Deep Concept of Diversification

8/9/2019 Deep Concept of Diversification

1/34

Deep concept ofdiversication


2/34

IntroductionO Diversication strategies are used to expand

rm’s operations by adding markets, products,

services, or stages of production to theexisting business.

O The purpose of diversication is to allo the

company to enter lines of business that aredi!erent form current operations.


3/34

O Diversication strategy is thus dened as astrategy in hich the groth ob"ective isought to be achieved by adding neproducts or services to the existing productor service line.

O #or example, $esoram %otton &ills intotextiles, cellphone, paper, rebricks, cement,IT% limited'a cigarette ma"or( into hotel,paper and packaging, )*T'engineering

ma"or( into cement, information technology,and shipping.


4/34

+eason for #irms to diversifyO etter use of resources

O Increasing organi-ational capabilities

O To achieve greater grothO To minimi-e uctuations

O Diversication due to nancial factor

O Tax factor

O /ccess to latest Technology

O Developing competitive edge

O Diversication makes rm Dominant inmarkets


5/34

0( etter use of resourcesO Diversication provides opportunities for

better use of resources by o!ering

synergistic e!ect.

O 1ome organi-ations may have synergistice!ects in any area of business operations,

namely, organi-ation and management,research and development, marketing and soon.


6/34

2( Increasing organi-ational

capabilitiesO Diversication provides opportunity for

increasing organi-ational capability for

adapting to a rapidly changing and increasingcompetition.

O This can be seen in combination ith thebetter use of resources.

OIn securing better use of resources, anorgani-ation may assume either a defensiveor an aggressive posture.


7/34

3( To /chieve greater groth

O The most important factor that motivatesmanagement to diversify in ne product4market lines is to achieve the groth rate ofthe rm faster than the present internal

groth.O If the management believes that the existing

product4market posture of the rm ill not beade5uate to reach a specic level of rules

and earnings, they have only one alternativeand that is diversication.

O Diversication strategy is also pursued henthe rm sees limitations or sloer groth inthe existing eld of business activity as alsoith in the country.


8/34

6( To minimise uctuation

O / large number of organi-ation pursuediversication strategy "ust to avoid instabilityin sales and prots hich can result from eventssuch as cyclical, seasonal and secular shifts in

demand, changes in the life cycles of di!erentproducts of the line, the impact of variations ofra material prices on nished goods prices anddemand, or delays in getting component parts.

O 1uch organi-ation seeks continuous sales and

prots groth ith a minimum of uctuationsabout the trend line. &inimising uctuation ofsales and prots is of great advantage tooners, managers and employees.


9/34

7( Diversication due to

nancial factorO / no. of nancial considerations may also be

responsible for diversication move.

O / rm may be tempted to exploit

diversication opportunities because it hasli5uid resources far in excess of the totalexpansion needs.

O 1ometimes, a company may seek a merger

ith another organi-ation ith the intentionof tiding over its nancial problems.

O The merged company ill be in betterposition to generate resources for investment

and into capital intensive pro"ects.


10/34

8( Tax factor

O To take tax advantage may also favourexternal diversication move of a rm,particularly hen it seeks a merger ithanother company.

O 9sually, the stockholders of the sellingcompany are keen to li5uidate the accruedearnings of their company at capital gains taxrate rather than as ordinary income.


11/34

:( /ccess to latest technology

O ;ery fre5uently a rm may align ith foreignrm so as to gain access latest product4

technology cheaply.

O #or example, erman%ollaborator, %arl schevek /> of >ermany.


12/34

?( Developing competitive

@dge

O Diversication is onderful competitivestrategy.

O Diversication is that process hich enablesthe rm to develop competitive edge over thecompeting rms in industry

O It may be a technological superiority, +*D

that lead to innovative approach4inproduction, marketing, nance and manpoerrelations.

O / timely diversication keeps o! the

competitors.


13/34

A( Diversication makes rm

dominant in markets

O In each market that the rm operates,

becomes and apple of eyes and an agent ofheart burning for malicious and "ealous rmsin the industry.

O It has top position in product market as it hashighest market shareB in the labour market, ithas the impression of best pay4master a tokenof sound relation beteen employees andemployers.


14/34

&eans of DiversicationO 0( &ergers and ac5uisitions

O 2( 1trategic alliances and "oint

venturesO 3( Internal development


15/34

0( &ergers and ac5uisitionO &ergers and ac5uisition refer to the outright

purchase of a company already operation by

another company, here there is only onecompany existing after the transaction.

O /c5uisition are the 5uickest ay to diversifyinto a ne business, as managers get to buyestablished brands, production facilities,trained and experienced employees, anddistribution channels in one deal.


16/34

2( 1trategic /lliances and


17/34

3( Internal developmentO Internal development occurs hen rms

diversify into other businesses through aprocess of developing their on skills andresources, and making fresh investments into

creating the appropriate manufacturing andEormarketing infrastructure.

O %ompanies like +eliance Industries )imitedhave gron into a variety of businesses

through internal development of greeneldventures, and internally building the re5uisiteskills and competencies for managing thosebusinesses.


18/34

TYPES OF DIVERSIFICATION

O This strategy allos a rm to expand itsproduct lines and operate in several di!erent

economic markets. / business oner needsto consider eFcient diversication strategiesto build a competitive advantage, to achieveeconomies of scale or scope to takeadvantage of a nancial opportunity that

aligns ith the business strategic plan.O There are to type of diversication

%oncentric diversication

%onglomerate diversication


19/34

Concentric diversifcation

O In this alternative, a company expands into arelated industry, one having synergy ith thecompany’s existing lines of business, creatinga situation in hich the existing and ne lines

of business share and gain special advantagesfrom common such as technology, customers,location, product, government access. It isvery useful appropriate corporate strategy

hen a company has strong competitiveposition and distinctive competenciesG..


