EXCEL International Journal of Multidisciplinary Management Studies

Vol.2 Issue 5, May 2012, ISSN 2249 8834 Online available at http://zenithresearch.org.in/

DIVERSIFICATION - STRATEGIES FOR MANAGING A BUSINESS

P. KANNAN*; DR. R.SARAVANAN**
*Head, Department of Management Studies, N.P.R. College of Engineering & Technology, Natham. *Research Scholar, Anna University of Technology Coimbatore, Coimbatore, Tamil Nadu, India. **Director, School of Management, Sri Krishna College of Technology, Kovaipudur, Coimbatore- 641042, Tamil Nadu, India.

ABSTRACT When thinking about building a diversified portfolio, remember the old adage, Dont put all your eggs in one basket. Diversification is not only about the number of investments in your portfolio, its also about the relationships among those investments. Diversification becomes an attractive strategy when a company runs out of profitable growth opportunities in its core business. In a diversified company the strategy making challenge involves assessing multiple industry environments and coming up with a set of business strategies, in which it operates. Multinational diversification strategies feature a diversity of business and a diversity of national markets. Despite the complexity of having to devise and manage so many strategies, these strategies have considerable appeal and more competitive potential. The study focuses on the manner in which diversification strategy is applied for different sectors like IT, FMCG etc. It deals with the core concept of diversification strategy to succeed by companies. KEYWORDS: Investments, Related Diversification, Strategy, Unrelated Diversification. ______________________________________________________________________________ INTRODUCTION www.zenithresearch.org.in Diversification is a form of growth marketing strategy for a company. It seeks to increase profitability through greater sales volume obtained from new products and new markets. A diversification strategy stands apart from the other three strategies such as merger and acquisition, internal start up, Joint Venture. These are usually pursued with the same technical, financial, and merchandise resources used for the original product line, whereas diversification strategy usually requires a company to acquire new skills, new techniques and new facilities. Therefore, diversification is meant to be the riskiest of other strategies to pursue. Whenever a single business companies faced with diminishing market opportunities and stagnating sales in its principal business, it is the indication for diversification. And a Management quote about diversification is given by Andrew Campbell as below,

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EXCEL International Journal of Multidisciplinary Management Studies

Vol.2 Issue 5, May 2012, ISSN 2249 8834 Online available at http://zenithresearch.org.in/

Fit between a parent and its business is a two edged sword; a good fit can create value and a bad one can destroy it. WHEN TO DIVERSIFY KEY FACTORS Whenever a single business companies faced with diminishing market opportunities and stagnating sales in its principal business, it is the signal for diversification. The other key factors are, a) When it has a powerful and well-known brand name that can be transferred to the product of other business. b) When diversifying into closely related business opens new avenue for reducing costs. c) When it can expand into industries whose technologies and products complement its present business? Judgments about the timing of a companys diversification effort are best made instance by instance, according to companys own unique situation. CORE CONCEPT PATH Once the decision is made to pursue diversification, the firm must choose whether to diversify into related business, unrelated business. Businesses are said to be related when their value chains possess competitively valuable cross business value chain matchups. Business are said to be unrelated when the activities comprising their respective value chains are so dissimilar that no competitively valuable cross business relationship are present. Most companies favor related diversification strategies because of the performance enhancing potential of cross business synergies. However, some companies opted to try to build shareholder value with unrelated diversification strategies. CASES FOR DIVERSIFYING INTO RELATED BUSINESS To present opportunity for the following, www.zenithresearch.org.in a) Combining the related activities of separate businesses into a single operation to achieve lower costs. b) Transferring valuable expertise, technology, knowledge etc., marketing capabilities, managerial

c) Exploiting common use of a well known brand name. d) To create valuable resource strength and capabilities.

