinson, 2000; Christensen, 2001). According to Zook and Allen (2001), achieving sustained and profitable growth is extremely difficult without having at least one strong and differentiated core business on which to build. Building this strong and differentiated core would require access to some form of competitive advantage. The sources of competitive advantage, according to Reed and DeFillippi (1990), are as numerous as there are activities in the firm. Prahalad and Hamel (1990) report that Western and Japanese companies are converging on ``similar formidable'' standards for product cost and quality. These are more important as qualifying criteria for continued competition and less important as sources of competitive advantage. They further suggest that the real sources of competitive advantage are related to companies' ability to consolidate technologies and production skills into competencies that empower businesses to adapt quickly to changing opportunities. Kanter (1990) proposes that, to be successful, companies must remain focused on their core competencies and invest in their development and de-emphasise activities that do not add value. She further suggests that defining the firm's core competencies and ``organising to support and augment them'' will ensure continuing success in changing conditions. While other sources of competitive advantage exist, investment in core competencies is the source of competitive advantage most widely agreed on in the literature (Hofer and Schendel, 1978; Hitt and Ireland, 1985; Hamel and Prahalad, 1990, 1991; Kanter, 1990; Prahalad and Hamel, 1990; Reed and DeFillippi, 1990; Chandler, 1992; Olesen, 1994; Campbell and Goold, 1995; Stork, 1995; Von Krogh and Roos, 1995; Porter, 1996; Christensen, 2001; Zook, 2001a, b).

According to Porter (1996), in the past two decades companies have been investing in becoming lean and flexible in order to respond rapidly to environment and market changes, benchmarking continuously to achieve best practice and outsourcing aggressively to achieve efficiencies. The Japanese are famous for deriving competitive advantage through operational effectiveness. These investments in achieving operational efficiency have resulted in operational improvements and competitive advantage but have failed to secure sustainable advantage. Strategy and operational effectiveness, he argues, are both essential for superior performance, which is the ultimate goal of any enterprise. In fact, the more benchmarking companies do, the more they look alike, and the more rivals outsource activities, the more generic those activities become. As rivals imitate one another's improvements in quality, cycle times or supplier partnerships, their strategies converge and they become ``a series of races down identical paths that no one can win'' resulting in mutually destructive competition (Porter, 1996). In a differentiation strategy, a firm selects one or more attributes that many buyers in an industry perceive as important and uniquely positions itself to meet the customers' needs. For its uniqueness it is rewarded by being able to charge a premium price. A firm must truly be unique at something, or be perceived as unique, if it is to expect a premium price (Porter, 1985, 1987). According to Ghemawat (1986) and Barney (1991), preferred access to resources or customers can award a business an advantage that is independent of its size. The advantage persists because competitors are held back by an investment asymmetry: they would suffer a penalty if they tried to imitate the leader. Strategic fit is about combining different activities in the firm in order to achieve competitive advantage. Competitive advantage is achieved through the way activities of a firm fit and reinforce one another (Campbell and Goold, 1995; Porter, 1996). Southwest Airlines' rapid gate turnarounds are essential to its high convenience, low cost positioning. This it achieves partly through well-paid gate crews, flexible union rules, no meals offered on flights, no seat assignment, no baggage transfer, effective airport selection, strict limits on the type and length of routes and standardised aircraft (Porter, 1996). These activities complement one another in ways that create real economic value. Since discrete organisational activities often

