Diversification Strategies Diversification strategies are used to expand firms' operations by adding markets, products, services, or stages of production to the existing business. The purpose of diversification is to allow the company to enter lines of business that are different from current operations. When the new venture is strategically related to the existing lines of business, it is called concentric diversification. Conglomerate diversification occurs when there is no common thread of strategic fit or relationship between the new and old lines of business; the new and old businesses are unrelated. Diversification is a market strategy, which is about expanding the business of the company in some way. It stretches from adding new products or services, which in some way are related to the corporation’s previous products or services on the market, too establish oneself with new, on a from the corporation’s point of view, completely unknown market (Grant). Although the idea of diversification as a strategy for growth and risk reduction is rather old, it was only after 1950 it became popular to let the corporation expand over different markets and product lines. This growth strategy continued to attract more and more companies, until it culminated in the 1970s when it became popular to build conglomerates, that is, companies expanding by adding more and more unrelated business to the corporation, often via acquisitions. In the following decades, the trend of diversification went down, for the benefit of focusing on core competences. This as a result of financial economists and business leaders starting to doubt the value of diversification. One reason for this was the increased focus on shareholder values, which requires transparency, which is difficult to achieve in companies with multiple businesses (Grant). Today diversification still exists as a strategy, although its glory days seem to be in the past. It is considered to be motivated essentially by three things; growth, profitability and, as focused on in this essay, risk reduction. This is the motives of diversification; by using it you might get both risk reduction, greater profitability and growth. Many risk reducing strategies, like buying different kind of financial derivatives and insurances might be a more successful method to reduce risks but diversification provides greater opportunities for increased profitability and growth (Grant).
Trends of diversification (USA) As mentioned earlier, diversification became popular among corporations in the 1950s and in the 1970s the number of diversified corporation reached its highest level. Since 1970 the trend changed and the focus of the core competence became more important. There are several studies from the 1990s (Berger) that indicates benefits of focus on core business, in the 2000s there are studies pointing in both direction, which have created a debate about the consequences of diversification. The percentage of diversified corporations in the USA from 1980 to 1997 can be seen in table 1. Here a corporation that has more than one sic code is seen as diversified. The data is taken from companies that have been on the market for a while. The reason for that is that companies in general start up as single segment companies. If taking them into the statistics the amount of starts-ups influence the result a lot.

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In the 21st century the level of diversified companies have had a stable level but in the end of the 90s and the beginning of the century the number of single segmented companies dropped due to the .com crash (Basu). Market diversification can be divided into two subgroups, related and unrelated. Related diversification means adding new products that somehow can make use of resources that already exists within the corporation. Unrelated diversification, on the other hand, means adding new products who cannot take advantage of existing resources and knowledge. This can be done in two separate ways, for the corporation to develop and release new products itself, or by buying companies in other sectors. Diversification may also involve expansion into new markets (Grant). Diversification is quite popular in businesses that are known to be associated with high cash flow but lack of high growth potential, for example tobacco and oil industries. The largest motive for applying diversification as a strategy in these industries is seldom to reduce risks, but to stimulate growth (Grant). There are also other kinds of diversification to reduce risks, for example by using several subcontractors or spread business geographically. By using several subcontractors there will not be a major impact if a subcontractor goes bankrupt or gets big troubles. And by spreading geographically to other countries the dependence of the situation in one’s country decreases. Thus, diversification can also be divided into the following three subgroups: Within the industry, within the company or geographically (Hoopes). Some corporations have diversified broadly over the years and have had great success. Other diversification attempts have taken companies away from their core businesses and their experiences are less successful. There are lot of examples of successful diversifications. For example, Armani’s diversification strategy. Armani is a company that really takes advantage of what their brand stands for. Armani have succeeded to spread the brand as a lifestyle. For many people Armani stands for quality and they have used this to diversify into other areas than their original business of suit selling. Today they sell all different types of clothes. Further they have diversified into eye wears, perfumes and you can even buy a flower arrangement or a chocolate box from Armani. None of this has damaged their reputation and today they even have a hotel in Dubai, using the fact that people associate Armani with luxury. Despite the serious economic crisis that hit world markets in 2009, the Armani Group showed remarkable staying power when compared with the average performance of the market, generating a turnover of 6 billion euro at retail value including licensed products, of which 4 billion Euros from the core business and 2 billion Euros from third party licenses. Consolidated Revenues reached 1,518million Euros, showing only a slight drop of 6% compared to 2008. The general slowdown in the fashion and luxury markets that also affected the Armani Group is largely due to a decline in GDP, in particular in North America, Europe and Japan. The Armani Group nevertheless succeeded in strongly growing sales in China, which saw a 32% rise in revenues compared to 2008, underlining the excellent growth momentum of recent years in the region and positioning it amongst the leaders of the sector. While aggressively researching for production efficiencies and containment of costs, in 2009 the Group pushed forward with its development program and invested even further in the expansion of its distribution network, opening 182 new stores (72 freestanding) - making a current total of 1,503 (609 freestanding) mono-brand points of sale worldwide.
The Group's net liquidity remains extremely high at over Euro 447 million, a 20% increase on the previous year, which is a sure sign of its financial strength and the product of a prudent and far-sighted management style. It is precisely this considerable liquidity, the solidity of our business model and the recognized excellence of our brand across the world thatallowsusthisyeartobeintheforefrontoftherecovery.2010has started with a marked recovery and the sales campaigns for the Autumn-Winter collection show positive signs of growth, allowing us to view the current year trend with optimism. In particular, the Far Eastern markets continue to flourish, offering significant potential and many opportunities for the Group, both in the region and beyond, thanks to the spending power of Asian tourists in the West.

