Diversification

10 Key excerpts on "Diversification"

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  Foundations of Strategy

  • Robert M. Grant, Judith J. Jordan, Phil Walsh(Authors)
  • 2015(Publication Date)
  • Wiley

    (Publisher)

  Diversification Defining Diversification Diversification is the expansion of an existing firm into another product line or field of operation. Diversification may be related or unrelated. Unrelated Diversification takes place when the additional product line is very different from the firm’s core business; for example, a food-processing firm starts to manufacture medical devices. Unrelated diver- sification is sometimes also referred to as conglomerate Diversification. Related diversifi- cation occurs when a firm expands into a similar field of operation; for example, a car manufacturer extends its product range to trucks or buses. This kind of Diversification is sometimes referred to as concentric Diversification. The distinction between related and unrelated Diversification is, however, not as straightforward as it might at first seem because it depends on the notion of relatedness. In our illustrative example we classified a car manufacturer diversifying into the truck market as related Diversification because cars and trucks use similar manufacturing Case Insight 7.4 The costs of corporate complexity at Empire Empire’s history of Diversification provides an exam- ple of the costs of corporate complexity. Significant investments in non-food products such as movie theatres and industrial products challenged man- agement to understand business segments that were not part of Empire’s core food retailing business. Furthermore, minority interests in food retailing out- side of Canada came with little control over how this investment was managed operationally. These kinds of complexity led to unnecessary costs that were deemed to be irrational by Empire’s management and resulted in the disposal of these assets. While diversi- fication remains a significant part of Empire’s strategy, there is a stronger need to rationalize acquisitions by identifying synergies with its core food retailing and related real estate activities.

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  The Growth Strategies of Hotel Chains

  Best Business Practices by Leading Companies

  • Kaye Sung Chon, Onofre Martorel Cunill, Onofre Martorell Cunill(Authors)
  • 2006(Publication Date)
  • Routledge

    (Publisher)

  If, as a starting point, Ansoff’s famous growth vector matrix (1976) is accepted, two forms of growth are possible: expansion and Diversification. Diversification occurs only when a company attempts to grow by introducing a new product to a new market, i.e., fulfilling a new mission. It therefore means the incorporation of a new productmarket pair or of an activity or activities different from the existing one(s). In contrast, expansion is the result of market penetration (intensifying efforts to increase the company’s share of its existing products in the existing market), market development (seeking new markets for the company’s existing products), or product development (offering new products to the existing markets).

  During the development of this new activity additional factors will be involved that hold the keys to success, together with a different competitive environment. This requires knowledge and the development of a new field of business with the resulting need for more skills.

  Remember that in response to the demands of a more complex reality Ansoff (1976) perfected his growth vector by situating it in a three-dimensional space. Thus executives can expand their companies by penetrating new geographic markets, meeting new market needs, or introducing new technologies in such a way that multiple strategic combinations and approaches are open to them, from continuing to meet the traditional needs of their usual markets with traditional technology to making an energetic bid to reposition themselves in the three dimensions.

  This definition of the nature of Diversification helps us to understand that when a company executive decides to diversify, his or her success depends not only on the potential growth and profitability of the new business activity, but also (and above all) on the company’s capacity to develop whatever new skills are required for this activity and even for this new field of business. This reveals the expansion- or specialization-related difficulties that Diversification entails. Perhaps a company should diversify only when it cannot expand by specialization (Strategor, 1988).

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  Contemporary Strategy Analysis

  • Robert M. Grant(Author)
  • 2021(Publication Date)
  • Wiley

    (Publisher)