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affect one another, seeing the organisation as a whole is more valuable than relying only on core competencies, key success factors or critical resources (Porter, 1996). Also, conversely, according to Campbell and Goold (1995), a lack of fit may result in reduced performance and competitive advantage. They cite examples of oil companies like British Petroleum and Shell that have invested in the minerals industry and were later forced to withdraw as a result of unacceptable levels of earnings which were a consequence of the parent oil companies' lack of understanding of the minerals business; in other words, a lack of fit. According to Christensen (2001), steep economies of scale exist where there are predominantly high fixed vs. variable costs in the business model. Economies of scale generally allow larger companies to enjoy lower costs than their competitors. Very closely linked to economies of scale is the concept of economies of scope, which signifies product line breadth. According to Christensen (2001), in the case of Caterpillar, its scope gave it an unassailable advantage in construction equipment against smaller competitors such as Komatsu. Only Caterpillar was able to absorb the high overhead costs that were required to offer a full line of products. According to Ghemawat (1986), economies of scope define the conditions under which synergy works. To achieve economies of scope a company must be able to share resources across markets, while making sure that the cost of those resources remains largely fixed. Only then can economies be affected by spreading assets over a greater number of markets (Ghemawat, 1986). Time compression is a source of potential advantage gained by performing activities faster. According to Kanter (1990), companies are increasingly competing on time, from first-mover advantage via innovation to faster cycle times for product development, to just-in-time deliveries and rapid response to market trends. According to Christensen (2001), vertical integration is an advantage when a company is competing for the business of customers whose needs have not yet been satisfied by the functionality of available products. Integrated companies are able to design interactively each of the major subsystems of a product or service, effectively extracting the most performance possible out of the available technology. Value creation as a source of competitive advantage requires companies to focus on creating or increasing shareholder value. Companies must continually demonstrate

that business practices founded on sustainable growth are generating tangible financial gain (Holliday, 2001). In order to use a number of sources of competitive advantage, Kanter (1990) argues that companies must underpin these sources of advantage with human factors. She argues that the barriers to effective use of these sources are largely social and not strategic. These issues include organisational classes (e.g. top management, senior management, middle management and workers), knowledge management, culture, openness to ideas, leadership style, teamwork, entrepreneurial drive and open communication, which are examples of social factors that often impact and underpin sources of competitive advantage (Gluck et al., 1980; Ghemawat, 1986; Porter, 1987, 1996; Kanter, 1990; Holliday, 2001; Roca Puig, 2001).

Ensuring the sustainability of competitive advantage

Ensuring sustainability of competitive advantage requires a significant investment from the firm in order to raise barriers to imitation. While it is clear that no advantage is indefinitely sustainable and that no barriers to imitation are insurmountable, several options exist for firms to prolong competitive advantage (Porter, 1987, 1996; Campbell and Goold, 1995; Reed and DeFillippi, 1990; Pearce and Robinson, 2000; Christensen, 2001). These include the following: Arguably, the most effective barriers to imitation are achieved when competitors do not comprehend the competencies on which the advantage is based (Reed and DeFillippi, 1990; Zook and Allen, 2001). This refers to situations where it is difficult for rivals to understand how a firm has created the advantage it enjoys (Pearce and Robinson, 2000). Fit is fundamental to the sustainability of advantage. It is harder for a rival to match an array of interlocked activities than it is to copy a single activity. Consider the simple exercise: the probability that rivals can match an activity is usually less than 1, e.g. 0.9. The probabilities then reduce very rapidly when more activities are added to the equation, e.g. 0.9 * 0.9 * 0.9 * 0.9 = 0.66. Rivals that try to copy a firm with an array of interlocked activities (fit) will have to reconfigure many activities in order to compete effectively, thus creating a formidable barrier to imitation (Porter, 1996).

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According to Christensen (2001), the practices and business models that constitute competitive advantage are only relevant at a particular time with particular factors at play and under certain conditions. Thus competitive advantage in itself is not sustainable. Strategists should therefore consider the underlying factors that underpin competitive advantage and attune themselves to how these factors change over time and continuously match strategy with these factors and conditions (Christensen, 2001). Physically unique resources are per definition impossible to imitate. Pearce and Robinson (2000) suggest examples of physically unique resources such as strategically located real estate positions, patents, copyrights and mineral rights. They concede, however, that only in rare cases can resources be considered to be physically unique. Path-dependency as a source of competitive advantage results from the difficulty through which another firm must go in order to create the same competitive advantage that the firm possesses. For example, Dell's system of selling direct via the Internet and their unmatched customer service provides a pathdependent organisational capability, since it would take any competitor years to develop the expertise, the infrastructure, reputation and capabilities necessary to compete with Dell (Pearce and Robinson, 2000). Economic deterrence, according to Pearce and Robinson (2000), is another source of inimitability. This occurs where the firm raises the barriers to imitation of its competitive advantage by making huge investments in capacity to provide products and services in markets that are scalesensitive. The size of the investment deters rivals from imitating the competence (i.e. resource or skill) required to compete. According to Zook and Allen (2001), the key to unlocking sources of growth is investment in and building unique strength (competitive advantage) in the core business. Continuous investment in this unique strength in the core business will result in sustainable competitive advantage in the core business.

