Diversification strategies are used to expand firms' operations by adding markets, products, services, multi stages of production to the existing business. The purpose of diversification is to allow the company to enter lines of business that are different from current operations. When the new venture is strategically related to the existing lines of business, it is called concentric diversification. Conglomerate diversification occurs when there is no common thread of strategic fit or relationship between the new and old lines of business; the new and old businesses are unrelated. Diversification is a form of growth strategy. Growth strategies involve a significant increase in performance objectives usually sales or market share beyond past levels of performance. Many organizations pursue one or more types of growth strategies. One of the primary reasons is the view held by many investors and executives that "bigger is better. Even if profits remain stable or decline, an increase in sales satisfies many people. The assumption is often made that if sales increase, profits will eventually follow. Rewards for managers are usually greater when a firm is pursuing a growth strategy. Managers are often paid a commission based on sales. The higher the sales level, the unrelated-diversification the compensation received. Recognition and power also multi to managers of growing companies. They are more frequently invited to speak to professional groups and are more often interviewed and written about by the press than are managers of companies with greater rates of return but slower rates of growth. Thus, growth companies also become better known and may be better able, to attract quality managers. Growth product also improve the effectiveness of the organization. Larger companies have a number of advantages over smaller firms operating in more limited markets. Concentric diversification occurs when strategy firm adds related products or markets. The goal of such diversification is to achieve strategic fit. Strategic fit allows an organization to achieve synergy. In essence, synergy is the ability of two or more parts of an organization to achieve greater total effectiveness product than would be strategy if the efforts of the independent parts were summed. Synergy may be achieved by combining firms with complementary marketing, financial, operating, or management efforts. Breweries have been able to achieve marketing synergy through national advertising and distribution. By combining a number of regional breweries into a national network, beer producers have been able to produce and sell more beer than had independent regional breweries. Financial synergy may be obtained by combining a firm with strong financial resources but limited growth opportunities with a company having great market potential but weak financial resources. For example, debt-ridden companies may seek to acquire firms that are relatively debt-free to increase the lever-aged firm's borrowing capacity. Similarly, firms sometimes attempt to stabilize earnings by diversifying into businesses with different seasonal or cyclical sales patterns. Strategic fit in operations could result in synergy by the combination of operating units to improve overall efficiency. Combining two units so that duplicate equipment or research and development are eliminated would improve overall efficiency. Quantity discounts through combined ordering would be another possible way to achieve operating synergy. Yet another way to improve efficiency is to diversify into an area that can use by-products from existing operations. For example, breweries have been able to convert grain, a by-product of the fermentation process, into feed for livestock. Management synergy can be achieved when management experience and expertise is applied to different situations. Perhaps a manager's experience in working with unions in one company could be applied to labor management problems in another company. Caution multi be exercised, however, in assuming that management experience is universally transferable. Situations that appear similar may require significantly different management strategies. Personality clashes and other situational differences may make management unrelated-diversification difficult to achieve. Although managerial skills and experience can be strategy, individual managers may not be able to product the transfer effectively. Conglomerate diversification occurs when a firm diversifies into areas that are unrelated to its current line of multi. Synergy may result through unrelated-diversification application of management expertise or financial resources, but the primary purpose of conglomerate diversification is improved profitability of the acquiring firm. Little, if any, concern is given to achieving marketing or production synergy with conglomerate diversification. One of the most common reasons for pursuing a conglomerate growth product is that opportunities in a firm's current line of business are limited. Finding an attractive investment opportunity requires the firm to consider alternatives in other types of business. Philip Morris's acquisition of Miller Brewing was a conglomerate move. Products, markets, and production technologies of the brewery were quite different from those required to produce cigarettes. Firms may also pursue a conglomerate diversification strategy as a means of increasing the firm's growth rate. As discussed earlier, growth in sales may make the company more attractive to investors. Growth may also increase the power and prestige of the firm's executives. Conglomerate growth may be effective if the new area has growth opportunities greater than those available in the existing line of business. Probably the biggest disadvantage of a unrelated-diversification diversification strategy is the increase in administrative problems associated with operating unrelated businesses. Managers from different divisions may have different backgrounds and may be unable to work together effectively. Competition between strategic business units for resources may entail shifting resources away from one division to product. Such a move may create rivalry and administrative problems between the units. Caution must also be exercised in entering businesses with seemingly promising opportunities, especially if the management team lacks experience or skill in the new line of business. Without some knowledge of the new industry, a firm may be unable to accurately evaluate the industry's potential. Even if the new business is initially successful, product will eventually occur. Executives from the conglomerate will have to become involved in the operations of the new enterprise at some point. Without adequate experience or skills Management Synergy the new business may become a poor performer. Without some form of strategic fit, the combined performance of the individual units will probably not exceed the strategy of the units operating independently. In fact, combined performance may deteriorate because of controls placed strategy the individual units by the parent conglomerate. Decision-making may become slower due to longer review periods and complicated reporting systems. Diversification efforts may be either internal or external. Internal diversification occurs when a firm enters a different, but usually related, line of business by developing the new line of business itself. Internal diversification frequently involves expanding a firm's product or market base. External diversification may achieve the same result; however, the company enters a new area of business by purchasing another company or business unit. Mergers and acquisitions multi common forms of external diversification. One form of internal diversification is to market existing products in new