Diversification of Business: A Critique

Section A: Diversification Related Theories

Diversification is about doing something new, taking risks and venturing into the unknown to
seek greater competitive advantage and increased income and profits.

1. Definition of Diversification

Diversification is doing something new. Diversification is a strategy for company growth

through starting up or acquiring businesses outside the company's current products and
markets. This refers that a company is developing new markets and new products.
Diversification is the final alternative. It calls for a simultaneous departure from the present
product line and the present market structure. Generally, diversification requires new skills,
new techniques, and new facilities. Diversification leads to a physical and organizational
changes in the structure of the business which represents a distinct break with past business
experience. It builds shareholders value.

Diversification is a corporate strategy decision matter. It is a decision, taken at the highest

level, impacts on the fundamental direction of firm. Moving towards diversification has
sometimes been compared to passing through the Bermuda Triangle. While some firms
succeed, many others get lost forever. Some popular big diversified companies are Microsoft,
Walt Disney, Nokia, General Electric, Mitsubishi, Shell etc.

2. Diversification Approach

A company can decide to diversify its business by taking Related Diversification Approach
or Unrelated Diversification Approach. It also can adopt both related and unrelated
businesses. There is a brief discussion about them.

1. Related diversification occurs when a company develops beyond its present

product an d m ar ke t w hi ls t re ma in in g i n th e s am e a re a. F o r ex am pl e a
n ew s pa pe r co mp an y expanding by acquiring a TV station remains with
 media sector. It will use its present strengths by using its expertise to develop
new interests in same area. Related diversification has some advantages. They are:
 Spreading the risk by way of producing similar and/or related goods, offering
similar or complementing services, or penetrating similar markets;
 In the majority of cases the companies use existing, available resources and
experience;
 If the company starts producing part of the raw materials (components) for its
main production line, it guarantees better quality, lower prices and regular
supplies;
 Strategic goals can be combined and, as a result, opportunities arising
throughout the "production chain" can be shared and fully utilized;
 Better usage of opportunities to share technologies, skills and expertise,
common distribution channels, similar management techniques and adapting
resources;
 Economies of scale can be achieved through the elimination or significant
reduction of certain expenses when more than one business activity is
developed in a common company and also because of the opportunities to use
any internal connections arising along the business chain;
 Synergy effect - when two activities are integrated, the result is greater than
the sum of the results of two individual activities.

2. Unrelated diversification is used to describe a company moving its present interests

into unrelated markets or products. For example a company whose core business is
media services may diversify into provision of financial services. Unrelated
diversification has both advantages and disadvantages. They are following:
Advantages:
  The unrelated diversification which is carefully developed and undertaken only after
thorough analysis of the environment and the company´s own resources usually brings
very good financial results. However, in all cases it should be a low risk investment with
a potential for high returns.
 In some cases of company acquisition, this diversification can secure funds on hand
during a seasonal slowdown, adding to the cash flow for the main business activity.
 Spreading the risk through different sectors of the economy. It is very important to
identify industries in which the business activity slowdown does not coincide with the
slowdowns in the main business of the company.

Disadvantages:

 Achieving successful unrelated diversification requires good management skills, closely

following each of the business activities and timely identifying and solving even the
smallest problems. The greater the number of business activities, the more difficult is the
total management task.
 In many instances the overall performance of the unrelated business activities does not
exceed the individual ones. Sometimes it is even worse, unless the managers are
exceptionally talented and focused.
 As a rule, the implementation of unrelated diversification strategy requires allocation of
significant financial and human resources and there is always the risk of harming the
main company business.

Section B: Examples of Product Diversification

The product diversification strategy is different from product development in that it involves
creating a new customer base, which by definition expands the market potential of the original
product. This is almost always done through brand extensions or new brands, but in some cases
the product modification may "create" a new market by creating new uses for the product.

General Electric
General Electric (GE) is probably the most famous example of what we called an unrelated
diversified company. Over the years, GE has been able to sustain best 1 position in a vast range
of industries.
The company produces aircraft engines, locomotives and other transportation equipments,
appliances (kitchen and laundry equipment), lighting, electric distribution and control equipment
and plastics. GE Capital Services, the financial subsidiary of GE, accounts for half of sales and is
one of the largest financial services companies in the US.
GE operates in more than 100 countries and employees 313000 people worldwide. The company
traces its beginnings to Thomas A. Edison, who established Edison Electric Light Company in
1878. In 1892, a merger of Edison General Electric Company and Thompson Houston Electric
Company created General Electric Company.

Section C: Ways of Diversification

Firm can diversify in several ways. They can acquire a new business or start one up internally.
Joint ventures are also another way firm can diversify.
Acquiring an Existing Business
Acquiring an existing company allows quick entry into the target market by hurdling various
entry barriers. One major barrier is technology in a given business or industry. Buying a
company that has the technological know-how gives the firm access to processes and expertise it
is lacking. Acquiring a company may also allow the firm to gain access to reliable suppliers or to
more adequate distribution channels. Frequently, a mid size firm will acquire an existing
company to achieve the size to match rivals in terms of efficiency and costs.
Internal Start-Up
Diversification via internal start-up is more attractive when time is not an issue. Such an
enterprise usually requires ample amounts of time and resources, though usually is less
expensive than buying an existing firm as no premium needs to be paid. The internal start-up
strategy assumes that the firm has most of the needed skills in house. In the case that the firm is a
new entrant in an existing industry, the firm must be sure that the additional productive capacity
it brings on line will not adversely impact supply demand balance in industry.
Joint Venture
When the diversification is too risky or costly to do it alone, a joint venture may be appropriate.
In industries such as the pharmaceutical business where product development may take a decade
and the investment runs to billions of taka, frequently firms use joint venture structures, in the
mobile telephone business, when licenses are auctioned, the expense and risk made for very
strange joint ventures with competitors joining together in different markets.
But, joint ventures also raise important questions. Conflicts between partners over who should
take what role are common.
Conclusion
Diversification is like politics. Everybody talks about it, everybody thinks he knows the answer
to big questions, but very can manage to do it well or stay in power for a long time.
Diversification is related when a firm seeks to enter a business that possesses some kind of
strategic fit with its core business. Diversification is called unrelated when there is no strategic fit
among the diversified firm’s lines of business or meaningful value chain relationships. The
decision of whether diversify or not must be assessed with great care.

References
1. A. A. Thompson, J. E. Gamble, A. K. Jain, and A. J. Strickland, Crafting &
Executing Strategy ( Tata McGraw Hill, 2010), pp. 274-322.
2. D. Allen and A. Gorgeon, Diversification Strategy (IE Publishing Department,
2007), pp.01-17.