companies which have diversified and achieved varying results from major successes to less profitable ventures and sometimes divestiture and bankruptcy (Biggadike, 1979; Ghemawat, 1986; Amit and Livnat, 1989; Reed and DeFillippi, 1990; Campbell and Goold, 1995; Davis and Devinney, 1996; Porter, 1996; Markides, 1997; Mukherji, 1998; Hatfield and Murrmann, 1999; Pearce and Robinson, 2000; Zook, 2001a; Zook and Allen, 2001). The decision to diversify or not is one of the most challenging decisions that confronts companies. Success stories are plentiful consider General Electric, 3M and Disney (Markides, 1997). However, there are also numerous accounts of diversification failures (Biggadike, 1979; Ghemawat, 1986; Amit and Livnat, 1989; Reed and DeFillippi, 1990; Campbell and Goold, 1995; Davis and Devinney, 1996; Porter, 1996; Markides, 1997; Hatfield and Murrmann, 1999; Pearce and Robinson, 2000; Zook, 2001a; Zook and Allen, 2001). According to Pearce and Robinson (2000), diversification represents a ``distinct departure'' from existing operations through acquisition or internal generation of separate businesses that are able to provide synergy with the original firm by counter-balancing strengths and weaknesses of the two businesses. There are several motivations for why firms choose to diversify. Some of these include: . increased stock value of the firm; . increased growth rate of the firm; . better use made of funds than internal investment; . revenue growth; . improved stability of earnings; and . increased efficiency and profitability. However, there is little conventional wisdom to guide managers as they consider diversification that could greatly enhance shareholder value or destroy it (Markides, 1997). Because diversification is risky it may sometimes lead to undesirable outcomes. These include reduced organisational fit, inconsistencies, loss of focus, and ultimately lower profitability (Biggadike, 1979; Davis and Devinney, 1996; Porter, 1996; Markides, 1997; Zook, 2001b; Zook and Allen, 2001). According to Markides (1997), it is critical for a company to first identify its existing unique competitive strengths in order to apply them in new markets.

From sustainable competitive advantage to concentric diversification

Growth can be achieved in a number of ways. For many companies growth through diversification has resulted in several benefits. However, for others, it has resulted in problems (Biggadike, 1979; Porter, 1996; Zook, 2001a; Zook and Allen, 2001). The literature abounds with case histories of

Concentric diversification leveraging competitive advantage

Owing to the risky nature of diversification, as a result of reduced fit with inconsistencies

