Diversification Strategies in Business

Diversification Strategies

• Related Diversification: value chains possess competitively valuable cross-business strategic fits
• Unrelated Diversification: value chains are so dissimilar that no competitively valuable cross-business relationships exist

Synergies of Related Diversification

• Transferring competitively valuable expertise, technological know-how, or other capabilities from one business to another
• Combining the related activities of separate businesses into a single operation to achieve lower costs
• Exploiting common use of a known brand name
• Using cross-business collaboration to create strengths

Related Diversification Guidelines

• When an organization competes in a no-growth or a slow-growth industry
• When adding new, but related, products would significantly enhance the sales of current products
• When new, but related, products could be offered at highly competitive prices
• When new, but related, products have seasonal sales levels that counterbalance an organization’s existing peaks and valleys
• When an organization’s products are currently in the declining stage of the product’s life cycle
• When an organization has a strong management team

Unrelated Diversification Guidelines

• When revenues derived from an organization's current products would increase significantly by adding the new, unrelated products
• When an organization competes in a highly competitive or a no-growth industry
• When an organization's present channels of distribution can be used to market the new products to current customers
• When the new products have countercyclical sales patterns compared to present products
• When an organization's basic industry is experiencing declining annual sales and profits
• When an organization has the capital and managerial talent needed to compete successfully in a new industry
• When an organization has the opportunity to purchase an unrelated business that is an attractive investment opportunity
• When there exists financial synergy
• When existing markets for an organization's present products are saturated
• When antitrust action could be charged against an organization that historically has concentrated on a single industry

Defensive Strategies

• Retrenchment: regroups through cost and asset reduction to reverse declining sales and profits
• Divestiture: selling a division or part of an organization, often used to raise capital for further strategic acquisitions or investments
• Liquidation: selling all of a company’s assets, in parts, for their tangible worth

Backward Integration Guidelines

• When an organization's present suppliers are especially expensive or unreliable
• When the number of suppliers is small and the number of competitors is large
• When the organization competes in a growing industry
• When an organization has both capital and human resources
• When the advantages of stable prices are particularly important
• When present suppliers have high profit margins
• When an organization needs to quickly acquire a needed resource

Horizontal Integration Guidelines

• When an organization can gain monopolistic characteristics in a particular area or region without being challenged by the federal government
• When an organization competes in a growing industry
• When increased economies of scale provide major competitive advantages
• When an organization has both the capital and human talent needed
• When competitors are faltering due to a lack of managerial expertise

Intensive Strategies

• Market Penetration Strategy: seeks to increase market share for present products or services in present markets through greater marketing efforts
• Market Development: involves introducing present products or services into new geographic areas
• Product Development Strategy: seeks increased sales by improving or modifying present products or services