  While Diversification has offered meager rewards to share- holders, it is the fastest route to building vast corporate empires. A further problem is hubris. A com- pany’s success in one line of business tends to result in the top management team becoming overly confident of its ability to achieve similar success in other businesses. Nevertheless, for companies to survive and prosper over the long term, they must change; inevitably, this involves redefining the businesses in which they operate. Without Diversification, Sony would still be a manufacturer of portable radios and Pfizer a brickmaker. For most companies that have survived for more than half a century, Diversification has played a vital role in their evolution. In most cases, this Diversification was not a major discontinuity but an initial incremental step in which existing resources and capabilities were deployed to exploit a perceived opportunity. If companies are to use Diversification as part of their long-term adaptation and avoid the many errors of the past, better strategic analysis of Diversification decisions is essential. The objectives 292 PART IV CORPORATE STRATEGY of Diversification need to be clear and explicit and its potential for value creation subjected to rig- orous analysis. Our tools for evaluating Diversification decisions have developed greatly in recent years. Vague notions of synergy have been displaced by more precise analysis of the sources of economies of scope both on the supply side and demand side, the role of transaction costs, and the administrative costs that can offset Diversification synergies. The inconclusive empirical research into the impact of diver- sification on performance has illuminated the fundamental truth about Diversification strategy.

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  Corporate Level Strategy

  Theory and Applications

  • Olivier Furrer(Author)
  • 2016(Publication Date)
  • Routledge

    (Publisher)

  Chapter 5 Diversification Strategies Creating Corporate Value

  DOI: 10.4324/9781315855578-5

  Diversification into new business areas can be economically justified only if it leads to value creation. Therefore, the mere existence of economies of scope is a necessary but not a sufficient condition for Diversification to be economically valuable (Barney, 2007 ). Rather, economic value derives from economies of scope that both exist and are less costly to realize within the boundaries of the firm than they would be through alternative forms of governance, such as market transactions or strategic alliances (Teece, 1980 ; Williamson, 1975 , 1985 ; Ye et al., 2012 ).

  For example, a diversified firm might create value by spreading its risk across multiple businesses. Most of the time, cash flows from different businesses do not correlate perfectly, so the riskiness of the cash flows of diversified firms should be lower than that of single business firms (for a demonstration, see Barney, 2007 ). Yet even if a firm reduces its overall risk by engaging in a portfolio of businesses, these risk reducing strategies are not necessarily valuable to the firm’s outside investors or shareholders, who tend to have their own, lower cost ways to reduce their risk (Chang & Thomas, 1989 ; Williamson, 1975 ). For example, they could invest directly through the stock market in their own diversified portfolio; doing so usually is much less costly than conceiving and implementing a corporate Diversification strategy. Moreover, most investors modify their portfolios easily and cheaply by buying or selling stocks. In contrast, modifying a firm’s portfolio of businesses, through M&A, internal development, or other means (see Chapters 10 and 11 ), tends to be far more costly. For these reasons, outside investors generally prefer to diversify their own portfolios to reduce risk by themselves rather than have managers diversify for them (Jensen, 1968 ; Jensen & Meckling, 1976 ). Empirical research in several industries also suggests that when firms pursue Diversification strategies solely to reduce shareholders’ risk, the strategies actually harm the economic performance of these firms on average (e.g., Amit & Livnat, 1988a ; Hill & Hansen, 1991 ). However, as shown in Box 5.1

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  Strategic Management

  Theory & Cases: An Integrated Approach

  • Charles Hill, Melissa Schilling, Gareth Jones(Authors)
  • 2019(Publication Date)
  • Cengage Learning EMEA

    (Publisher)

  Another advantage of related Diversification is that it can allow a company to use any general organizational competency it possesses to increase the overall per-formance of all its different industry divisions. For example, strategic managers may strive to create a structure and culture that encourages entrepreneurship across divi-sions, as Google, Apple, and 3M have done; beyond these general competences, these companies all have a set of distinctive competences that can be shared among their different business units and that they continuously strive to improve. 10-3b Unrelated Diversification Unrelated Diversification is a corporate-level strategy whereby firms own unrelated businesses and attempt to increase their value through an internal capital market, the related Diversification A corporate-level strategy based on the goal of establishing a business unit in a new industry that is related to a company’s existing business units by some form of commonality or linkage between their value-chain functions. Figure 10.3 Commonalities Between the Value Chains of Three Business Units Value-Chain Functions A R&D Materials management Engineering Manufacturing Marketing Sales Business Units B R&D Materials management Engineering Manufacturing Marketing Sales C R&D Materials management Engineering Manufacturing Marketing Sales unrelated Diversification A corporate-level strategy based on a multibusiness model that uses general organizational competencies to increase the performance of all the company’s business units. Copyright 2020 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

