Module 05B: Diversification

Concepts Covered
➢ Strategic Choices

• Diversification
‒ Concentric (Related) diversification
‒ Conglomerate (Unrelated) diversification
‒ Vertical Integration
‒ Horizontal Integration
• Diversification and Synergy
− Production synergy, Marketing synergy, Financial synergy, Organizational synergy

• Diversification vs. Expansion

• Planned Diversification and Options to Management for Diversification

2
5-B Diversification
➢ What is Diversification?

➢ What are the drivers for diversification?

‒ Economies of scope
‒ Greater market share
‒ Risk reduction
‒ Utilize existing managerial, operational talents

3
5-B Diversification

➢ Diversification and Performance

- Too little or too much diversification ??

➢ Types of Diversification
‒ Concentric (Related) diversification
‒ Conglomerate (Unrelated) diversification
5-B Diversification

Diversification and Performance

5
 Constrained Concentric Diversification

2
1

Base
Business

4 3

e.g., Honda motor, Canon, Apple, Google

6
 Linked Concentric Diversification

Base
Business
4

3
5-B Diversification

➢ Integration

• Vertical Integration
‒ Backward Integration
‒ Forward Integration

• Horizontal Integration

• What are the advantages and disadvantages?

8
 Forward Vertical Integration

Nylon Filament Polyester

Filament
Yarn
Yarn
Nylon Indus-
trial Yarn

V Belt
Conveyor
Belting

Tyre

• What are the advantages and disadvantages?

9
 Vertical Integration

Upstream
E&P Co.

Thermal Power

Backward
Forward Plant
Downstream
Refinery

Retailing Retailing
HSD, Petrol Kerosene, LPG

Downstream
Petrochemicals

• What are the advantages and disadvantages?

 Backward Vertical Integration
Naphtha
Para-
Xylene

PTA MEG

Polyester Polyester
Filament Yarn Staple Fibre

Fabric

• What are the advantages and disadvantages?

11
 Vertical & Horizontal Integration

Grand Father
Vertical Integration

Horizontal Integration:
Owning/Controlling a no. of similar but
separate activities in same kind of business
Father Uncle

Son Nephew

Horizontal Integration
5-B Diversification

Diversification and Integration options

13
5-B Diversification

➢ Diversification & Synergy

- Production synergy
- Marketing synergy
- Financial synergy
- Organizational synergy
5-B Diversification

➢ Diversification vs. Expansion

- Likely return
- Market growth rate, market size, marketing capability
- Supply-demand gap
- Experience curve advantage
- Brand Image

15
 5-B Diversification

➢ Planned Diversification
Options to Management
- Status quo
- Sail with the wind
- Move in same direction
- Move in new direction
Conclusion
• Diversification is a popular strategic alternative to growth. It is used to expand business by adding
new product or service or business or market to the existing business.
• Diversification is a way of gaining market supremacy, spreading risk and utilising existing
resources, facilities and capabilities in a more effective and efficient manner.
• This chapter discusses various types of diversification – concentric and conglomerate
diversification, vertical integration (forward and backward), horizontal integration, and
diversification performance. It also discusses diversification and synergy mentioning that there are
four types of synergy viz. production synergy, marketing synergy, financial synergy, and
organizational synergy.
• It further elaborates on the criteria for deciding when to go for diversification vis-à-vis expansion,
various options available to management for diversification and planned diversification.

17
References
1. Crafting and Executing Strategy – The Quest for Competitive Advantage, Concepts and Cases,
Thomson & Strickland, McGraw-Hill Education.
2. Strategic Management – Planning for Domestic and Global Competition, John Pearce, R.Robinson
and Amita Mital, McGraw-Hill Education, 14th edition.
3. Strategic Management – Text and Cases, Dess, McNamara and Eisener McGraw-Hill Education, 8th
edition.

18