Market Oriented Strategic Planning

A summary: Strategies for Diversification

Submitted To:
Dr. Prantosh Banerjee

Submitted By: Group 8

Aastha Tulsyan (190201002)
Himanshu Ninawat (190201039)
Sakshi Shah (190201089)
Shivam Garg (190201096)
Shubham Chauhan (190201101)
Shubham Gupta (190201102)
Utsav Sharma (190201120)
As per Igor Ansoff, there are 4 alternatives which the business can use to grow. These are as
follows:

 Market Penetration
 Product Development
 Market Development
 Diversification

Diversification is a bit different from the other 3 alternatives as it involves change in the
characteristics of the company’s product line or market. These alternatives represent a
product – market strategy.
Product – market strategy refers to the product line and the set of missions that the product is
designed to perform. Product mission is the description of the job that the product is intended
to perform in the market.
The 4 alternative strategies are explained hereunder:
Market Penetration: In this strategy, the company seeks to improve business performance
either by increasing the volume of sales to its present customers or by finding new customers
for existing products.

Product Development: It retains the present mission of the company and develops products
that have different features and characteristics which will help in improving the performance
of the mission.

Market Development: Here the current product of the company is retained and some
modifications are done to it so that it can adapt to new missions.

Diversification: This strategy entails a simultaneous departure from present product line as
well as the existing market structure of the company.

In most of the actual business world scenarios, companies would follow several of these
paths at the same time. However, diversification is a significant departure from the other
three. It generally requires new skills, new techniques and new facilities and leads to physical
and organizational changes in the business.

Companies generally diversify due to technological obsolescence, risk distribution, utilization

of excess capacity, re-invest earnings or any such reason. In order to decide whether to
diversify, the company has to analyze its future growth prospects. The future growth
prospects can be analyzed by considering the following factors.

 Long-term trends: Some standards used by companies to analyze future growth

prospects are long-term sales, general economic trends, political and international
trends, industry particular trends, and firm’s competitive strength and so on.
  Contingencies: These are certain environmental conditions which, if they occur, can
greatly impact the sales of a company. However, their occurrence cannot be predicted
with certainty. For example, a technological breakthrough or an economic depression.
 Unforeseeable Events: These are the events to which the companies can assign a
probability of occurrence but it cannot be described in the present state or knowledge.
These are important and warrant the firm’s attention while analyzing the future
growth prospects.

If the growth analysis indicates that the company should diversify, then the company can go
for one of the following opportunities:

 Vertical Diversification: It means to branch out and start manufacturing the

components, parts and materials which are required in the production process.
 Horizontal Diversification: This refers to the introduction of new products which does
not contribute to the present product line but lie within the company’s know-how and
management expertise.
 Lateral Diversification: This means moving beyond the confinement of the industry
in which the company belongs. It opens up a plethora of opportunities for the
company.

Each diversification objective is designed to improve some aspect of the product – market
strategy and the expected environment. These growth objectives can be grouped in three
categories:

 Growth Objectives: Designed to improve balance under favorable trend conditions.

 Stability Objectives: Designed to protect against unfavorable trends and foreseeable
contingencies.
 Flexibility Objectives: Designed to strengthen the company against unforeseeable
contingencies.

While selecting a strategy the following two steps should be taken:

 Qualitative Evaluation: Companies should select a strategy which is most consistent

with the basic character of the company. The company should compare the
diversification opportunity with the diversification objective. Also, unforeseeable
contingencies should be considered as they cannot be measured quantitatively.
 Quantitative Evaluation: Various performance ratios can used for this purpose such
as, return on sales, net worth, return on assets and ratio of assets to liabilities. The
most frequently used ratio is the return on investment.
Tests can be done to measure a certain capability of the company, such as, tests of
income to measure the earning ability, tests of debt coverage and liquidity to measure
preparedness for contingencies, etc.