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Expansion through Diversification & Integration

Expansion through Diversification
• Diversification involves a substantial change in the business definition-singly or jointly in terms of customer functions, customer groups, or technologies of one or more of a firm’s businesses. • When a firm is no longer able to grow any more through market penetration/not able to expand in the basic product market or it becomes mature, then it must add new products or markets to its existing business line. This approach towards growth is known as DIVERSIFICATION. • DIVERSIFICATION is thus defined as a strategy in which the growth objective is sought to be achieved by adding new products or services to the existing product/service line.

• Move firm into attractive industries • Prolong “life” of firm • Improve long-term performance • Capture synergies and strategic “fit” between businesses by capitalising on organisational strengths & minimise weaknesses. .Benefits of Diversification • Reduce earnings volatility • Minimize risk by spreading it over several businesses.

Types of diversification strategy i) • • • Horizontal diversification Internal diversification External diversification/Co-operative strategies Concentric diversification(OR RELATED DIVERSIFICATION) • Conglomerate diversification(OR UNRELATED DIVERSIFICATION) ii) Vertical diversification(or Vertical Integration) • Forward Integration • Backward Integration .

Washing machines. External diversification/Co-operative strategies: if new pdcts/services are added to the existing line of business through Acquisition or Merger with other external firms. detergents. It may b further divided into: Internal diversification External diversification/Co-operative strategies Internal diversification: when new pdct r developed by the firm on its own or creates new pdn facilities in addition to the existing prdct line.Horizontal diversification • This is a broad category which includes strategies involving addition of parallel new pdcts/services to the existing prdct/service line. . soaps. Eg: GODREJ originally started with manufacturing steel safes & locks. then it is called External diversification/Co-operative strategies. later added refrigerators. etc to its product line.

. Synergy exists when the value created by businesses working together exceeds the value created by them working independently Examples: • A Co. Choclates. • Amul has diversified out of the simple dairy products into related businesses like ice-creams. “Pasta” . “soups”. the concept is of SYNERGY that 2 businesses will generate more profits together than they could separately. which r sold to housewives through a chain of retail stores.etc. So. in the sewing machine business diversifies into kitchenware & household appliances. or (b) introduction of new pdcts/services using technologies similar to the present pdct line.• Horizontal diversification may be further sub-divided into: Concentric(or Related) diversification: related to the existing business definition of 1 or more of a firm’s businesses involves either: (a)introduction of new pdcts/services to serve similar customers in similar markets with the help of unrelated technology.etc to the existing “Maggi” brand after success of instant noodles(technology related Concentric diversification) • Titan Industries Ltd diversified out of watches into designer jewellery & sunglasses.( market related Concentric diversification) • Addition of “tomato ketchup”.

Concentric diversification is pursued for several reasons like:  Offers excess cash flow if the products it produces in one industry is subject to cyclical fluctuations. or new technology or entering new mkts or products.  It may be prompted by the top mgmt ‘s inclination to gain managerial expertise in a new field .  If there is saturation of demand in the present product market or industry.e.  Economies of Scope i.  Concentric diversification into a related industry may be a very appropriate corporate strategy when a firm has a strong competitive position & distinctive competence & so the Co uses this strength as its means of diversification. . CONCENTRIC DIVERSIFICATION leads to Cost savings that occur when a firm transfers capabilities and competencies developed in one of its businesses to another of its businesses.

Concentric diversification enables a firm to attain synergy by exchange of resources & skills. Increase in risk & commitment 2. DISADVANTAGES 1. 2.Advantages & disadvantages of Concentric/related diversification ADVANTAGES 1. These related diversification strategies help to avail economies of scale & thus tax benefits. Reduction in flexibility .

etc. diversification into business fields which are not significantly related or similar to the primary business mission. originally a cigarette Co diversified into agro products. .etc.e. marine construction diversified into iron & steel. either in terms of the customer groups. etc. orignally into shipping. FMCG’s. ESSAR Group .Conglomerate diversification(OR UNRELATED DIVERSIFICATION) • Addition of dissimilar prdct/services to the existing line of business i. cust functions or technologies used. due to constant threat it had in the cigarette business. fertilisers. • It is taking up of those activities which r unrelated to the existing business definition of its present businesses. pdcts EXAMPLES: ITC . sugar. hotel business. • A Conglomerate is defined as a firm which has atleast 5 or 6 divisions selling diff. paper products. chemicals. DCM Ltd added a wide range of unrelated products to its existing business line of textiles like engineering goods. telecom.

.The reasons for using Conglomerate diversification strategy may be:  When mgmt realises that the current industry is unattractive or it lacks competence in related pdcts or services in other industries  To achieve a growth rate higher than what can b realised through expansion  To make better use of financial resources with retained profits xceeding immediate invstmt needs  To avail of potential opportunities of profitable investments  To achieve a distinct competitive adv & broader stability  To spread the risk & gain increased stABILITY.

