This document discusses diversification strategies for companies. It defines related and unrelated diversification, and outlines various reasons for and approaches to diversification. Related diversification involves entering businesses with strategic value chain fits to the company's core business, while unrelated diversification has no meaningful strategic relationships. Diversification can be done through acquisition, internal startup, or joint ventures. The key motives for diversification are growth, risk spreading, and profit. Managers play a crucial role by developing mental models of how diversification creates synergies and should be managed.

2. Compilation Group
Namrata Tambe
 Shalaka Patil
 Harshada patil
 Pratik Valendra
 Shoaib shikh
 Anshu Tiwari
 Shoaib Sayyed


3. Introduction

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

4. When Should a Firm
Diversify?

Diminishing growth prospects in present
business

Expand technologies and products
complement

Leverage existing competencies and
capabilities

Reduce costs

Powerful brand name

5. Why Diversify?
To build shareholder value!
Diversification is capable of building
shareholder value if it passes three tests
 1.Industry Attractiveness Test



2. Cost of Entry Test
3. Better-Off Test — the company’s
different businesses should perform better
together

6. Strategies for Entering
New Businesses
Acquire
existing
company
Internal start-up
Joint ventures/strategic partnerships

7. Acquisition of an Existing
Company

Most popular approach to diversification

Advantages
 Quicker
 Easier
entry into target market
to hurdle certain entry barriers

Acquiring technological know-how

Establishing supplier relationships

8. Internal Startup

More attractive when
 Parent
firm already has most of needed
resources to build 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

9. 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
Surmount tariff barriers and import quotas
 Offer local knowledge about





Market conditions
Customs and cultural factors
Customer buying habits
Access to distribution outlets

10. What Is Related
Diversification?


Involves diversifying into businesses
whose
value
chains possess competitively valuable
“strategic fits” with the value chain(s) of
the present business(es)
Capturing the “strategic fits” makes related
diversification a 1 + 1 = 3 phenomenon

11. What Is Unrelated
Diversification?

Involves diversifying into businesses with



No meaningful value chain
relationships


No strategic fit
No unifying strategic theme
Basic approach – Diversify into
any industry where potential exists
to realize good financial results
While industry attractiveness and cost-ofentry tests are important, better-off test is
secondary

12. Related vs. Unrelated
Diversification
Related Diversification

Involves
diversifying into
businesses whose
value chains
possess
competitively
valuable ―strategic
fits‖ with value
chain(s) of firm’s
present
business(es)
Unrelated Diversification

Involves
diversifying into
businesses with
no competitively
valuable value
chain match-ups
or strategic fits
with firm’s present
business(es)

13. Motives for Diversification

GROWTH

RISK SPREADING

PROFIT

14. Crucial Role of Managers

Managers must develop two important
types of mental models
•
Must also have well-developed beliefs about
how diversification should be managed in order
to achieve synergies.

The ―Learning Hypothesis‖