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EXCEL International Journal of Multidisciplinary Management Studies

Vol.2 Issue 5, May 2012, ISSN 2249 8834 Online available at http://zenithresearch.org.in/

RELATED DIVERSIFICATION BUSINESS ACTIVITIES Related diversification thus has a strategic appeal from several angles. It allows a firm to reap the competitive advantage benefits of skills transfer, lower cost, common brand names, and stronger competitive capabilities over a broad business phase. It also provides sharper focus for managing diversification and a useful degree of strategic unity across the companys various business activities. COMPANIES THAT HAVE DIVERSIFIED INTO RELATED BUSINESS Samples of companies that have pursued a strategy of related diversification are illustrated below. TABLE 1 COMPANY IN RELATED DIVERSIFICATION JOHNSON & JOHNSON Baby products First aid products Medical devices Surgical & Hospital products Snack foods (Lays, Chee tos etc.,) Contact lenses Breakfast products Personal Care products GILLETTE Blades and Razors Tooth Brush (Oral B) Toiletries products Hair dryers, Shavers. PROCTER & GAMBLE Hair care products Household cleaning/care www.zenithresearch.org.in Beauty care products Laundry products Soft drinks Fruit juices (Tropicana) Other beverages (Aquafina bottled water etc.,) Sports drinks (Gatorade) PEPSICO

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EXCEL International Journal of Multidisciplinary Management Studies

Vol.2 Issue 5, May 2012, ISSN 2249 8834 Online available at http://zenithresearch.org.in/

FIGURE 1 REPRESENTING VALUE CHAIN ACTIVITIES SUPPORT ACTIVITIES

Supply chain

Techno logy

operati ons

Sales & marketing

Distrib ution

Customer services

COMPETITIVE VALUE CHAINS OF A (BUSINESS A) AND B (BUSINESS B)

Supply chain

Techno logy

Operati ons

Sales & marketing

Distrib ution

Customer services

SUPPORT ACTIVITIES

Table 1 it is inferred that the factors the companies adopted while going for related diversification. From the above samples, the Core areas that the companies pursue as under: Transfer of technology, Marketing Capabilities, Managerial Knowledge Shared Skills and Competencies Exploitation of by Products Reduction in unit cost Reduces risks www.zenithresearch.org.in

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EXCEL International Journal of Multidisciplinary Management Studies

Vol.2 Issue 5, May 2012, ISSN 2249 8834 Online available at http://zenithresearch.org.in/

CASES FOR DIVERSIFYING INTO UNRELATED BUSINESSES Companies that pursue a strategy of unrelated diversification generally exhibit a willingness to diversify into any industry where there is potential market for a company to realize consistently good financial results. CRITERIA TO KEEP OR DIVEST EXISTING BUSINESS a. Whether the business can meet corporate targets for profitability and return on investment b. Whether the business will require substantial infusions of capital to replace out-of-date plants and equipment, fund expansion etc., c. Whether the business is in an industry with significant potential growth d. Whether the business is big enough to contribute significantly to the parent firms bottom line UNRELATED BUSINESS ACTIVITIES FIGURE 2 REPRESENTATIVE VALUE CHAIN ACTIVITIES SUPPORT ACTIVITIES

Product R&D

Production

Advt & Promotion

Dealers

Supply chain

Assembly

Distribution

Customer services

SUPPORT ACTIVITIES

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ABSENCE OF COMPETITIVE VALUE CHAINS OF A (BUSINESS A) AND B (BUSINESS B)

EXCEL International Journal of Multidisciplinary Management Studies

Vol.2 Issue 5, May 2012, ISSN 2249 8834 Online available at http://zenithresearch.org.in/

From the below illustration of unrelated business activities says that, A strategy of unrelated diversification involves no deliberate effort to seek out businesses having strategic fit with the firms other business. COMPANIES THAT HAVE DIVERSIFIED INTO UNRELATED BUSINESS A sample of companies that have pursued a strategy of unrelated diversification are illustrated below. TABLE 2 COMPANY IN UNRELATED DIVERSIFICATION WIPRO Electrical appliances Information technology Computer accessories Toilet soap (santoor) GE medical system Baby care products TATA GROUPS Home appliances Financial services Watches Telecom services Information technology Tea products

LG Mobile Phones Television, Radio Projectors Home appliances Lamps Note books

RELIANCE Telecom services Power Petro chemical products Mobile phones Construction Textiles Mutual funds , money www.zenithresearch.org.in

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EXCEL International Journal of Multidisciplinary Management Studies

Vol.2 Issue 5, May 2012, ISSN 2249 8834 Online available at http://zenithresearch.org.in/

