Diversification

Diversification is creating additional value through synergetic integration of a new business with the existing one.  The two types of Diversification are:- 1) Related, and 2) Unrelated.

Objectives of Diversification:

Improving core process execution and/or enhancing a business unit`s structural  position.

The basic role of Diversification is for management to create value for stockholders in ways stockholders cannot do better for themselves.  Adding value through synergy of new business with the existing one through competitive advantage.

Three forms of Diversification:

• Vertical integration:  Integrating business along the value chain both up and down stream so that one efficiently feeds the other.
• Horizontal Diversification:  Getting into more than one industry, the new one somehow relating to the existing one, though some conglomerates instead pursue a strategy unrelated diversification.
• Geographical Diversification: Moving into new geographical area to overcome limited growth opportunities in the local market and/or to gain global leadership postion.

Three means of Diversification:

• Internal development
• Acquisition
• Strategy alliances
• Joint Ventures.

Since each route has its own issues, advantages and limitations, the different form and means of diversification can be mixed and matched to create a variety of options.

Capitalizing on Core Competencies:

Core competencies are things a company can do better than the competition and this can often be extended to products or markets beyond which they were initially developed.  Such exclusions and expansion provide excellent opportunities for diversification.

 Core competencies that meet the following three requirements provide a viable basis for a company to create or strengthen a new business unit as diversification.

• Core competency must translate into a worthwhile competitive advantage,
• The new unit must have similarities to existing businesses to benefit from the existing core competencies.
• The bundle of core competencies must be difficult for competition to imitate.

Diversification can be achieved through internal Research and Development, etc. or it can be done through with either a new company, or with strategy alliances, acquisitions, or joint ventures.

Questions:

• What does diversification mean?
• What are the three forms of diversification?