Page 126 - DCOM506_DMGT502_STRATEGIC_MANAGEMENT

Strategic Management

Notes Diversification can be achieved through a variety of ways:
1. Through mergers and acquisitions.
2. Through joint ventures and strategic alliances.
3. Through starting up a new unit (internal development)
Thus, the first concern in diversifying is what new industries to get into and whether to enter by
starting a new business unit or by acquiring a company already in the industry or by forming a
joint venture or strategic alliance with another company. A company can diversify narrowly
into a few industries or broadly into many industries. The ultimate objective of diversification
is to build shareholder value i.e., increasing value of the firm’s stock.

Reasons for Diversification: The important reasons for a company diversifying their business
are:
1. Saturation or decline of the current business: If the company is faced with diminishing
market opportunities and stagnating sales in its principal business, it may become necessary
to enter new businesses to achieve growth.

2. Better opportunities: Even when the current business provides scope for further growth,
there may be better opportunities in new lines of business. A firm in a “sunset industry”
may be tempted to enter a “sunrise industry.”

3. Sharing of resources and strengths: Diversification enables companies to leverage existing
competencies and capabilities by expanding into businesses where these resources become
valuable competitive assets. By sharing production facilities, technological capabilities,
managerial expertise, distribution channels, sales force, financial resources etc., synergy
can be obtained.
4. New avenues for reducing costs: Diversifying into closely related businesses opens new
avenues for reducing costs.

5. Technologies and products: By expanding into industries, the company can obtain new
technologies and products, which can complement its present businesses.
6. Use of brand name: Through diversification, the company can transfer its powerful and
well-known brand name to the products of other businesses.
7. Risk minimization: The big risk of a single-business firm is having all its eggs in one
industry basket. If the market is eroded by the appearance of new technologies, new
products or fast–changing consumer preferences, then a company’s prospects can quickly
diminish.

Example: Digital cameras have diminished markets for film and film processing; CD
and DVD technology has replaced cassette tapes and floppy disks and mobile phones are
dominating landline phones. Thus, there are substantial risks to single-business companies, and
diversification into other businesses minimizes this risk. But diversification itself can become
risky.

Risks of Diversification: Diversification has several risks. They are:
1. There is no guarantee that the firm will succeed in the new business. In fact, many
diversifications have been failures.

2. If the new lines of business result in huge losses, that adversely affects the main business
of the company.

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