Diversification: Strategies for

Managing a Group of Businesses

Presented by:-
Shingala Parth
Diversification and
Corporate Strategy
• A company is diversified when it is in two or more lines
of business that operate in diverse market environments
• Strategy-making in a diversified company is a bigger
picture exercise than crafting a strategy for a single line-
of-business
– A diversified company needs a multi-industry,
multi-business strategy
– A strategic action plan must be developed
for several different businesses competing
in diverse industry environments
Four Main Tasks in
Crafting Corporate Strategy
• Pick new industries to enter and decide on means of entry

• Initiate actions to boost combined performance of

businesses
• Pursue opportunities to leverage cross-business value
chain relationships and strategic fits into competitive
advantage
• Establish investment priorities, steering resources into
most attractive business units
When Should a Firm Diversify?
• It is faced with diminishing growth prospects in present
business
• It has opportunities to expand into industries whose
technologies and products complement its present business
• It can leverage existing competencies and capabilities by
expanding into businesses where these resource strengths
are key success factors
• It can reduce costs by diversifying into closely related
businesses
• It has a powerful brand name it can transfer to products of
other businesses to increase sales and profits of these
businesses
Strategies for Entering
New Businesses

Acquire existing
company

Internal start-up

Joint
ventures/strategic
partnerships
Acquisition of an Existing Company
• Most popular approach to diversification
• Advantages
– Quicker entry into target market
– Easier to hurdle certain entry barriers
• Acquiring technological know-how
• Establishing supplier relationships
• Becoming big enough to match rivals’ efficiency and costs
• Having to spend large sums on introductory advertising and
promotion
• Securing adequate distribution access
Internal Startup
• More attractive when
– Parent firm already has most of needed resources to build a
new business
– Ample time exists to launch a new business
– Internal entry has lower costs than entry via acquisition
– New start-up does not have to go head-to-head against
powerful rivals
– Additional capacity will not adversely impact supply-demand
balance in industry
– Incumbents are slow in responding to new entry
Joint Ventures and Strategic Partnerships

• Good way to diversify when

– Uneconomical or risky to go it alone
– Pooling competencies of two partners provides more
competitive strength
– Only way to gain entry into a desirable foreign market
• Foreign partners are needed to
– Overcome tariff barriers and import quotas
– Offer local knowledge about
• Market conditions
• Customs and cultural factors
• Customer buying habits
• Access to distribution outlets
Related vs. Unrelated Diversification
Related Diversification Unrelated Diversification

• Involves diversifying into • Involves diversifying into

businesses whose value businesses with no
chains possess competitively valuable
competitively valuable value chain match-ups or
“strategic fits” with value strategic fits with firm’s
chain(s) of firm’s present present business(es).
business(es). • E.g.:- American Standard in
• E.g.:-PEPSICO in soft drinks, heat pumps, air
fruit juices, sports drinks etc conditioners, bath tubs,
shower basins etc.
Advantages of Related Diversification
• Reap competitive advantage benefits of
– Skills transfer
– Lower costs
– Common brand name usage
– Stronger competitive capabilities
• Spread investor risks over a broader base
• Preserve strategic unity across businesses
• Achieve consolidated performance greater than the sum of
what individual businesses can earn operating
independently.
Cont.
• Competitive advantage can result from related
diversification when a company captures cross-
business opportunities to
– Transfer expertise/capabilities/technology from one
business to another
– Reduce costs by combining related activities of different
businesses into a single operation
– Transfer use of firm’s brand name reputation from one
business to another
– Create valuable competitive capabilities via cross-business
collaboration in performing related value chain activities
Advantages of Unrelated Diversification
• Business risk scattered over different industries

• Financial resources can be directed to those industries

offering best profit prospects

• If bargain-priced firms with big profit potential are

bought, shareholder wealth can be enhanced

• Stability of profits – Hard times in one industry may be

offset by good times in another industry
Key Drawbacks of
Unrelated Diversification
Demanding Managerial Requirements
• The greater the number and diversity of businesses,
the harder it is for managers to
– Discern good acquisitions from bad ones
– Select capable managers to manage the diverse
requirements of each business
– Judge soundness of strategic proposals of business-unit
managers
– Know what to do if a business subsidiary stumbles
Limited Competitive Advantage Potential

• Lack of cross-business strategic fits means unrelated

diversification offers no competitive advantage potential
beyond what each business can generate on its own

– Consolidated performance of unrelated businesses tends

to be no better than sum of individual businesses on their
own (and it may be worse)

– Promise of greater sales-profit stability over business

cycles is seldom realized
How to Evaluate a
Diversified Company’s Strategy?
Step 1: Assess long-term attractiveness of each industry firm is in
Step 2: Assess competitive strength of firm’s business units
Step 3: Check competitive advantage potential of cross-business
strategic fits among business units
Step 4: Check whether firm’s resources fit requirements of
present businesses
Step 5: Rank performance prospects of businesses and determine
priority for resource allocation
Step 6: Craft new strategic moves to improve overall company
performance
Four main alternatives after a company
diversifies.
 Broaden the diversification base.
 Divest some businesses and retrench to a
narrow diversification base.
 Restructure the Company’s Business Lineup.
 Pursue Multinational Diversification.
Multinational Diversification Strategies
• Distinguishing characteristics
– Diversity of businesses and
– Diversity of national markets

• Presents a big strategy-making challenge

– Strategies must be conceived and executed for each business, with as
many multinational variations as appropriate
– Cross-business and cross-country collaboration opportunities must be
pursued and managed
– Examples are Sony (TV, VCRs, DVD players etc), Nestle (Beverages, Milk
products, pet foods etc.)
Opportunities to Build Competitive
Advantage via Multinational Diversification
• Full capture of economies of scale and experience curve effects
• Capitalize on cross-business economies of scope
• Transfer competitively valuable resources from one business to
another and from one country to another
• Leverage use of a competitively powerful brand name
• Coordinate strategic activities and initiatives across businesses
and countries
• Use cross-business or cross-country subsidization to out-
compete rivals
Competitive Power of
a DMNC in Global Markets
• A DMNC has a strategic capability of defeating both a
domestic-only rival or a single-business rival by
competing in
– Multiple businesses and
– Multiple country markets

• Can use its multiple profit sanctuaries and can employ

cross-subsidization tactics if need be.
• Example:- Samsung in Notebook computers, CD/DVD-
ROM drives, printers, fax- machines etc.
THANK YOU