Reference no: EM132196305
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DIVERSIFICATION STRATEGIES:
The reason for crafting diversification strategies on a corporate level are based on three facts:
Picking new industries to enter and deciding the means of entry
Pursuing opportunities to leverage cross-business value chain relationships, where there is a strategic fit, into a competitive advantage
Initiating actions to boost the combined performance of the corporation’s collection of businesses.
The primary reasons for businesses to pursue a diversification strategy is often due to the stagnation in the growth of their business offerings for matured industries. Diversifying into new industries will allow the single-businesses company to navigate away from diminishing market opportunities and stagnating sales of its principal business thus creating a new business as a strategy.
APPROACHES OF DIVERSIFICATION
The means of entering new businesses take on any of the three forms:
1) Acquisition
Diversifying by the acquisition of an existing business:
The acquisition is one of the most popular means of diversifying into another industry. It is quicker method than launching a new operation and also serves as an effective way to surpass entry barriers such as technological know-how, establishing supplier relationships, achieving scale economies, building brand awareness and securing adequate distributions.
2) Internal Start-up
Entering a new line of business through internal development:
Achieving diversification through internal development is the process of starting a new subsidiary from scratch. Although the initial processes to internal development can be time-consuming, the final outcome of this diversification form allows businesses to avoid the issues faced in acquisition processes and offers businesses with a viable solution when there are no good enough acquisition candidates.
3) Joint ventures with other companies.
Using Joint venture to achieve diversification
Entering a new business through a joint venture is useful in 3 types of situations
A joint venture is a good vehicle for pursuing an opportunity that is too complex, uneconomical, or risky for one company to pursue alone.
Joint ventures make sense when opportunities in a new industry require a broader range of competencies and know-how than a company can marshal on its own
Joint ventures are used to diversify into a new industry when the diversification move entails having operations in a foreign country
1) Related diversification
Related diversification
A related diversification strategy involves building the company around businesses where there is a good cross-business strategic fit across corresponding value chain activities.
Reasons for related diversification:
2) Unrelated diversification.
Unrelated diversification
An unrelated diversification strategy is the willingness to diversify into any business in any industry where senior managers see an opportunity to realize consistently good financial results. With a strategy of unrelated diversification, the acquisition is seen to have the most potential if it passes the industry-attractiveness and cost of entry tests and has room for attractive financial performances.
3. Combination Related-unrelated diversification
Combination Related-unrelated diversification
In actual practices, many business makeups of diversified companies vary considerably. Some diversified companies are dominant enterprises which have one core business account and the remainder accounts are made up of multiple related and unrelated business accounts.