...Diversification is one of the segments of the Ansoff matrix; it is a type of strategic direction whereby a company decides to take a new product into a new market. There are two types of diversification; related and unrelated. Related diversification is the process of developing further than their original products and markets whilst keeping within the organisation’s strengths. Unrelated diversification however, allows the organisation to step out of its capabilities comfort zone to develop new products for a completely new market. When a company decides to diversify its portfolios in a related field, it will either embark on a vertical or horizontal integration. Quite often an organisation will decide to take over a stage within the value network that is adjacent to their own. They thereby take over the responsibilities that input into the business. This is called backward integration. Others decide to take control of the next stage of their supply chain; this is referred to as forward integration. Furthermore, other organisations may decide to either develop activities that are complimentary to their existing products, or buy out competitors. Which is known as horizontal integration. This often creates economies of both scale and scope. Since a related diversification allows a corporation to use its competencies in developing a new product in a new market, it will be able to share many of it’s common resources, creating the advantage of economies of scope. These resources...
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...ntry Foreign Market Entry and Diversification Question # 1-Create an argument for diversification of your business that will be presented to the board of directors or business investors. A diversified company is no longer a single-business enterprise. A diversified company is a collection of different and individual businesses. This collection of businesses, whether related or unrelated, will cause the strategy- making and decision-making tasks for these collection and/ or groups of businesses to be even more complicated, important, and crucial than ever before (Thompson, Strickland, & Gamble, 2010). There is a greater need for strategy and decision making because the diversified company is venturing out into other [outside] industries. "But in a diversified company, the strategy -making challenge involves assessing multiple industry environments and developing a set of business strategies, one for each industry arena in which the diversified company operates" (Thompson, et al., 2010, p. 239). For these reasons alone, there needs to be extensive research and knowledge done into the arenas of anticipated diversifications. Diversification is a very important and vital move for any business or company. A business must only know the need to diversify. It must also be aware of when to diversify. As stated by Arthur Thompson, A.J. Strickland, and John Gamble (2010): So long as a company has its hands full trying to capitalize on profitable growth opportunities...
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...Economics of industry According to Daniel O. Klier, diversification is defined as a process when the firm enters into a new product category than the industry that it is currently working in. Thus, diversification leads to the firm entering into new markets by offering new product range. Currently, many companies have been initiating to enter into diversification since it helps to reduce their dependency on a single product range and its limited market. Over a period of time, many companies have been diversifying to reduce their risks. For instance, Wipro which is an IT firm few years back diversified into fast moving consumer goods industry, Giorgio Armani which is a fashion luxury goods brand diversified into hotel industry, Hindustan unilever limited diversified into water purifiers etc. A firm can diversify into three categories: Concentric diversification: in this type of diversification the companies would like to generate those product categories which require the same technology inputs. Thus, the company will be using the same research and development and technological knowhow and enter into a new product category. For instance, for instance, Maggie has introduced soups and ketchups where the technological efforts in the food processing market remain the same but the product is new. Conglomerate diversification: in this type of diversification, the company is entering into a new industry with a new product range which is not similar to its products in any form. for...
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...Diversification is a form of corporate strategy for a company. It seeks to increase profitability through greater sales volume obtained from new products and new markets. Diversification can occur either at the business unit level or at the corporate level. At the business unit level, it is most likely to expand into a new segment of an industry that the business is already in. At the corporate level, it is generally very interesting[clarification needed] entering a promising business outside of the scope of the existing business unit. Diversification is part of the four main growth strategies defined by the Product/Market Ansoff matrix[1]: Ansoff pointed out that a diversification strategy stands apart from the other three strategies. The first three strategies are usually pursued with the same technical, financial, and merchandising resources used for the original product line, whereas diversification usually requires a company to acquire new skills, new techniques and new facilities. Note: The notion of diversification depends on the subjective interpretation of “new” market and “new” product, which should reflect the perceptions of customers rather than managers. Indeed, products tend to create or stimulate new markets; new markets promote product innovation. Contents [hide] • 1 The different types of diversification strategies o 1.1 Concentric diversification o 1.2 Horizontal diversification o 1.3 When Horizontal diversification is desirable? 1.3.1 Another...
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...revenue annually. The purpose of this essay is to discuss how the diversification strategy changed Procter & Gamble in Singapore over the last ten years. The main position in this essay is that diversification can be considered as one of the main strategies used to assist Procter & Gamble build up business competitive advantage. This essay will use theoretical evidence from literature review to analysis the impact of diversification on Procter & Gamble in different time period. The analyses of Procter & Gamble will be carried out in 3 perspectives: the operation of business, the performance of business and the brand of business. Literature Review & analyses of organization Diversification can be defined as a strategy used to increase the range of products or markets of organization. (Johnson, Scholes & Whittington, 2008) There is a range of reasons result the diversification of organization such as spreading the business risk and increasing the business expectation of stakeholder. (Johnson, Scholes & Whittington, 2008) But the result of research from Aisjah and Subroto (2011) indicated that there are two main reasons boost the diversification of business: firstly, diversification expands the economics of scope of the organization; secondly, diversified business helps organization develop the market power. Similarly, Kotler & Armstrong (2008) also claimed that the diversification enable organization acquire business not only from current products...