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[pic] An unsuccessful diversification was their cooperation with Samsung. Their Samsung-Armani mobile phone wasn’t a hit. The phone could be bought anywhere and most people could afford it, which meant that !rmani could not use their reputation in advantage. This experience shows that they’ve been most successful when their products have focused on their original consumers that are looking for luxury. This example shows the importance for companies of knowing what they stand for before diversifying (cpp-luxury).

Another example of an unsuccessful diversification is the Quaker Oats and Snapple.
In December 1994 Quaker Oats chose to diverse their business by purchasing Snapple, the, at the moment, fastest growing beverage corporation. Since Quaker Oats already had one successful beverage corporation, Gatorade, in its portfolio, they saw an opportunity of growth and synergies. In the summer of 1994, the competition in the market segment, which Snapple was trying to reach, grew, in the same time as weather conditions lead to a decreasing demand. Even though Snapple already had begun to wobble, Quaker Oats saw an opportunity and thought they had the resources to make Snapple expand internationally. In December 1994, Quaker Oats acquired Snapple for $1.7 billion (businessweek.com). To be able to purchase Snapple and try to let it expand, Quaker Oats chose to sell off other some other businesses, among others their pet food and candy businesses, which had a history of providing steady streams of incomes to the corporation. The reason for this was that they saw no ability of growth in those businesses. Unfortunately, the expected synergies between Snapple and Gatorade did not occur, and Quaker Oats had trouble to turn Snapple’s downward trend. Some of the causes of this failure were cultural differences between the two companies and that Gatorade and Snapple wasn’t as similar as they first appeared to be. When they realized the extent of losses related to Snapple, the leaders of Quaker Oats demanded the top managers to focus on the core business, and not let the losses of Snapple destroy the other businesses (businessweek.com). In 1997, Quaker Oats decided to sell of Snapple for 300 million USD. This attempt to economic growth turned out to cost the corporation somewhere between $1-1.5 billion, depending on what aspects one chooses to rely on (Winer). Because the fact that portfolio diversification is in most cases a good way of reducing risks, one might believe that the even corporate diversification is a solid risk reducing strategy. Although it in these terms theoretically seems to be a successful strategy, it appears to often not work out in practice. I believe that diversification under certain conditions might be a good way of reducing risks, for example for companies that are affected by external conditions such as season changes, weather and climate changes. But in even in these cases, it is important for the company in mind not to lose focus on its core business and always remember why it chose to diversify its business. This is to ensure that the diversification doesn’t damage the public view of the corporation if the new area for example is inconsistent with what they normally stand for. Also, for diversification as a risk reducing strategy to be successful, it is important for the corporation to only focusing on those aspects, and not trying to combine the risk reducing benefits with for example growth benefits. It seems like many diversifications fail because of mixed interests. The management might want to reduce risks, while shareholders want to increase revenues. Shareholders therefore are more likely to prefer to enter businesses with more growth potential. But where there is big growth potential, there are often big risks. This might lead to that a strategy aimed to reduce risks, actually turns out to increase risks instead. Therefore, before a corporation diversifies it seems to be important to carefully analyze for example the attractiveness of the new market, what mutually benefits that exists and what the cost of entry is. I further believe that diversification within the land area might lead to simplification to relocate staff and maybe other resources from one kind of business to another if the market goes down in one area. The ability to keep the knowledge and resources within the corporation therefore increases, which hopefully will lead to that it will be easier to restart, or increase, production when the market changes and better times comes along. Different types of diversification lead to different kinds of risks. One risk considering related diversification might be that the expected synergy gain simply does not exist, and therefore the costs of the corporation rise. Risks with unrelated diversification might be that the corporation lacks knowledge in the new industry and therefore fails. This might lead to economic problems and, even worse, damage to the brand. Sometimes consequences of diversification might be quite obvious, especially when crisis occur. If the core business crashes due to for example the market of the core business crashes an earlier, unrelated diversification can keep the company alive. I find it interesting how, in line with the arguments, which caused the trend of diversification to turn downwards, Quaker Oats realized the importance of focusing on the core business when times got harder. One of the reasons for failure in this case was that the cultures of the two companies where quite different, they simply did not understand each other. Also, since the expected synergies did not occur. My final conclusion is that diversification might be a good strategy for reducing risk with a side effect of growth and increased profitability. But we believe that it is easy to overestimate the potential positive effects of diversification. What we find most important when diversifying is to not lose focus on the core business.