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between and loss of focus in the existing and acquired business, diversification strategies that reduce this risk and result in highly compatible acquisitions will be desirable (Davis and Devinney, 1996; Porter, 1996; Markides, 1997; Zook, 2001b). A number of characteristics of successful concentric diversification efforts include the following themes: . existence of a strong core business; . diversification into adjacencies that are close to the core business; and . leveraging of skills from the core business. Concentric diversification results in a highly compatible acquisition of a new business that is related to the acquiring firm in terms of its key assets technology, markets, distribution channels, resources or products. Growth undertaken is based on existing strengths and weaknesses and the diversified firm profits from an improvement in strengths and reduced weaknesses resulting in synergies (Pearce and Robinson, 2000). Based on a ten-year study of more than 2,000 technology, service and product companies in a variety of industries, Zook and Allen (2001) argue that most diversification strategies fail to deliver value and that most successful companies achieve their growth by expanding into logical adjacencies that have shared economies, and not from unrelated diversifications or moves into ``hot'' markets. According to Zook (2001a), most businesses fail to achieve sustained profitable growth because they wrongly diversify from their core business. In order to succeed, firms must first know their ``key assets'' consistent with concentric diversification. For example, they must identify their customers, capabilities, products, distribution channels, and other strategic assets, such as patents, brands, and position. They must reach their full potential in their core business and then expand into logically adjacent businesses surrounding the core (Zook, 2001a, b). According to Markides (1997), when embarking on diversification strategies, managers must consider not only what their company does but also what it does better than its competitors, in other words what is their competitive advantage. In order to achieve effective concentric diversification, these firms must first concentrate on understanding their true strengths and unique assets, deepening their strategic positions and reaching the full potential of the core business (Chatterjee and Wernerfelt, 1988; Amit and Livnat, 1989;

Campbell and Goold, 1995; Collis and Montgomery, 1995; Davis and Devinney, 1996; Porter, 1996; Markides, 1997; Zook, 2001b; Zook and Allen, 2001). According to Porter (1996), this will ensure that they do not ``undermine [their existing] competitive advantage''. Collis and Montgomery (1995) suggest that companies must leverage their existing resources into all the markets in which those resources may contribute to competitive advantage. Therefore, in diversifying concentrically, firms must not lose sight of their existing competitive advantage and leveraging it in their expansion programmes. Porter (1987) reports a success rate of less than 10 percent for companies which diversified into distant adjacencies. In contrast companies which diversified close to their core have shown between 70 and 90 percent success rates (Porter, 1987; Zook, 2001a). Zook and Allen (2001) suggest that the most sustainable growth pattern is that of the strong or dominant core business that benefits from continual reinvestment, constant adaptation to circumstances or business environment, and persistent leveraging of the competitive advantage created by these strengths into new markets or geographies, applications, or channels. According to Porter (1996), companies erode their competitive advantage based on their original target markets through diversification by making strategic compromises and allowing inconsistencies between their existing and new businesses. This is consistent with Porter's (1987) article in which he supports the idea that firms must identify their core business, which will be the foundation of the corporate diversification strategy. Faced with pressures to grow in maturing markets, companies broaden their positions into adjacencies by extending product lines, adding new features, copying rivals, matching processes or making acquisitions. This often results in top-line growth, i.e. growth in revenue, but a decline in profitability. Consider the well-known concentric diversification failure of Maytag Corporation which were known for their focus on reliable, durable washers and dryers. They expanded into other appliances and acquired companies with various disparate strategic positions, in the process targeting customers from the low end to the high end of the market. Although they grew their revenue from $684 million in 1985 to $3.5 billion in 1994, profitability declined severely. Return on sales fell from 12 percent to less than 1 percent over the same period.

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Their adjacent businesses showed lower profitability than expected and they relied on their traditional (core) business to support the diversified firm (Porter, 1996). Zook and Allen (2001) found that companies that grew revenues but not profits did not create economic value in the long term (though they might create shareholder wealth in the short term in the stock market). Porter (1996) offers a number of mistakes made by companies who failed to achieve successful diversification. These examples are consistent in their deviation from the core business and are listed below: . They attempt to compete in more ways than one; for example, consider the popular failures of Maytag competing with several brands in disparate positions or Continental Lite's attempts to compete in both ``full-service'' higher cost flights and the low cost ``no frills'' flights at the same time (Porter, 1996). . They fail to adapt acquired services, products or features to their strategy. Cooper Industries' 1989 successful acquisition and transformation of Champion International Corporation, the spark-plug company, illustrates the importance of adaptation to ensure strategic fit. New acquisitions are ``Cooperized.'' Factories are audited, human resource, cost accounting, planning and budgeting systems are improved and made to conform with central policies (Campbell and Goold, 1995). . They expand into new markets where the company has nothing special to offer. In the early 1990s Neutrogena, from its original high cost focused position, expanded into a wider variety of products including eye-make-up remover and shampoo where the company had no uniqueness. This diluted its image and it had to resort to price promotions to induce revenue (Porter, 1996; Markides, 1997). Davis and Devinney (1996) report findings of a comprehensive analysis of 1,449 US firms that suggest that the greater the number of industries in which a firm operates, the less will be its market-to-book-value ratio.

