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Sometimes in the course of pursuing its primary business, a company discovers an unexpected source of revenue. It is particularly interesting in cases when a humble support function is found to be more profitable than the final product or service.

For example, I was reading about a company which set up an aluminum smelter in a developing country. Aluminum smelters require a lot of electricity, and since the power supply in this country was unreliable, they also had to build their own mini power station.

They soon realized that the power they could generate from their power station was more valuable than the aluminum they could produce, so they shut down their aluminum smelter and made money from selling power!

Are there other examples of this? Is there a name for this, other than listening to the market and being responsive? (I don't like the word "pivot" because that has the connotation of what entrepreneurs and startups do when their effort has failed and they're trying to put a brave face on it.)

I am looking for more examples of joyful serendipity in business.

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The Aerobie Sports company mostly makes odd-ball equipment for having a catch. But they made a coffee maker called the Aeropress as a side project and now it makes up more than half of their sales.

The Woolworth Company (of five and dime fame) founded the Foot Locker shoe store as a side business and now it is the core-surviving brand of that corporation when the main Woolworth business was closed.

Post it notes were a side business for 3M but now amount to \$1 billion in sales a year. But that's only about 3 percent of revenue.

The Michelin Guide books were developed to help promote the sale of tires through encouraging road touring. It survives today and though the business might be a small fraction of the revenue produced by the tire business it has significant cultural influence and an independent life.

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  • $\begingroup$ Nice examples! The Michelin Guide is a particularly notable one. I had always wondered what tires had to do with fine dining... $\endgroup$ – SlowMagic Sep 21 '15 at 0:36
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Microplane graters grew out of a company that was manufacturing dot-matrix printer parts, using a process that created extremely sharp metal bands— which was, at the time, more of a liability than a strength. As dot-matrix printers fell into obsolescence, the company decided to find a use for its unnaturally sharp strips of metal, and "pivoted" toward making woodworking tools, specifically rasps. Chefs then discovered that these rasps made excellent graters, and in response to growing demand from the culinary world, the company eventually began focusing on producing culinary tools.

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  • $\begingroup$ This is a perfect example, thank you! I would imagine that at the time, they felt a lot of desperation. This was an unexpected escape hatch. $\endgroup$ – SlowMagic Sep 21 '15 at 0:37
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SlowMagic,

I think the terms you are looking for are ‘backward vertical integration’ and ‘horizontal integration’.

A company uses the process of backward vertical integration as it decides to independently carry out a previous production stage. It can also exhibit backward vertical integration when it controls subsidiaries that produce some of the inputs used in the production of its products. By mentioning the construction of a mini power station, in order to provide the necessary power for the smelting process, you gave an example of backward vertical integration. Another example is an automobile company that owns a tire company, a glass company, and a metal company. Control of these three subsidiaries is intended to create a stable supply of inputs and ensure a consistent quality in their final product. It was the main business approach of Ford and other car companies in the 1920s, who sought to minimize costs by integrating the production of cars and car parts as exemplified in the Ford River Rouge Complex.

Horizontal integration, however, is an economic term that indicates that a company integrates multiple activities at the same level in different production chains. Regarding your example, starting to sell the electricity that the mini power plant generated, is an example of horizontal integration. The shutdown of the aluminum smelter, however, is a logical decision because in your case, selling the generated power is more lucrative than the original core business of the company. A familiar example of horizontal integration is a fuel station that also sells grocery items. Music shops that nowadays also sell films and computer games are also a common phenomenon. At production level, we can think of companies like Philips. They produce a large variety of products, ranging from consumer electronics to medical equipment.

The discovery of penicillin is attributed to Scottish scientist and Nobel laureate Alexander Fleming in 1928. He showed that, if Penicillium chrysogenum was grown in the appropriate substrate, it would exude a substance with antibiotic properties, which he dubbed penicillin. This serendipitous observation began the modern era of antibiotic discovery.

Last but not least, the beginning of another era, the era of the smartphones and tablets, is also linked to the vertical approach of integration: http://venturebeat.com/2010/05/06/vertical-vs-horizontal-silicon-apple-google

I hope this will help you

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  • $\begingroup$ Thanks, this is very informative and provides a lot of context. $\endgroup$ – SlowMagic Sep 21 '15 at 0:41
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McDonald's is actually a real estate broker, not a fast food company.

For some time after his hire, Ray Kroc was struggling to make the business profitable. He wasn't bringing in enough revenue from his franchised restaurants. Part of his trouble was in getting the funds to pay for the land and the building for the restaurant. In order to maintain control over operations, Kroc needed to franchise one store at a time, rather than a whole slew of stores over a particular geographic zone, which is what other food chains did. Although other chains could attract big investors, the franchisees Kroc attracted didn't have the funds to pay for the land and the building.

That all changed in 1956 when he hired Harry Sonneborn, who convinced him that the real money was in real estate. Sonneborn's idea was to have the McDonald's company lease a plot of land and the building for each restaurant. The company would then sublease to the franchisee who would run the restaurant. Sonneborn further developed the plan to eventually take out mortgages to own both the building and the land. Kroc soon established the Franchise Realty Corp. to find willing landowners.

At first, McDonald's charged franchisees markups of 20 percent of lease costs, but it eventually increased this to 40 percent. Franchisees were responsible for insurance and taxes, ensuring a steady profit for the company as long as the restaurant stayed in business.

But that's not all: The rent due to McDonald's could be even more if the restaurant was doing well. The franchisee had to pay either the stipulated lease markup or 5 percent of the sales -- whichever was higher. Kroc and Sonneborn also requested up-front security deposits from the franchisees. Unbeknownst to the franchisee, this capital would fund the opening of more restaurants. Overall, this created a symbiotic relationship between the franchisee and the company -- McDonald's Corp. had a vested interest in the ongoing success of its individual restaurants.

http://money.howstuffworks.com/mcdonalds2.htm

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