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Discuss the main reasons for an diversification as a strategic direction.

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Diversification is one of the segments of the Ansoffs matrix; it is a type of strategic direction whereby a company decides to take a new product into a new market. There are two types of diversification: related and unrelated. Related diversification is the process of developing further than their original products and markets whilst keeping within the organisations strengths. For example a newspaper company expanding by acquiring a TV station remains with media sector. It will use its present strengths by using its expertise to develop new interests in same area. This form of diversification can further be broken down. When a company decides to diversify its portfolios in a related field, it will either embark on a vertical or horizontal integration. Quite often an organisation will decide to take over a stage within the value network that is adjacent to their own. They thereby take over the responsibilities that input into the business. This is called backward integration. (Backward diversification, when activities related to the inputs in the business are developed). For example a newspaper company acquiring a printing or publishing company.

Others decide to take control of the next stage of their supply chain; this is referred to as forward integration. (Forward diversification, refers to development into activities which are concerned with a companys output). For example a newspaper company acquiring a distribution outlet.

Furthermore, other organisations may decide to either develop activities that are complimentary to their existing products, or buy out competitors. This approach is known as horizontal integration. (Horizontal diversification, occurs when a company develops interests complementary to its current activities). For a company may integrate its activities to include all aspect of the value chain; design, manufacture, market and distribute.

Since a related diversification allows a corporation to use its competencies in developing a new product in a new market, it will be able to share many of its common resources, creating the advantage of economies of scope. These resources not only include a companys tangible assets but also the firms brand, personnel and other intangible resources. Given the opportunity the organisation can then synergise these creating more combined benefits than if the resources were used separately. This in turn could help with the development of the organisations expansion lowering its overall costs and allowing them to also take advantage of economies of scale.

Unrelated diversification allows the organisation to step out of its capabilities comfort zone to develop new products for a completely new market. For example a company whose core business is media services may diversify into provision of financial services

With regards to unrelated diversification, often referred to as a conglomerate strategy; economies of scope arent achieved as there are no obvious transferable competencies that can be used in the implementation of the new product into the new market. However successful managers who exploit their dominant logic can create a lot of value when entering a completely new market. Also if a manager decides to use a conglomerate strategy in a country with an underdeveloped market it can prove to be a wise decision.

There are several reasons why a company may decide to branch out in either of these categories of diversification.

Companies may be able to maximise on their own under used resources (Efficiency gains when the underutilized resources and competences are used by diversifying into a new activity).

Capabilities of the corporate parenting firm can also be maximised. (Stretching corporate parenting capabilities into markets and products).

Being able to apply existing competences, such as good management skills or maintaining a strong brand personality within new markets and with new products will give a firm an advantage.

Also an immediate increase in market power from having a range of businesses can often influence a managers decision to acquire another company. With a varied portfolio they are able to subsidise those businesses that are dwindling with revenue made from those currently doing well. This can often create an advantage when their competitors are also facing the same hardships and cannot afford or

do not have the means to do the same. (Increasing market power, an organisation can afford to cross-subsidize one business from the surpluses earned by another in a way that competitors may not be able to).

Other managers may decide to diversify as a response to growth slowing down in their own market or even to spread risk. (Responding to market decline and spreading risk).

However, there are several issues which need to be, as well, taken into account by the managers before the decision to diversify is made.

May result in slowing growth in the core business of the firm. Adding management costs. Adding bureaucratic complexity. (By the need to coordinate and control core activities with additional activities). May result in negative synergies The limitations may come from the political and legal requirements of the different countries in which the organisation has controlling interests. A mismatch between core competencies or experiences of the acquirer and acquired businesses can happen.

To conclude, some diversification is good, but not too much. Obviously, it depends on what position and circumstance which the company is in and experiencing that affects the managers decision of whether diversification would give a worthwhile result. This in its self will also push companies to pursue a more varied approach to their business.

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