Diversification as a

Strategy
By
17PGP001 Abhinav Chauhan
17PGP076 Megha Kanapala
17PGP077 Mojahid Rahim
17PGP080 Nabyendu Saha
17PGP088 Nilanshu Raj
17PGP096 Pankaj Kumar
Sharma
Diversification

Corporate strategy to enter into a new market or industry in

which the business doesn't currently operate, while also creating
a new product for that new market

Three categories of diversified companies

Dominant Business Companies
70-95% of sales from single business or vertically
integrated chain of businesses
GM, IBM, Texaco, Scott Paper
Related Business Companies
Unrelated Business Companies
Diversified by adding activities related to collective skills,
Diversified without relating new business to the old
strengths of the company
Litton, LTV, Rockwell, Olin, Textron
DuPont, Eastman Kodak, GE, Gen. Foods
Performance of Diversified
Company
• Dominant Business Companies under-performed
• Unrelated Business Companies showed significantly higher
growth rate but a lower level of capital productivity
• Related business Companies outperformed the average on all
five measures
• Mutual funds provided a more efficient diversifications as well
as a better risk/return trade-offs than unrelated corporate
diversifiers
• Diversification, bith related and unrelated, can be rewarding
but needs execution with the utmost care
Concept of Strategy in Diversified Company

Concept of Fit Among Concept of Corporate

Businesses Management of Business Unit

Corporate Goals

Concept of Assembly of
Generic Function Policies
the Portfolio
Component of Strategy for a Diversified
Company
Corporate Goals Corporate level analog of the goals for the single business company

Concept of Fit Among Company’s concept of how the individual business units relate to one another in a technological,
Businesses product or other senses

Company’s concept of actually finding and acquiring business units to be added to the corporate
Concept for Assembly
portfolio

Concept of Corporate It defines the respective roles that the corporate management and the business unit management
Management in will take and how corporate management will measure and reward business unit managers in
Business Units fulfilling their roles

Generic Function
Corporate-wide philosophies or approaches to managing certain functional areas of the business
Policies
 Relationship among distinct businesses in
the portfolio. Fit can take a variety of
different forms and lead to a variety of
economic benefits

Can be described in terms of a portfolio,

generic functional skills, complementary
Strategic Fit strategic assets, shared strategic logics, and
compatible management styles

Fit must reflect a concept of how to create

real economic value for shareholders
 Diversification can create Value when the
combinations of skills and resources satisfy at
least one of the following

Value from An income stream greater than what could

be realized from a portfolio investment in the
Diversification two companies

A reduction in the variability of the income

stream greater than that could be realized
from a portfolio investment in the two
businesses
 When the particular skills and one
merger partner’s knowledge of the
industry are applied to the competitive
problems and opportunities facing the
other partner

Investments in markets closely related to

current fields of operation can reduce
7 Principal long-run average costs

ways to Business expansion in an area of

create Value competence can lead to the generation of
a “critical mass” of resources necessary to
outperform the competition

Diversification into related product

markets can enable a company to reduce
systematic risks
 Can route cash from units operating
with a surplus to units operating with
a deficit and thus reduce the need to
purchase working capital funds from
outside

7 Principal Can direct its currently high net cash

flow businesses to transfer investment

ways to funds to the businesses in which net

cash flow is zero or negative but where
management expects positive cash flow
create Value to develop

Through Risk Pooling, the diversified

company can lower its cost of debt and
leverage itself more than its non
diversified equivalent. The company’s
total cost of capital thereby goes down