Reduction of risk by spreading investment in different businesses & industries DISADVANTAGES 1. 2.Advantages & disadvantages of Conglomerate/unrelated diversification ADVANTAGES 1. Diversion of resources & attention to other areas leads to a lack of concentration & facing the risks of managing entirely new businesses. . Better management & allocation of cash flows leads to a higher return on investments.

.e. moving towards the end customer & the firm serves as a customer for its own outputs. the greater its degree of vertical integration. • Eg: Highly integrated companies – such as the major oil companies that own and control their value chain from exploring for oil down to the retailing of gasoline.e. This type of Vertical growth can b achieved by taking over a function that was previously provided by a supplier or by a distributor. • . – Forward integration—a firm operates its own distribution system/retail stores for delivering its outputs/downstream expansion i. • Vertical integration refers to a firm’s ownership of vertically related activities.Vertical Integration/diversification – Backward integration—a firm produces its own inputs/supplies i. • The greater the firm’s ownership and control over successive stages of the value chain for its product. the firm moves up in the value chain/upstream development & firm serves as its own customer. • Thus Vertical Integration/diversification is a type of growth strategy wherein new pdcts/services are added which are complementary to the existing pdct line.

The cost of making the items used in the manufacture of one’s own pdct are to b evaluated against the cost of procuring them from suppliers. . then it is profitable for the firm to move down on the value chain. in Vertical Integration. attempts to widen the scope of business definition of a firm by combining several activities in the value chain either forward or backwards. • if the cost of making r less than the cost of procurement.• A “make or buy” decision is taken when firms wish to negotiate with suppliers or buyers. • Similarly. if the cost of selling the finished pdcts is lesser than the price paid to the retailers/distributors to do the same thing. a Co. then the firm moves up the value chain to manufacture the supplies itself. • Thus.

where the firm takes over ownership and control of activities previously undertaken by its customers. or forward.• Vertical integration can be either backward. vertical integration can be also achieved either internally by expanding current operations or externally through acquisitions. • Just like related & unrelated diversification can be achieved either internally or externally. where the firm takes over ownership and control of producing its own components or other inputs. Vertical Integration .

Cisco Systems. So we see that Ford manufactured much of its own steel rather than buy it from suppliers • In contrast.Examples of Vertical Integration • Henry Ford used internal Co resources to build his River Rogue plant outside Detroit. the maker of internet hardware. The m/fring process was integrated to the point that iron ore entered one end of the long plant & finished automobiles rolled out at the other end into a huge parking lot. chose the external route to vertical growth by purchasing Radiata Inc(a maker of chip sets for wireless networks) .

The company controlled not only the mills where the steel was made. for sale to consumers. transporting it around the world. the ships that transported the iron ore and the railroads that transported the coal to the factory. the coal mines that supplied the coal. . or BP) often adopt a vertically integrated structure. This means that they are active along the entire supply chain from locating crude oil deposits. (such as ExxonMobil.• One of the earliest. largest and most famous examples of vertical integration was the Carnegie Steel company. to distributing the fuel to companyowned retail stations. Royal Dutch Shell. the coke ovens where the coal was cooked. refining it into petroleum products such as petrol/gasoline. • Oil companies. etc. but also the mines where the iron ore was extracted. drilling and extracting crude.

along with retail sector. also synthetic garments to retail outlets. • Eg: many sugar mils in India have developed their own sugarcane farming. Reliance now has a complete vertical product portfolio from oil and gas production. . refining.(Backward) • Eg: textile mills like DCM.• The Indian petrochemical giant Reliance Industries has integrated back into polyester fibres from textiles and further into petrochemicals. Reliance has entered the oil and natural gas sector. NTC have set up their own retail distribution systems. petrochemicals.

Benefits of vertical integration: • cost savings that arise from the physical integration of processes. Eg: steel sheets are produced by integrated producers in plants that first produce steel. then roll hot steel into sheet. Linking the two stages of production at a single location reduces transportation and energy costs. • To gain a greater control over sales & prices of its existing output. • To gain control over a scarce resource • To guarantee quality control of a key input as well quality control during distribution system. and a metal company. . a glass company. Control of these three subsidiaries is intended to create a stable supply of inputs and ensure a consistent quality in their final product. an automobile company may own a tire company. • To secure a regular supply of materials or components particularly when the mkt is dominated by monopolistic firms. • Results in Lower uncertainty and higher ROI for the enterprise through better use of overhead facilities • For example. • To obtain access to potential customers & true customer feedback.

The demerits of Vertical Integration • Higher coordination costs • Higher monetary and organizational costs of switching to other suppliers/buyers • Monopolization of markets • Opportunities of purchasing at a lower cost which may emerge cannot b availed of. .