Diversification

Strategy
 Introduction
• Diversification Strategy is the strategy that an organization
adopts for the development of its business.
• It is a form of growth strategy which helps the organization’s
business to grow.
• By adopting this strategy, the organization not only diversifies its
product offering in the target market but also expands its
business.
Example- Microsoft, ITC, Google etc.
 Trends in Diversification
•The urge of Diversity(1950-1980)
•Refocusing (1980-2009)
1. Emphasis on shareholder value
2. Trends in Marketing Thinking
Evolution of diversification strategies
 Motives for Diversification
• To refocus the reordering of corporate objectives.
•Corporate diversification for most of the 20th century was driven by
two key objectives.
i) Growth
ii) Risk Reduction
 Growth
• In the absence of diversification, for firms in declining industries,
Diversification is the daunting prospect.
• Companies in low growth, cash flow rich industries have been
susceptible to the temptation of diversification.
•Diversification helps to destroy shareholder’s value.
 Risk Reduction
• Diversification appeals managers more than to owners.
• The advantage is if firms can diversify at lower cost than
individual investors.
• The transaction costs to shareholder’s of diversifying their
port folios are far less than the diversifying through
acquisition.
 Value Creation : Porter’s “Essential
Tests”
• In establishing the conditions for profitable diversification, Michael Porter refines
these into three essential tests.
•The Attractiveness Test: Industry chosen must be structurally attractive.
•The Cost-of-Entry Test: Must not capitalized all the future profits.
•The Better-off Test: Either the new unit must gain competitive advantage from its link
with the corporation or vice versa.
 Competitive Advantage from
Diversification
1)Economies of scope-Diversification benefits on economies
of scope.
•Greater control, accuracy and repeatability of process.
•Reduce costs from less waste and lower training costs.
•Better machine use.
•Less risk.
a)Tangible Resources- Such as distribution networks, information technology
systems, sales forces, research laboratories offer economies of scope by eliminating
duplication between business through creating a single shared facility. Greater the
fixed cost, greater the economies of scope.
Ex: Centrica.
b)Intangible Resources- Such as brands, reputation, technology etc. gives the ability
to extend them into additional businesses at low marginal cost. This is called Brand
Extension.
Ex: Starbucks
c)Organizational Capabilities- It can be transferred within the diversified company .
Ex: LVMH-Diversified supplier of branded luxury goods.
2)Economies from Internalizing Transactions- To achieve economies of scope, a firm can
not only diversify across different businesses but can also exploit by simply selling or
licensing the use of the resource or capability to another company.
Ex: Starbucks, Cadbury.
3)Diversifies firm as an Internal Market- Lower cost of managing internally can offer
better options.
a)Internal Capital markets: Diversified companies have two key advantages:
•They can avoid the costs of using the external capital market.
•Better access to information on the financial prospects of their different businesses
than that typically available to external financiers.
b)Internal Labor markets:
Diversified companies transfer employees especially managers and technical specialists,
between their divisions and rely less on hiring and firing. Thus saving the costs
associated with hiring including advertising, time spent in interviewing and selection.
 Diversification and Performance
 The relationship between these are not clear. Studies have found
that extensive diversification leads to lower profitability.
 The performance effects of diversification depends on the mode of
diversification.
 Related and Unrelated Diversification: Empirical research had
initially supported that diversification in related industries are more
profitable than into unrelated industries.
 According to Tom Peters and Robert Waterman, the golden rule of
excellence is "Stick to the knitting".
 Relatedness in Diversification
The Determinants of Strategic Relatedness
Between Businesses
Thank You…
Group 3
Anusua Das
Sucharita Sarkar
Rupali Roy
Sumit Saurav
Mridul Sinha