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  Strategic Thinking

  Today’s Business Imperative

  • Irene M. Duhaime, Larry Stimpert, Julie Chesley(Authors)
  • 2012(Publication Date)
  • Routledge

    (Publisher)

  Evidence supplied by Cynthia Montgomery of the Harvard Business School shows that the level of Diversification among the 500 largest public companies in the United States actually increased in recent years. 55 Furthermore, there are many good reasons to believe that Diversification will continue to be an important feature of the economic landscape. Extensions of existing product lines, exploitation of economies of scale and scope, and expansion into new geographical areas remain compelling reasons for firms to move into new markets or to pursue new business opportunities. Firms will also continue to diversify into new businesses to reduce their reliance on declining business lines or industries. Given the dynamic nature of the economy, we can expect that firms will seize opportunities resulting from demographic shifts, the development of new products and services, and the emergence of new technologies, to diversify into new arenas. Much of the de-Diversification and restructuring activity that has occurred over the last two decades can be explained by the failure of these firms to develop effective understandings of how their businesses were related or fit together and how to manage those interrelationships effectively. Sears’ grand strategy for developing a consumer retailing powerhouse based on its merchandising, insurance, real estate, and financial services businesses failed because the company was never able to realize the anticipated synergies. Furthermore, Sears’ Diversification activities had a devastating impact on the company’s merchandising operations as managers “took their eye off the ball,” and lost sight of the need for Sears’ stores to maintain a strong and effective business definition in the ever-changing retail marketplace. 56 In addition, as noted in Chapter 9, many companies are restructuring their operations to emphasize those value-chain activities that contribute to their competitive advantage while outsourcing other, less critical activities

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  Planning and the Growth of the Firm

  • John Bridge, J. C. Dodds(Authors)
  • 2018(Publication Date)
  • Taylor & Francis

    (Publisher)

  4 The Diversification Process 4.1 Forms of Development and Diversification The Diversification of the product line is seen by Marris as the prime means by which growth in demand is sustained. In fact Diversification may involve changes in the relationship between the firm and its markets as well as changes involving the product line itself. The firm’s choice of strategies can be represented in two dimensions. First, in H.I. Ansoff’s (9, 10) terminology, is the classification according to ‘product mission’ which is a description of the job which the product is supposed to perform. Second is the product line which can be described in terms of the physical attributes of the products and their performance characteristics. Ansoff prefers to use the concept of a mission rather than that of a customer since the latter has many different needs to be satisfied, each of which may require a different product. Businesses can achieve growth without Diversification, using market penetration, market development and product development strategies. Market penetration is brought about through increasing the volume of sales to the firm’s present customers, or by finding new customers with the same mission requirement. Market development involves the seeking of new mission requirements which can be served by the present production line, albeit frequently with some minor modifications in the products’ characteristics. Product development is an attempt to improve the performance of the mission by introducing new characteristics to the product line, but without seeking to serve a different mission

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  Strategic Logic

  • J. Jarillo(Author)
  • 2003(Publication Date)
  • Palgrave Macmillan

    (Publisher)

  Only when growth contributes a specific value, in terms of better prices or lower costs, does it really create value. In the following pages we will see which diversi- fication strategies are really profitable. But first we must discuss the important matter of up to what point Diversification can create value, although it does not increase profits, through the decrease in risk. Diversification Does Not Diminish Risk … Except for Some In fact, we should still answer an essential point: as we saw at the begin- ning of this chapter, the most frequently alleged reason in favour of divers- ification is to decrease risk. The argument seems irrefutable: given that business is intrinsically unpredictable, it seems reasonable not to put all your eggs in one basket, but to have various sources of income, if possible unconnected. This is an evident truth for the private investor, but not for a company. Let us see why with an example. Imagine a person who has all her savings invested in IBM shares. The investment is solid, but there is an unavoidable risk: if the computer busi- ness in general, or IBM in particular, takes a turn for the worse, our saver risks losing a significant part of her capital. There are two solutions to this. The first is that IBM, with the money it earns, instead of distributing divi- dends, buys a biscuit company, for example. This may appear stupid (and it is) but it is not so far-fetched: Tubacex, currently a very successful Basque company specializing in seamless stainless steel pipes, decided years ago that the steel industry was not very attractive and invested all its spare cash flow in works of art, a market which it thought had a great future. We could also mention investments by many European electric util- ities in telecommunications or television stations which have been sources of endless losses.