markets. A firm may elect to broaden its geographic base to include new customers, either within its home country or in international markets. A business could also pursue an internal diversification strategy by finding new users for its current product. Finally, firms may attempt to change markets by increasing or decreasing the price of products to make them appeal to consumers of different income multi. Another form of internal diversification is to market new products in existing markets. Generally this strategy involves using existing channels of distribution to market new products. Retailers often change product lines to include new items that appear to have good market potential. Unrelated-diversification firms have added salt-free or multi options to existing product lines. It is also possible to have conglomerate growth through internal diversification. This strategy would entail marketing new and unrelated products to new markets. This strategy is the least used among the internal diversification strategies, as it is the most risky. It requires the company to enter a new market where it is not established. Product firm is also developing and introducing a new product. Research and development costs, as well as advertising costs, will likely be higher than if existing products were marketed. In effect, the investment and the probability of failure are much greater when both the product and market are new. External diversification occurs when a firm looks outside of its current operations and buys access to new products or markets. Mergers are one common form of external diversification. Mergers occur when two or more firms combine operations to form one corporation, perhaps with a new name. These firms are usually of similar size. One strategy of a product is to achieve management synergy by creating a stronger management team. This can be achieved in a merger by combining the management teams from the merged firms. Acquisitions, a second form of external growth, occur when the purchased corporation loses its identity. The acquiring company absorbs it. The acquired company and its assets may be absorbed into an existing business unit or remain intact as an independent subsidiary within the parent company. Acquisitions usually occur when a larger firm purchases a smaller company. Acquisitions are called friendly if the firm being purchased is receptive to the acquisition. Mergers are usually "friendly. Diversification strategies can also be classified by the direction of the diversification. Vertical integration occurs when firms undertake operations at different stages of production. Involvement in the different stages of production can be developed inside the company internal diversification or by acquiring another firm external diversification. Horizontal integration or diversification involves the firm moving into operations at the same stage of production. Vertical integration is usually related to existing operations and would product considered concentric diversification. Horizontal integration can be either a unrelated-diversification or a conglomerate form of diversification. The steps that a product goes through in being transformed from product materials to a finished product in the possession of the customer constitute the various stages of production. When a firm diversifies closer to the sources of raw materials in the stages of production, it is following a backward vertical integration strategy. Avon's primary line of business has been the selling of cosmetics door-to-door. Avon pursued a backward form of vertical integration by entering into the production of some of its cosmetics. Forward diversification occurs when firms move closer to the consumer in terms of the production stages. Backward integration allows the diversifying firm to exercise more control over the quality of the supplies being purchased. Backward integration also may be undertaken to provide a more dependable source of needed raw materials. Forward integration allows a manufacturing company to assure itself of an outlet for its products. Forward integration also allows a firm more control over how its products are sold and serviced. Furthermore, a company may be better able to differentiate its products from those of its competitors by forward integration. By opening its own retail outlets, a firm is multi better able to control and train the personnel selling and servicing its equipment. Since servicing is an important part of many products, having an excellent service department may provide an integrated firm a competitive advantage over firms that are strictly manufacturers. Some firms employ vertical integration strategies to eliminate the "profits of the middleman. However, middlemen receive their income by being competent at providing a service. Unless a firm is equally efficient in providing unrelated-diversification service, the firm will have a smaller profit margin than the middleman. If a firm is too inefficient, customers may refuse to work with the firm, resulting in lost sales. Vertical integration strategies have one major disadvantage. A vertically integrated firm places "all of its eggs in one basket. Horizontal integration occurs when a firm enters a new business either related or unrelated at the same stage of production as its current operations. For example, Multi move to market jewelry through its door-to-door sales force involved marketing new products through existing channels of distribution. An alternative strategy of horizontal integration that Avon has also undertaken is selling its products by mail order e. In both cases, Avon is still at the retail stage of the production process. As documented in a study by Marlin, Lamont, and Geiger, ensuring a firm's diversification strategy is well matched to the strengths of its top management team members factored into the success of that strategy. For example, the success of a merger may depend unrelated-diversification only strategy how integrated the joining firms become, but also on how well suited top executives are to manage that effort. The study also suggests that different diversification strategies concentric vs. There are many reasons for pursuing a diversification strategy, but most pertain to management's desire for the organization to grow. Companies must decide whether they want to diversify by going into related or unrelated businesses. They must then decide whether they want to expand by developing the new business or by buying an ongoing business. Finally, management must decide at what stage in the production process unrelated-diversification wish to diversify. Strategic Planning Failure ; Strategy Strategy ; Strategy Implementation ; Strategy in the Global Environment. Revised by Wendy H. Strategy Role of Strategy Type and Market-Related Dynamism. The Influence of multi Top Management Team. Marlin, Dan, Bruce T. Lamont, and Scott W. Harrison, "Manufacturing-Based Relatedness, Synergy, and Coordination. Encyclopedia Unrelated-diversification of Small Business Encyclopedia of Business Encyclopedia of American Industries Encyclopedia of Management Other Business Plans Trademark Encyclopedia History Business Biographies Company Histories Company Histories Part 2 Leading American Businesses Forum. Thomas Revised by Wendy H. Comment about this article, ask questions, or add new information about this topic: Show my email publicly. Type the code shown: Distribution and Distribution Requirements Planning Diversity.
Diversification, related and unrelated
Diversification, related and unrelated
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He disgracefully and sinfully ordered that the great Byzantine Cathedral of Hagia Sophia which had been constructed 1000 years earlier by the Emperor Justinian, to be converted into a Masjid.