20/34

Features o Concentric

diversifcation1. Focus on interna deveo!"entC4 rms

can attempt related diversication through

various channels. for example, rms could CO.Identify and exploit an underlying technologyor skill that denes the ay set of productsdesigned.

O.1tart up ne products or services on iderbase of activities.

O./c5uire ne businesses that closely matchthe rm’s existing strengths in its originalactivity.


21/34

2. #uidin$ "utua% reinorcin$#usinessesC4

O The rst step in building synergy is identifyingthe potential for close t among the rm’sdi!erent businesses.

O for example, in the case of sharp, theprecision manufacturing skills, at screendisplay technologies and innovative + * Dused in making all4thin T; sets, ovens, D;Dplayers etc.


22/34

3. Ensurin$ "ana$eria ftC4O #inally , a strong t among the di!erent

managers that run the underlying businessesis important.

O &anagers ith similar levels ofentrepreneurial 5ualities, technicalknoledge, marketing or engineeringbackgrounds provide an importantfoundation for building synergies.


23/34

I"!ortance o Concentric

diversifcation1. E&cess cas' (o) *+ here the existingproduct line has produced a high degree ofli5uidity through positive cash os and

opportunities exist ith favourable rates ofreturn, a company may consider %oncentricdiversication very attractive.

,. Saturation o !roduct "ar-et *+ /nothercompelling reason for concentric diversicationmay be saturation of demand in the in theindustry or product market.


24/34

. /ana$eria e&!ertise*+ %oncentricdiversication may also be prompted by the top

management’s inclination to gain managerialexpertise in a ne eld, or ne technology, orentry into ne markets, or ne products.

0. Co"#inin$ t'e vaue c'ain*+#irms cansignicantly loer costs and increase eFciencies

by combining the value chains of multiplebusinesses such as manufacturing multipleproducts in the same mfg plantB using samelogistics H arehousing and transportation.

. 2evera$in$ stron$ #rand na"esC4#irms couldleverage their existing strong brand names acrossmultiple businesses to help achieve signicantmarket share and customer loyalty. #or example.GGGGGGGGGGGGG


25/34

2i"itations o Concentric

diversifcation0. E3ects ne) #usiness* in case of

obsolescence, commonality or relatedness

factor, say , technology, the ne businessmay also be a!ectedG.

,. Co"!e& and di4cut C4 relateddiversication is a process that takes placehen a business expands its activities intoproduct lines that are similar to those itcurrently o!ers hich makes it complex anddiFcult of coordinating di!erent but relatedbusiness.


26/34

3. Ot'er disadvanta$esC4

O1hared risks, in some cases, herediversication is extensive. Di!erentindustries have di!erent and unpredictablebusiness cycles.

O 1hared losses hen there are no strongcommonalities to leverage competencies andduring economic donturns hen allindustries ill be hit altogether.


27/34

Con$o"erate

diversifcationO hen an organi-ation adopts a strategy hich

re5uire taking up those activities hich areunrelated to the existing business denition of one

or more of its businesses, either in terms of theirrespective customer groups, customer functions or

alternative technologies, it is called Con$o"eratediversifcation. For e&a"!e. ITC a ci$aretteco"!an% diversi%in$ into t'e 'ote industr%

O %onglomerate diversication is occurs hen a rm

diversies into areas that are unrelated to itscurrent line of business.


28/34

Features o Con$o"erate

diversifcation1. Ac5uisitions over internadeveo!"ent*+ The unrelated diversication strategies of %onglomerates /re designed to

ac5uire, hold and sell businesses in variousindustries ithout the benet or guide of anunderlying distinctive competence.%onglomerate based diversication is basedentirely on ac5uiring and selling di!erent

parts of the rm to maximi-e corporateprotability. hen compared ith relateddiversied rms, unrelated rms gro andcontract primarily through asset ac5uisitions

and divestitures.


29/34

,. Atte"!tin$ to #eat t'e "ar-etC4Theseexamples also point out the some of theproblems in pursuing an unrelateddiversication strategy. /ll of these companiesthought they could make informed bets thatthey could purchase fast groing, highlyprotable businesses for the long term.oever senior management cannot alaysaccurately predict ho each individual business

is likely to perform in the future.


30/34

I"!ortance o Con$o"erate

diversifcationO Sta#e !eror"ance */ business that uses

this strategy should have stable performanceover time. During any given period, if somebusinesses oned by the organi-ation are in acycle of decline, other may be in a cycle ofgrothGGGGG

O E4cient resource aocationC4


31/34

O Econo"ic surviva C4The primary benet fromthis is that an entrepreneur is spared from

risking all his capital toards one businessscheme. Instead of continuing to sell theproducts that are not so demandable yet, onecan resort to drastic product change to aid thebusiness for economic survival.

O 6e!s in e&!andin$ #usiness C4ith theunrelated diversication, one expands thebusiness using a di!erent marketing plan. This islike hitting to birds in one stone. The business

ill gro hand in hand ith each other for illboost the other. This is very advisable for abusiness that is experiencing economic crisistooG.


32/34

2i"itations o

Con$o"erate diversifcationO Re5uires $ood "ana$e"ent s-is C

/chieving successful unrelated diversicationre5uires good management skills, closelyfolloing each of the business activities andtimely identifying and solving even thesmallest problems. The greater the number ofbusiness activities, the more diFcult is the

total management task.


33/34

O Poor !eror"ance o #usiness activitiesC4In many instances the overall performance ofthe unrelated business activities does notexceed the individual ones. 1ometimes it iseven orse, unless the managers areexceptionally talented and focused.


34/34

Thank you

Deep Concept of Diversification

Documents

Transcript of Deep Concept of Diversification