business. Zook and Allen (2001) further suggest that management teams constantly meet with opportunities for concentric diversification and that taking advantage of these opportunities is at times absolutely necessary in order to strengthen the core. Sikora (2001) offers further evidence in support of this reverse link between effective concentric diversification and sustainability of competitive advantage, i.e. that effective concentric diversification improves the sustainability of competitive advantage. He proposes that companies that balance growth and focus on their competitive advantage or key strengths are broadening their core business. The ideas put forward include the following themes : . effective concentric diversification further strengthens competitive advantage; . effective concentric diversification broadens the core business; and . effective concentric diversification enhances the capabilities of the organisation. Companies that have successfully diversified concentrically, having focused on one core business in which they hold competitive advantage and clear leadership, will grow sustainably over extended periods of time. This sustainable growth, based on strengthened competitive advantage, creates increased market power and gives companies increased profitability and provides access to a wider industry profit pool (Zook and Allen, 2001). Thus, in addition to strengthening competitive advantage, effective concentric diversification enhances firm performance. Further, according to Dutton (1997), in a study conducted by Arizona State University it was found that the most consistently profitable companies for the past century are those that have diversified around their core business. A reason for the superior profitability of these companies is that they diversified based on their existing knowledge. It is evident that the level of competitive advantage enjoyed by the core business supports successful concentric diversification and that concentric diversification in turn strengthens competitive advantage. Porter (1987) supports this notion and recommends that when diversifying a corporation must apply the ``better-off test''. In other words, will the corporation be able to bring significant competitive advantage to the new business unit and/or does the new business unit offer potential for significant advantage to the corporation?

Successful concentric diversification reinforces competitive advantage

According to Markides (1997), managers should examine whether a diversification move will allow them to gain new competencies (sources of competitive advantage) that can be applied to their existing

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Conceptual model for improved business performance

It has been shown that achieving effective concentric diversification or growth around the core business requires the firm to possess a competitive advantage in its core business. So step number one is to create a competitive advantage. Several sources of competitive advantage are available to the firm including investment in core competencies, operational effectiveness, and strategic fit of activities which should be supported by attention to social factors. The second step requires the firm to first consolidate its competitive advantage in its traditional business and ensure that it gains the maximum benefit before venturing into adjacencies. It involves investment into raising the barriers to imitation. Step number three is to diversify by using the firm's sustainable competitive advantage. Several methods of sustaining the competitive advantage in the core business are reported in the literature (Porter, 1987, 1996; Reed and DeFillippi, 1990; Pearce and Robinson, 2000; Christensen, 2001) some of these include paying attention to underlying conditions and factors, physically unique resources, causal ambiguity, economic deterrence and strategic fit. Once the firm is able to consolidate its competitive advantage, i.e. make it sustainable, it is able to use this as a basis for concentric growth without undermining its existing sustainable competitive advantage. The firm will then be able to leverage its competitive advantage into any logically adjacent markets it wishes to enter. Step four should result in improved business performance. Effective concentric diversification will strengthen the organisation`s competitive advantage. Failure to diversify successfully will lead to reduced performance. Opportunities do exist for reducing the risk associated with diversification and paying attention to sustainability of competitive advantage and concentric diversification. This relationship has been investigated and a model is proposed to help companies in achieving successful concentric diversification. This is shown in Figure 1.

