Note on Diversification

as a strategy
Traditional Meaning: Product diversification
Current: Extent cover by measure of relatedness
Performance of Diversified Companies

 Fin
: strategy of unrelated diversification 
Not led to increase corporate funds
 Defense : Helped increased profitability

 Rumelt, Dominant Business underperformed

 Highercorporate growth rates, low capital

productivity
Components

 Corporate Goals
 Concept of fit among businesses
 Concept of assembly
 Concept of corporate management of BU
 Generic Functional Policies
Value creation and strategic fit

 Income stream greater than portfolio of 2

companies
 Reduction in variability of income stream greater
than from 2 businesses.
 Diversifying acquisitions can raise productivity of
capital
 Investment markets closely related to current
fields of operations reduce cost in long runs
Value creation and strategic fit

 Business expansion in area of competence can

lead to generation of critical mass of resources
necessary – OUTPERFORM COMPETITION
 Diversification into related products enable
company to reduce systematic risks
 Risk Pooling
Buni