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...1 Causality and the Diversification Discount 1 Introduction Does corporate diversification, i.e. the expansion of a firm’s business operations into unrelated areas, destroy shareholder value? The wealth effects associated with conglomerates have been controversially discussed in scholarly journals ever since the seminal papers of Lang and Stulz (1994) and Berger and Ofek (1995) suggested that diversification reduces shareholder value. Both find that conglomerates are attributed with a lower market value than a portfolio of comparable focussed firms operating in the same businesses as the conglomerate. This finding seemed to suggest the hypothesis of a “diversification discount”. In line with this Scharfstein and Stein (2000) postulate "it has become almost axiomatic among researchers in finance and strategy that a policy of corporate diversification is typically value reducing.” Yet, subsequently financial scholars have challenged this dogma of a diversification discount. They did so with respect to the method used (Mansi and Reeb (2002); Glaser and Müller (2010)) and the causal interference (Graham et al. (2002); Campa and Kedia (2002); Villalonga (2004)). Taking these latest developments into account, the empirical evidence on the value effects of corporate diversification is mixed. The controversy that has evolved around these wealth effects provides a suitable setting to investigate the pitfalls associated with causal analysis and interference in empirical...
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...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...
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...Diversification Strategies Diversification Strategies The question of whether a business should diversify or not sounds fairly simple. Businesses are always looking for ways to reduce risk in the marketplace as well as ways to improve performance and diversification is often a way to achieve those goals (“Business Diversification,” n.d.). Upon further examination though, the question is more complicated and could have a tremendous impact on whether a business succeeds or fails (Heller, R. 2006). This paper examines two companies that implemented diversification strategies with very different results: one successful and one that wasn’t. It will conclude with possible reasons why their outcomes were different and suggested actions the unsuccessful company could have taken that would have resulted in a successful outcome. Hallmark Cards, Inc. Hallmark Cards was first incorporated in 1923 and is now the world’s largest greeting card company. They distribute their cards and other products in more than 30 languages to more than 100 countries and in 2006 had $4.1 billion in sales. In the US alone, their products are sold in over 40,000 retail outlets, they have over 20,000 employees, and they continue to be privately held (“Hallmark Cards, Inc.,” 2007). Even in the early years of the company’s history, Hallmark saw a need to diversify and it continues that strategy today. Early diversification efforts were related to products like wrapping paper...
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...Chapter 10--Corporate-Level Strategy: Formulating and Implementing Related and Unrelated Diversification Student: ___________________________________________________________________________ 1. Diversification is the process of a company entering new industries distinct from its core industry, using a multibusiness model. True False 2. Free cash flow refers to additional funds from a government stimulus program. True False 3. If a company generates free cash flow, that money technically belongs to shareholders. True False 4. Transferring competencies across industries involves taking a distinctive competency developed in one industry and implanting it in an existing business unit in another industry. True False 5. A 100-year-old industrial giant, 3M serves as an example of how a company can leverage technology to create successful new business. True False 6. If a company's core skills are highly specialized and have few applications outside the core business, then a company should pursue a related diversification strategy. True False 7. A company should pursue related diversification only to enhance the competitive position of its core business. True False 8. Economies of scope arise when one or more of a diversified company's business units are able to realize cost-saving or differentiation advantages because they can more effectively pool, share, and utilize resources or capabilities. True False 9. Firms with superior strategic...
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...Diversification BUS 508: Contemporary Business Dr. Micky Mouse Assignment2: Diversification Strategies Submitted by Minnie Mouse Research two corporations that have had different outcomes (one successful and one unsuccessful) with their diversification strategies. Compare and contrast each corporation’s diversification strategy and evaluate the reasons for each one’s success or failure in the venture. Compare and contrast the two businesses—core business, their size, financials, global presence, use of e-business (marketing, sales, etc.). A great example of companies that utilized completely opposite paths in the business world is Wal-Mart and Kmart. Recently, Kmart is on an endless downhill spiral while Wal-Mart has risen to the top of the retail industry and is their financial strength is strong. Wal-Mart is the largest business enterprise in the world as well as the nation’s biggest employer and the number one retailer in the U.S. There are over 5000 Wal-Mart stores and they report sales over three-hundred billion dollars. Two million people are employed by Wal-Mart in twenty-eight countries in the world. Fortune magazine’s 2010 Most Admired Companies Survey ranks Wal-Mart among the top ten retailers. Kmart is now the #3 discount retailer behind Wal-Mart and Target. There are 1,300 Kmart stores located in 49 US States as well as Puerto Rico, Guam, and the US Virgin Islands. ...
