Strategic diversification and capacity utilization

Abstract

This paper analyzes acquisitions resulting in a product line expansion of a firm. When the firm faces a non-stationary and stochastic demand in both the current and the new product line, switching between the production facilities may give diversification advantages. Switching between production facilities is similar to holding an inventory for both products. A case in the beverages industry illustrates that even when switching costs are relatively high as compared to inventory costs, switching has significant advantages over holding inventories.