From the above table it is depicts that the following are the merits of Unrelated diversification strategy for the above companies: Superior skills of top management people Business risks is scattered over a set of diverse industries. Companys financial resources can be employed to maximum advantage investing in industries offers the best profit prospects. Building share-holder value Increasing Profitability by exploiting general organization competencies DISCUSSION & FINDINGS From the above analysis of both diversification strategies the below are the findings Why is related diversification only marginally profitable than unrelated? How can diversification dissipate rather than create value? Michael Porters research(1) suggests that average related company is at best only marginally more profitable than the average unrelated company. He found that most of the companies had divested many more diversified acquisitions than they had kept. He and its team have concluded that the corporate diversifications strategies pursued by most companies can dissipate value rather than creating it. Accomplishments of unrelated diversification business are, Cutting unrelated cost Concentrating on core areas Seeking external markets www.zenithresearch.org.in

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EXCEL International Journal of Multidisciplinary Management Studies

Vol.2 Issue 5, May 2012, ISSN 2249 8834 Online available at http://zenithresearch.org.in/

KEY BARRIERS OF UNRELATED DIVERSIFICATION Planning controls

Lack of Skills

Barriers for Unrelated Diversification

Capacity to develop a business case

Specialist business advisor

Regulatory controls

WHY RELATED COMPANIES?

DIVERSIFICATION

MOSTLY

PREFERRED

BY

THE

Boost profitability in numerous ways Involved fewer risks Top management has related knowledge about parent business KEY BARRIERS OF RELATED DIVERSIFICATION Access to finance Skilled Personnel

Barriers for Related Diversification Regulatory controls Validity of Marketing Research

Planning controls

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EXCEL International Journal of Multidisciplinary Management Studies

Vol.2 Issue 5, May 2012, ISSN 2249 8834 Online available at http://zenithresearch.org.in/

RESULTS Diversification Strategies Related Diversification Unrelated Diversification Characteristics Operates in a few related industries Operates in many unrelated industries Growth Low Profit High Risk Low

High

Low

Medium

DIVERSIFICATION STRATEGY MATRIX Growth High Mixed Diversification Unrelated Diversification Low Related Diversification

High Profit Low INFERENCE

Divestment

When companies mainly focusing on profit, they can prefer unrelated or mixed diversification strategy. When companies mainly focusing on growth, they can prefer related diversification or mixed diversification strategy. When the companys growth and profit are at low, suggest that they can go for disinvestment the business operations. CONCLUSION It is very tempting for a business leader to diversify with related or unrelated business activities carried out in a company. But it must be understood that it is a very complex task. Hence any such move must be planned & executed with great care. And diversification strategy matrix is given above for the business leader to help in choosing the strategy for diversifying the business activities. www.zenithresearch.org.in

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EXCEL International Journal of Multidisciplinary Management Studies

Vol.2 Issue 5, May 2012, ISSN 2249 8834 Online available at http://zenithresearch.org.in/

REFERENCES (1) Charles W.L.Hill and Gareth R. Jones on Strategic Management, Volume- 06, Biztantra Publication. (2) Arthur .A. Thompson, A. J. Strickland, John. E. Gamble on Crafting and Execution Strategy, vol.14, Tata McGraw-Hill Publication. (3) George Stone House, David Campbell, Jim Hamill, Tony Purdie on Global and Transnational Business, 2nd Edition, Wiley Publication. (4) Sukul Lomash abd P K Mishra on Business Policy and Strategic Management 3rd Edition, Vikas Publication. WEBSITES 1. http://ideas.repec.org/p/imf/imfwpa/06-50.html 2. http://www.fao.org/docrep/006/ad689e/ad689e07.htm 3. http://www.investopedia.com/articles/02/111502.asp 4. http://www.mydigitalfc.com/personal-finance/why-diversification-strategydidn%E2%80%99t-work-crash-353 5. http://dkmt.regionalnet.org/docu/t4.htm 6. Company websites for the following: i. ii. iii. iv. v. vi. vii. viii. Johnson & Johnson Gillette Protector & Gamble PepsiCo Tata Groups Reliance Wipro LG www.zenithresearch.org.in

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