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...TERM PAPER EFFECT OF DIVERSIFICATION ON FIRM VALUE IRENE TIURMA SIAGIAN 1.0 INTRODUCTION Corporate diversification reveal both benefits and costs to a company. Company can benefit from diversification through the creation of internal capital markets (Williamson, 1970), higher debt capacity (Lewellen, 1971; Shleifer & Vishny, 1992) and economies of scope (Teece, 1980). Meanwhile, the costs of diversification stem mainly from agency problems. Managers may diversify to protect their human capital (Amihud & Lev, 1981), to increase their private benefits (Jensen, 1986; Morck et al., 1990), or to entrench themselves (Shleifer & Vishny, 1989). Within a diversified firm, managers may have easy access to capital through cross subsidization (Meyer et all., 1992), which may lead to over-investment (Jensen, 1986; Stulz, 1990; Berger & Ofek, 1995). Recent literature shows that corporate diversification strategies are associated with significant value loss and that increasing corporate focus is value-enhancing. Examples of these studies include Lang and Stulz (1994), liebeskind and Opler (1994), Berger and Ofek (1995, 1996), Comment and Jarrell (1995), John and Ofek (1995), Servaes (1996), and Denis et. Al. (1997). The evidence in thse studies suggests that the costs of diversification outweigh the benefits. Given the extensive evidence that diversification is associated with a reduction in firm value. Even firms in the developing countries inclusive Malaysia...
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...Business STRATEGIC 1. How can a company overcome the limitations of being in a fragmented industry? Fragmented industry consists of many small and medium sized companies or firms. There is few scale economies and hence large company cannot have advantage overall advantage. Furthermore the lack of scale economies low barriers to entry characterize many fragmented industries and new entry keeps the industry fragment.. Similarly transportation cost may keep the industry fragmented. Entrepreneurs are eager to gain the cost advantage of pursuing a low cost strategy of a fragmented industry. The required rate of return from consolidating industry is often huge. A fragmented industry is a sector of business without a distinct industry leader to control market trends. This business phenomenon happens frequently in local markets with small businesses, including restaurants, auto repair shops and construction companies. A small business owner can use several proactive strategies to overcome industry fragmentation and begin to distinguish her company in the minds and wallets of consumers. A fragmented industry is an entrepreneur's dream, and offers unbelievable opportunity compared to more homogeneous industries. Restaurants, Home Improvement Outlets and Homebuilders, and other Mom-and-Pop endeavors are good examples. Tons of small competitors and no consistent supply chain. Compare this to the a handful...
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...centralised corporations. At the same time, the individual businesses benefit from the world-wide, inter-industrial reputation of the parent corporation’s Virgin brand and are able utilize this brand recognition in their marketing efforts. The corporate level strategy is important in that it is the defining factor of what makes the ‘whole’ of the corporation add up to greater than the sum of its parts. It sets the corporation apart from its competitors and is unique to the particular company. What are the different levels of diversification firms can pursue by using different corporate-level strategies? There are 3 distinct levels of diversification firms can pursue by using different corporate-level strategies. These are Low-level, Moderate-level and high-levels of diversification. A low level of diversification strategy requires between 70% and 95% of revenue coming from a single business within the firm’s portfolio. Moderate to high levels of diversification are observed when less than 70% of revenue is generated from the company’s dominant business and there are clear links between its business units. For...
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...Diversification Strategies Kenneth Thomas Strayer University Contemporary Business 508 November 2, 2011 Dr. Dennis Darlark Diversification Strategies Diversification strategies in today’s business world can allow a company to increase its presence and product line to increase shareholder value in an ever changing economy. A well thought out mix of product development and acquisitions through mergers can reap a company many inherent rewards while expanding on their core business, while a plan that was not properly executed or researched can cause a diversification attempt to severely devalue the company’s net worth. In the following pages I will show two examples, first 3M whose strategies in diversifying brought forth a favorable outcome and the AOL Time Warner merger which did not prove to be the success everyone had hoped. Successful Diversification This section will help describe the success of 3M. “When most people think of 3M Co., adhesives and hooks used to hang posters or pictures typically come to mind.”(Pohl, K. 2007) 3M can be classified as “a diversified technology company with a presence in industrial and transportation; health care; display and graphics; consumer and office; safety, security and protection services,” (Reuters, 2011). The products that have come from these service areas have propelled the company into a global presence. 3M has operations in over 65 countries and product sales in nearly 200 countries. (3M, 2011) Global sales...
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...International portfolio investment and international diversification- benefits and limits Project submitted for assessment of the Curricular Unit: Fundamentals of Finance and International Financial Management of the 2nd Year of the Joint Degree International Business Management 2014.01.10 Contents Introduction 3 1.1 International Portfolio Investment definition 4 1.2 Principles of International Portfolio Investment 4 1.3 The Benefits from International Portfolio Investment 5 1.4 Participation.in.Growth.of.Foreign.Markets 6 1.5 Risks of International Portfolio Investments 6 2.1 International Diversification definition 7 2.2. History of research about international diversification 9 2.3 Benefits of International Diversification 10 2.4 Costs of International Diversification 12 Conclusion 15 References 16 Introduction At first sight, the idea of investing internationally seems exciting and full of promise because of the many benefits of international portfolio investment. By investing in foreign securities, investors can participate in the growth of other countries, hedge their consumption basket against exchange rate risk, realize diversification effects and take advantage of market segmentation on a global scale. Even though these advantages might appear attractive, the risks of and constraints for international portfolio...
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