Diversification is a corporate strategy where a firm enters new markets or industries that are not currently part of its business by developing new products for those markets. Firms diversify for reasons such as having excess resources, diminishing growth in their current industry, cost savings opportunities, or spreading business risks. There are two main types of diversification: related diversification, where a firm leverages its technical expertise across industries, and unrelated diversification, where a firm enters industries with no strategic fit. Firms must evaluate the attractiveness and costs of new industries as well as whether diversification creates shareholder value.
2. 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
3. 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
4. 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
5. Major Corporate Level Strategies
Single Business
Dominant Business
Related Diversification
Unrelated Diversification
6. 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
7. What is Related Diversification?
This means that there is a technological similarity
between 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.
8. 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
9. 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
10. 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
11. 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
12. Involves diversifying into businesses with
No strategic fit
No meaningful value chain
relationships
No unifying strategic theme
Approach is to venture into “any business
in which we think we can make a profit”
Firms pursuing unrelated diversification are often
referred to as conglomerates
What is Unrelated Diversification?
13. Example of Unrelated Diversification?
W. R. Grace
Chemicals
Coal Mining
Oil and Gas Extraction
Food Manufacturing
Paper Products
Health Services
14. 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
15. 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
16. Strategies for entering new businesses
Acquisition
Internal new
venture (start-up)
Joint venture
Diversifying into
New Businesses
17. 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