Conclusions and managerial implications

Since there are no generally accepted models to assist companies on how they have to go about diversifying, there have been many

diversification failures reported over the past few decades. Managers who are embarking on diversification strategies require guidance on the most appropriate way to enhance firm value through diversification. In examining the literature, some patterns for achieving improved business performance through effective diversification have emerged. It appears that companies which diversify concentrically and take their competitive advantage in their core business into consideration when diversifying have a greater chance of success than those which do not. Johnson Wax diversified from packaged goods into recreational equipment in the early 1970s. In the process, it lost momentum in its mature markets for furniture polish, insect repellent and shaving-cream by overpricing and underpromoting. It later returned to what it knew best and regained lost market share in its core product markets by launching new products (Dickson, 1997). Investing in or enhancing the existing competitive advantage of the core business can help to develop a sustainable competitive advantage. Specifically, there are a number of ways this can be achieved: . Increasing the fit of various activities or units in the firm will make copying the sources of competitive advantage more difficult, thus prolonging the competitive advantage. Companies such as Charles Schwab, Hewlett-Packard, Apple, AT&T and Intel have used their superior higher order learning processes to create innovative, new training processes for their employees (Dickson, 1997). . Realising causal ambiguity makes it difficult for competitors to understand how a firm has created the advantage it enjoys and thus reduces the probability that the advantage can be copied. . Strategists should consider the underlying factors that underpin competitive advantage and observe how these factors change over time. Furthermore they should continuously match strategy with these factors and conditions. The electric typewriter was developed and enhanced by IBM and not by Remington or Underwood, the market leaders in manual typewriters. Wang and Apple, rather than IBM, developed computer word processing (Dickson, 1997). . Investment in physically unique resources that are per definition impossible to imitate. These include mineral rights, copyrights, patents, or real estate with unique locations. . Developing a path dependency could result in any competitor taking years to

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Figure 1 Conceptual model for concentric diversification

acquire the assets or skills necessary to compete with the firm these may include expertise, infrastructure, reputation or capabilities. EganaGoldfeil the manufacturer of branded fashion accessory products has a prestigious brand name in Germany. It pursues a related diversification strategy through extending this long-established and wellknown name to other fashion accessories. They maintain their competitive edge based on technical superiority, product quality and innovativeness, as well as customer service. Economic deterrence occurs where the firm raises the barriers to imitation of its competitive advantage by making huge investments in capacity.

Concentric diversification must leverage off the existing firm's competitive advantage in expanding into adjacencies. Characteristics of successful concentric diversification efforts include the following: . existence of a strong core business with a strong competitive advantage; and . diversification into adjacencies that are close to the core business, so that the existing competitive advantage held by the firm in terms of skills, activities, assets and resources may be leveraged and used in the new business unit.

Wilkinson Sword had a good reputation in the manufacture of naval and military ceremonial swords. The market for these products is small. The company chose to diversify into the manufacture of razorblades in a market that is dominated by Gillette. They were able to exploit their traditional name in the manufacture of quality metallic cutting implements into the related area of blades. Business performance can be improved through effective concentric diversification in the following ways: . effective concentric diversification further strengthens competitive advantage; . effective concentric diversification broadens the core business; . effective concentric diversification enhances the capabilities of the organisation; and . ultimately, effective concentric diversification improves the profitability of the firm. PepsiCo and Coca-Cola are two of the largest and oldest arch-rivals in the soft drinks industry. In order to grow, both companies diversified into various food and beverage enterprises. They both could use their distribution skills and similar customers to grow their sales volumes and profits.

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The following three recommendations for achieving successful diversification are suggested: 1 Since competitive advantage in itself is not sustainable in the long term, companies have to continue to invest in raising the barriers to imitation, thus making their competitive advantage sustainable. 2 Prior to embarking on a diversification, management must carefully consider the core business and its competitive advantage. Any diversification option must be evaluated based on whether the business can provide an added advantage to the new business unit or whether the new business unit can provide an added advantage to the traditional business. 3 Companies must constantly review their portfolio in terms of their core business. For example, if a company finds itself in a position where they have diversified into a wide variety of disparate businesses or industries that deliver less value than anticipated, it is recommended that they sell off those units that are furthest away from their core business.

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