Master in Business Administration

Strategic Management
MBA 6094

COMPARISON OF
DIVERSIFICATION STRATEGIES
BY:
RASHID JAMALUDDIN
MBAP18096617
 INTRODUCTION
• Diversification Definition

• Diversification - growing into new business areas either

related (similar to existing business) or unrelated (different
from existing business); allows a firm to create value by
productively using excess resources

• Diversification, a primary form of corporate-level strategies,

concerns the scope of the markets and industries in which
the firm competes as well as “how managers buy, create
and sell different businesses to match skills and strengths
with opportunities presented to the firm.”
 Question 1

Describe the extent and nature of

diversification used at each firm
TYPES AND LEVEL OF DIVERSIFICATION
 TYPES AND LEVEL OF DIVERSIFICATION
(CONT.)
Related businesses possess competitively
valuable cross-business value chain and
resource matchups.
Unrelated businesses have dissimilar
value chains and resource requirements,
with no competitively important cross-
business relationships at the value chain
level.
TYPES AND LEVEL OF DIVERSIFICATION (CONT.)

• Concentric (Related) diversification

– growth into a related industry when a firm has a
strong competitive position but attractiveness is
low
• Synergy
– the concept that two businesses will generate
more profits together than they could separately
TYPES AND LEVEL OF DIVERSIFICATION (CONT.)

• Conglomerate (Unrelated) diversification

– diversifying into an industry unrelated to its
current one
• Management realizes that the current industry is
unattractive.
• Firm lacks outstanding abilities or skills that it could
easily transfer to related products or services in other
industries.
CHOOSING THE DIVERSIFICATION PATH: RELATED
VERSUS UNRELATED BUSINESSES

• Related Business
– Example: The Walt Disney Company
– Founded: 16 October 1923
– This firm is mostly related to
entertainment business industries
– Products: Television and films publishing,
music, video games, radio, web portal,
amusement park
– Subsidiary: Marvel Entertainment
– Have competitively valuable cross-business
value chain and resource matchups.

8–8
CHOOSING THE DIVERSIFICATION PATH: RELATED
VERSUS UNRELATED BUSINESSES

• Unrelated Business
– Example: General Electric Company
(GE)
– Founded: 15 April 1892
– This firm is conglomerate company
involves in multiple kind of businesses
– Have dissimilar value chains and
resource requirements, with no
competitively important cross-business
relationships at the value chain level.

8–9
GE: UNRELATED DIVERSIFICATION
• Aircraft Engines
• Commercial Fina • Medical Systems
nce • NBC
• Consumer Finan •
ce Plastics
• Power Systems
• Consumer Produ
cts • Specialty Material
• Equipment Man • Transportation Syst
agement ems
• Industrial System
s
• Insurance
 Question 2

Provide a motive for the firm’s

diversification strategy, given the
rationales for diversification put forth
 WHY FIRMS DIVERSIFY
– To grow
– To more fully utilize existing resources and
capabilities.
– To escape from undesirable or unattractive
industry environments.
– To make use of surplus cash flows.
 GENERAL MOTIVES FOR DIVERSIFICATION
GROWTH -- The desire to escape stagnant or declining industries a
powerful motives for diversification (e.g. tobacco,
oil, newspapers).
-- But, growth satisfies managers not shareholders.
-- Growth strategies (esp. by acquisition), tend to
destroy shareholder value.

RISK -- Diversification reduces variance of profit flows

SPREADING -- But, doesn’t create value for shareholders—they can
hold diversified portfolios of securities.
-- Capital Asset Pricing Model shows that diversification
lowers unsystematic risk not systematic risk.

PROFIT -- For diversification to create shareholder value, then

bringing together of different businesses under
common ownership and must somehow increase
profitability.
COMPETITIVE ADVANTAGE FROM DIVERSIFICATION
• Predatory pricing Evidence
MARKET • Reciprocal buying of these
POWER • Mutual forbearance is sparse

• Sharing tangible resources (research labs, distribution

systems) across multiple businesses
• Sharing intangible resources (brands, technology) across
ECONOMIES
multiple businesses
OF • Transferring functional capabilities (marketing, product
SCOPE development) across businesses
• Applying general management capabilities to multiple
businesses

• Economies of scope not a sufficient basis for diversification—

ECONOMIES must be supported by transaction costs
FROM • Diversification firm can avoid transaction costs by operating
INTERNALIZING internal capital and labor markets
TRANSACTIONS • Key advantage of diversified firm over external markets---
superior access to information
GENERAL REASONS FOR DIVERSIFICATION
 EVALUATING THE STRATEGY
OF A DIVERSIFIED COMPANY

