Diversification

GROUP - 1

What is Diversification?

Diversification is a corporate strategy to enter into a new market or industry which the business is not currently in, whilst also creating a new product for that new market.

Most risky section of Ansoff matrix

Why do Firms Diversify?

When they have excess resources, capabilities, and core competencies that have multiple uses

Diminishing growth prospects in present industry

Cost saving opportunities

Capture strategic fits

Capture financial economies

Spread business risk

Leverage brand name

Building Shareholder Value

Ultimate justification for diversifying

A diversification move must pass three tests

The industry attractiveness test

The cost-of-entry test

The better-off test

Decision to Diversify Requires Two Additional Decisions:

Level and Degree of Diversification

Number and Relatedness

Mode of Diversification

Acquisition, Internal Development, Joint Venture

Major Corporate Level Strategies

Single Business

Dominant Business

Related Diversification

Unrelated Diversification

Dominant-business firms One major core business accounting for 50 - 80 percent of

revenues, with several small related or unrelated businesses accounting for remainder

Narrowly diversified firms Diversification includes a few (2 - 5) related or unrelated

businesses Broadly diversified firms

Diversification includes a wide collection of either related or unrelated businesses or a mixture

Multibusiness firms Diversification portfolio includes several unrelated groups of

related businesses

Combination Related-Unrelated Diversification Strategies

What is Related Diversification?

This means that there is a technological similaritybetween the industries, which means that the firm is able to leverage its technical know-how to gain some advantage.

The company could seek new products that have technological or marketing synergies with existing product lines appealing to a new group of customers.

Examples of Related Diversification?

Proctor and Gamble (distribution/marketing) Provides branded consumer goods products worldwide

3 GBUs

Beauty GBU

Beauty segment

Grooming segment

Health and Well-Being GBU

Health Care segment

Snacks, Coffee, and Pet Care segment

Household Care GBU

Fabric Care and Home Care segment

Baby Care and Family Care segment

Examples of Related Diversification?

Johnson and Johnson Engages in the research and development, manufacture, and sale of various

products in the health care field worldwide

3 segments

Consumer segment

Products for baby care, skin care, oral care, wound care, and women’s health care fields, as well as nutritional and over-the-counter pharmaceutical products

Pharmaceutical segment

Products for anti-infective, antipsychotic, cardiovascular, contraceptive, dermatology, gastrointestinal, hematology, immunology, neurology, oncology, pain management, urology, and virology

Medical Devices and Diagnostics segment

Products for circulatory disease management, orthopaedic joint reconstruction and spinal care, wound care and women’s health, minimally invasive surgical, blood glucose monitoring and insulin delivery, and diagnostic products, as well as disposable contact lenses

Examples of Related Diversification?

Campbell Soup Company Engages in the manufacture and marketing of branded

convenience food products worldwide

4 segments

U.S. Soup, Sauces, and Beverages

Baking and Snacking

International Soup, Sauces, and Beverages

North America Foodservice

Strategic Appeal of Related Diversification

Capture Strategic Fits/Synergies/Scope Economies

Strategic fits along value chain

Cost reductions

Spread investor risks over a broader base

Preserves strategic unity in its business activities

Achieve consolidated performance greater than the sum of what individual businesses can earn operating independently

Involves diversifying into businesses with

No strategic fit

No meaningful value chainrelationships

No unifying strategic theme

Approach is to venture into “any businessin which we think we can make a profit”

Firms pursuing unrelated diversification are often referred to as conglomerates

What is Unrelated Diversification?

Example of Unrelated Diversification?

W. R. Grace Chemicals

Coal Mining

Oil and Gas Extraction

Food Manufacturing

Paper Products

Health Services

Example of Unrelated Diversification?

Textron, Inc.

Operates in the aircraft, industrial, and finance industries worldwide.

4 segments Bell – helicopters plus parts and service

Cessna – general aviation aircraft

Industrial – auto parts, food containers, hydrolics, golf carts

Finance – aircraft finance, asset-based lending, distribution finance, golf finance, resort finance

Strategic options for Diversification

Acquisition / Merger

Acquire or merge with company competing in market

Greenfield Venture / Internal Development

Start up new business unit and use it to enter in to market

Strategic Alliances and Joint Ventures

Combine resources with partners

Strategies for entering new businesses

AcquisitionInternal new

venture (start-up)Joint venture

Diversifying into New Businesses

Strategy options for a firm that is already Diversified

Stick with

the Existing

Business

Lineup

Broaden the

Diversification

Base with New

Acquisitions

Divest and

Retrench to

a Narrower

Diversification

Base

Restructure

through

Divestitures

and

Acquisitions

Strategy Options for a Firm That Is Already Diversified

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