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  Contemporary Strategy Analysis

  • Robert M. Grant(Author)
  • 2018(Publication Date)
  • Wiley

    (Publisher)

  M. Grant, “On Dominant Logic, Relatedness, and the Link between Diversity and Performance,” Strategic Management Journal 9 (1988): 641. Reused by permission of John Wiley & Sons, Ltd. CHAPTER 12 Diversification STRATEGY 311 Ultimately, the linkage between the different businesses within a company may depend upon the strategic rationale of the company—what Prahalad and Bettis refer to as the dominant logic of the company. 37 Such a common view of a com-pany’s identity and raison d’être is a critical precondition for effective integration across its different businesses. For example, Richard Branson’s Virgin group of companies is based upon a logic that asserts that start-up companies in mature, consumer industries can provide innovative differentiation and a commitment to enthusiasm, fun, and fairness the allows them to establish competitive advantage over bigger, established rivals. 38 Summary Diversification: it’s attractions are obvious, yet the experience is often disappointing. For top management, it is a minefield. The Diversification experiences of large corporations are littered with expensive mistakes: Exxon’s attempt to build Exxon Office Systems as a rival to Xerox and IBM; Vivendi’s Diversification from water and environmental services into media, entertainment, and telecoms; Royal Bank of Scotland’s quest to transform itself from a retail bank into a financial services giant. Despite so many costly failures, the urge to diversify continues to captivate senior managers. Part of the problem is the divergence between managerial and shareholder goals. While Diversification has offered meager rewards to shareholders, it is the fastest route to building vast corporate empires. A further problem is hubris. A company’s success in one line of business tends to result in the top management team becoming overly confident of its ability to achieve similar success in other businesses.

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  Sustainable Business Strategy

  Analysis, Choice and Implementation

  • Andrew Grantham(Author)
  • 2022(Publication Date)
  • De Gruyter

    (Publisher)

  They tend to have a corpo- rate parent that sets performance targets rather than intervene in the day-to-day run- ning of the firm. An executive management is left to develop strategy, but they have to report their performance and financial results periodically. These managers act as busi- ness strategists rather than corporate strategists. Corporate strategy here is the decision to acquire a subsidiary in a new market with an unfamiliar product, to invest or to divest. Berkshire Hathaway is made up of businesses and subsidiaries/strategic business units (SBUs) in familiar industrial production industries, such as chemi- cals, metalwork and energy. It also has interests in investment and financial prod- ucts such as insurance. It is also an asset portfolio management business. In other words, it is highly diversified. Many Chinese tech firms are diversifying as conglomerates. Alibaba diversified away from its trading platform into financial services (Alipay/Ant/MYbank), cloud services, sport (Guangzhou Evergrande soccer team), cinema and TV (Alibaba pictures) and newspapers (South China Morning Post) as well as managing an investment portfo- lio. Baidu, China’s biggest search engine business, is diversifying into cloud services, live streaming (YY Live); and so-called “intelligent driving” – robotaxis, electric vehicle production and mobility data services – maps, parking (The Economist 2021a). Decisions about which type of Diversification to embrace can additionally be informed by direction: 1. Vertical Diversification – all firms have suppliers, of which some are strategic in that they sell components or provide services that are essential for the delivery of the end product. For example, the automobile industry has many strategic suppliers of components ranging from seats and engines to tyres and wind- screens. These suppliers undertake their own research and development, often to meet exacting standards stipulated by the focal firm, usually the assembler.

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