Attractiveness Strength of Cross-business

of industries Business Units strategic fit

Diversified Strategy

Fit of firm’s Allocation of New Strategic

resources resources Moves

8–16
 WHEN TO DIVERSIFY
Competitive Position
Strong Weak

Strong competitive Weak competitive

position, rapid market position, rapid market
Rapid
Market Growth

growth -- Not a good growth -- Not a good

time to diversify time to diversify

Strong competitive Weak competitive

position, slow market position, slow market
Slow

growth -- Diversification growth -- Diversification

is top priority merits consideration
consideration
 STRATEGIC DIVERSIFICATION OPTIONS
• Sticking closely with the existing business lineup and
pursuing opportunities presented by these businesses.
• Broadening the current scope of diversification by entering
additional industries.
• Divesting some businesses and retrenching to a narrower
collection of diversified businesses with better overall
performance prospects.
• Restructuring the entire firm by divesting some businesses
and acquiring others to put a whole new face on the firm’s
business lineup.
 DISNEY: RELATED DIVERSIFICATION
• Reason of Disney Diversification:
– Transferring specialized expertise,
technological know-how, or other
resources and capabilities from one
business’s value chain to another’s.
– Cost sharing between businesses by
combining their related value chain
activities into a single operation.
– Exploiting common use of a well-known
brand name.
– Sharing other resources (besides brands)
that support corresponding value chain
activities across businesses.
 DISNEY RELATED DIVERSIFICATION
• Competitive advantage can result from related
diversification if opportunities exist to:
– Transfer expertise/capabilities/technology
– Combine related activities into a single operation and reduce
costs
– Leverage use of firm’s brand name reputation
– Conduct related value chain activities in a collaborative fashion
to create valuable competitive capabilities
• Approaches:
– Sharing of sales force, advertising, or distribution activities
– Exploiting closely related technologies
– Transferring know-how / expertise from one business to another
– Transferring brand name and reputation to a new
product/service
– Acquiring new businesses to uniquely help firm’s position in
existing businesses
GENERAL ELECTRIC: RELATED DIVERSIFICATION

• Reason of GE Diversification:
– Creation and allocation of right
resources to the right place, in the
right way overtime
– To strengten GE’s global presence
and create a more collaborative
culture.
– To improve their profitability with
success and failure being realized
in almost equal measure
 GE UNRELATED DIVERSIFICATION
• 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
• Attractive Targets:
– Companies with undervalued assets
• Capital gains may be realized
– Companies in financial distress
• May be purchased at bargain prices and turned around
– Companies with bright prospects but limited capital
 Question 3

Which firm’s diversification strategy

appears to be more effective? Try to justify
your answer by explaining why you think
one firm’s strategy is more effective
than the other.
 SUMMARY
• Disney Horizontal or related diversification
– Advantages
• Opportunities to achieve economies of scale and scope.
• Opportunities to expand product offerings or expand
into new geographical areas.
Disadvantages of related diversification
• Complexity and difficulty of coordinating different but
related businesses.
 SUMMARY (CONT.)
GE Conglomerate or unrelated diversification
– Firms pursue this strategy for several reasons:
• Continue to grow after a core business has matured or
started to decline.
• To reduce cyclical fluctuations in sales revenues and
cash flows.
– Problems with conglomerate or unrelated
diversification:
• Managers often lack expertise or knowledge about
their firms’ businesses.
 SUMMARY (CONT.)
• Disney Related diversification
– More profitable than unrelated diversification
– exploit economies of scale
• common productive capacity, markets or inputs,
– or economies of scope
• exploiting a distinctive competence
• GE Unrelated diversification
– “Fixing” underperforming firms
In conclusion, Disney Related Diversification strategy
appears to be more effective
 DIVERSIFICATION AND PERFORMANCE

The Curvilinear
Relationship
Between
Diversification
and
Performance
 CONCLUSIONS
• Size alone does not guarantee firms an advantage.
– Coordination required to exploit economies of scale
and scope is not without cost.
– Size creates additional challenges and difficulties,
including problems of communication and
coordination.
• Higher levels of diversification are not
incompatible with high performance -- nor do they
necessarily imply that firms will suffer lower
performance levels.
 CONCLUSIONS (CONT.)
• Critical factor in determining success is the
level of management expertise in formulating
and implementing corporate strategy.
– More difficult for diversified firms.
– Managers of large diversified firms possess a
variety of well-developed mental models that
provide them with powerful understandings of
how to manage their firms.
 REFERENCES
1. Boston Consulting Group. (2006). How the world’s top diversified
companies produce superior returns.
2. Collins, D. J., & Montgomery, C. A. (2008). A corporate strategy: A
resource based approach (2nd ed.). New York, NY: Mc Graw-Hill
3. Kotler, P., & Keller, K. L. (2006). Marketing management (12th ed.).
Prenticehall.
4. R.P. Rumelt (1974). Strategy, Structure and Economic Performance,
Harvard University.
5. Wan, W. P. (2005). Country resource environments, firm capabilities
and corporate diversification strategies. Journal of Business.
6. Campa. J. M., & Kedia, S. (2002). Explaining the diversification
discount. The Journal of Finance. http://dx.doi.org/10.1111/1540-
6261.00476
Thank you