As part of Economics of Strategy taught by Dr. Suresh Srinivasan at Great Lakes Institute of management Chennai. Information was complied by the data available on the Internet and have tried my best to maintain correctness and credits as much as possible.

1. Economics of Strategy
Strategies of Related Diversification
GROUP 17

2. Introduction
 Corporate Scope – It defines which businesses should a firm
diversify/expand into.
 Not only “related” diversification are always successful but also the
ones those effect organizational changes resultant from the expansion
 Key pointers for diversification :
i. Timing
ii. Industry Attractiveness
iii. Synergies
iv. Implementation
v. Ownership

3. Timing : What is the motive to expand?
 Motive of expansion needs to be clear :
Offensive – Triggered by healthy margins in core business and
business that can be replicated in other sectors.
Defensive – The firm is trying to escape from its declining core
competencies
 Most of the times “defensive” companies fall back to focus on their
core businesses
 Misplaced Motives: Such expansion strategy is a result of overvalued
stock which would suffer a dive in absence of such forced
diversification

4. How attractive is the targeted industry?
 An analysis of target industry is paramount to analyze all
vulnerabilities new entrant can face.
 It is also essential to find the profits/margins enjoyed by the
incumbent players.
 Porter five forces is an useful tool to evaluate the target industry.
 It is useful to examine and predict whether the firm’s intended entry
strategy can effectively combat the likely competitive forces.
 Incorrect interpretations of industry would make a firm falsely belief
that an industry’s poor characteristics(i.e. threat) is an evidence that
it is ripe with opportunities

5. Synergy : Where are the scope
economies with our existing business?
 A firm must evaluate whether this diversification would be in synergy
with their exiting business
 Whether the proposed expansion would be leveraging the resources
and sharing activities from current businesses or not, or it would be
enhancing them.
 Cost sharing, centralize procurement, economies in distribution &
logistics along with cross-selling, bundling will increase revenues and
reduce costs.
 Firms should be cautious not to equate their core competencies with
distinctive competencies.

6. Implementation: What are the organizational
mechanism for coordination?
 Companies should carefully evaluate the organizational changes
needed to support the new venture.
 Firms should identify which integration is required – forward or
backward. It can be done by understanding the kind of scope
economies required by the firm.
 Firm’s often find themselves in a tough spot when they ignore
organizational considerations or there’s a mismatch with existing
organization

7. Ownership: Where should boundaries of
firms be drawn?
 The reasons of expansion could be:
Market Failure – markets are absent, specific investments and
holdup, increase efficiency through coordination
Market Power – using integration as leverage to increase market
share
 The firms should not expand to mitigate risks or to smoothen their
earnings
 Also, firms should not give a justification that the expansion would
lead to greater market share in other parts of value chain which are
unrelated to core business.

8. Thank You !