Question

Can a powerful brand name be transferred to the products of other businesses? If so, how?

Diversification may result in building shareholder value if it passes three tests: what are the three tests?

Answer 1

Can a powerful brand name be transferred to the products of other businesses? If so, how?

Answer: A powerful brand name can be transferred to the products of other businesses. This process is known as business diversification. This is especially helpful if the business can leverage its existing capabilities and core competencies to branch into businesses that can benefit from these strengths. By using its existing powerful brand to transfer onto a new set of products or services to increase revenue/profits.

Some of the strategies to enter a new business, as part of diversification, includes:

· Acquiring an existing organization: It is lucrative when the know-how and technology are different from the current capability set up of the parent firm. For instance, Google is vigilant on market dynamics and acquires existing organizations/outfits that are synchronous with its strategy and vision of the business, it acquired a VOIP company GrandCentral, which came to be known as Google Voice. Google transferred its powerful brand onto a new set of products and assimilated the new product into its product bouquet.

· Upstarting and internal Start-ups: It is lucrative when the internal production is an organic route and internal capabilities can be leveraged effectively without causing delays or gaps in quality. For instance, Chanel, the luxury brand was a renowned fragrance maker, extended its capabilities to diversify into fashion apparel and jewelry. It leveraged its powerful brand name and transferred it onto fashion products.

· Strategic partnerships or Joint Ventures: Forming strategic partnerships with another mutually compatible organization to pool resources and know-how/technology and leverage the combined brand power and brand name. For instance, Suzuki and Maruti partnered to produce passenger automobiles in the Indian market.

Diversification may result in building shareholder value if it passes three tests: what are the three tests?

Answer: Diversification may result in building shareholder value if it passes the following three tests:

· Attractiveness test: The markets to be diversified into must be attractive, as determined by Porter’s market attractiveness model.

· Cost-of-Entry test: The cost-of-entry must not cannibalize future earnings/profits of the parent company.

· Better-off test: The combined synergetic revenue share for the shareholders should be better-off than standalone enterprises leading to a 1+1=3 effect for the shareholders.