The use of diversification varies both across and within industries. In some industries, most firms may follow a single- or dominant-product approach. Other industries are characterized by a mix of both single-product and heavily diversified firms. The purpose of this exercise is to learn how the use of diversification varies across firms in an industry, and the implications of such use.

Part One

Working in small teams of 4–7 persons, select an industry to research. You will then select two firms in that industry for further analysis. Many resources can aid in your identification of specific firms in an industry for analysis. One option is to visit the Web site of the New York Stock Exchange (http://www.nyse.com), which has an option to screen firms by industry group. A second option is http://www.hoovers.com, which offers similar listings. Identify two public firms based in the United States. (Note that Hoovers includes some private firms, and the NYSE includes some foreign firms. Data for the exercise are often unavailable for foreign or private companies.)

Once you have identified your target firms, you will need to collect business segment data for each company. Segment data break down the company’s revenues and net income by major lines of business. These data are reported in the firm’s SEC 10-K filing, and may also be reported in the annual report. Both the annual report and 10-K are usually found on the company’s Web site; both the Hoovers and NYSE listings include company homepage information. For the most recent three-year period available, calculate the following:

• Percentage growth in segment sales

• Net profit margin by segment

• Bonus item: Compare profitability to industry averages (Industry Norms and Key Business Ratios publishes profit norms by major industry segment.)

Next, based on your reading of the company filings and these statistics, determine whether the firm is best classified as:

• Single product

• Dominant product

• Related diversified

• Unrelated diversified

Part Two

Prepare a brief PowerPoint presentation for use in class discussion. Address the following in your presentation:

• Describe the extent and nature of diversification used at each firm.

• Can you provide a motive for their diversification strategy, given the rationales for diversification put forth in the chapter? 

• Which firm’s diversification strategy appears to be more effective? Try to justify your answer by explaining why you think one firm’s strategy is more effective than the other?