Strategic Management - Strategy Formulation
Types of Diversification - Diversification Strategies
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There are three general types of diversification strategies: concentric horizontal, and conglomerate.
Types of Diversification
There are three general types of diversification strategies: concentric horizontal, and conglomerate.
Under concentric diversification new products and services are added to the line with the condition that these products and services are related to their existing products/services carried by the organization. For concentric diversification it becomes necessary that the products or services that ate added must be within the framework of the know how and experience in technology, product line, distribution channels or customer base of the organization.
When the industry grows, the organization will get strength where concentric diversification becomes an important strategy for its survival and growth. A study of 460 corporations accounting for two/thirds of the US corporate industrial assets concluded, “that diversification that has led to relatively rapid rates of corporate growth has been to markets that are related to the entering organization’s original market. Concentric diversification has been successfully practiced by a large number of organizations in India. For instance “Amul” has diversified in chocolates, Ice creams, Butter, Ghee etc. On the same pattern, “Milk Food” has diversified. Similarly, Honda has diversified into to Motor Cycles, Cars etc. In conclusion, it may be stated that concentric diversification has been quite successful in the past; it is expected to be successful in future also.
Where an organization adds unrelated products and services for existing customers, this is called horizontal diversification. The strategy is comparatively less risky because the customers are known. The organization is fully acquainted with their consumers’ preference and their expectations about the quality and price of the goods and services.
Horizontal diversification can be accomplished by acquiring the shareholding of the competitor, by the purchase of the assets or by pooling of the interests of two organizations. .Horizontal diversification seeks to eliminate competitors.
In our country a T.V. manufacturing company Uptron has created a new division for spreading computer education in the country. It is a combination of hardware and software.
Conglomerate diversification is a growth strategy in which new products and services are added which are significantly different from the organization’s present product and services. Conglomerate diversification is effected in the hope that the addition of new products and services may bring about some turnaround by way of conversion of losses into profits. Mechanics for adopting conglomerate diversification has been summarized as follows:
1. Supporting some divisions with cash flow from other divisions during the period of development or temporary difficulty.
2. Using the profits of one division to cover the expenses of another division without payment of taxes from the first division.
3. Encouraging growth for its own sake or to satisfy the values and ambitions of management or the owners.
4. Taking advantage of unusually attractive growth opportunities.
5. Distributing risk by serving several different markets.
6. Improving overall profitability and flexibility of the organization by moving into industries that have better economic prospects than those of the acquiring organizations.
7. Gaining better access to capital markets and better stability or growth in the earnings.
8. Increasing the price of an origination’s stock
9. Reaping the benefits of synergy. Synergy results from “a conglomerate merger when the combined organization is more profitable than the two organizations operating independently.
The scheme of Conglomerate Diversification should be implemented with caution and patience. It will create big business and will bring in turn, the problems of management associated with big businesses. Big businesses involve greater risk in the event of abnormal economic situation like recession or stagflation. In the light of the above, the success of the conglomerate diversification will depend on the following factors:
1. A clear definition of organizational objectives.
2. A determination of the organization’s ability to diversify, which includes an analysis of its present operations (internal organizational analysis) and resources available for diversification.
3. Establishment of specific criteria for purchasing other organizations
4. A comprehensive search for organizations and their evaluation against the criteria.
Examples of companies that have diversified into related business concentric diversification
Blades and razors
Toiletries (Right Guard, Foamy, Dry Idea, Soft & Dry , White Rain)
Oral-B toothbrushes
Braun shavers, coffeemakers, alarm clocks, mixers, hair dryers, and electric toothbrushes
Duracell batteries.
Baby products (powder, shampoo, oil, lotion)
Band-Aids and other first-aid products
Women’s health and personal care products (Stay free, Carefree, Sure & Natural)
Neutrogena and Aveeno skin care products
Nonprescription drugs (Tylenol, Motrin, pepcid AC, Mylanta, Monistat)
Prescription drugs
Prosthetic
and other medical devices
Surgical and hospital products
Accuvue contact lenses
1. Soft drinks (Pepsi, Diet Pepsi, Pepsi One, Mountain Dew, Mug, Slice)
2. Fruit juices (Tropicana and Dole)
3. Sports drinks (Gatorade)
4. Other beverages (Aquafina bottled water, SoBe, Lipton ready-to-drink tea, Frappucino-in partnership with Starbucks, international sales of 7UP)
5. Snacks foods (Fritos, Lay’s Ruffles, Doritos, Tostitos, Santitas, Smart Food, Rold Gold pretzels, Chee-tos, Grandma’s cookies, Sun Chips, Cracker jack, Frito-Lay dips and salsas)
6. Cereals, rice, and breakfast products (Quaker oatmeal, Cap’n Crunch, Life, Rice-A-Roni, Quaker rice cakes, Aunt Jemina mixes and syrups, Quaker grits)
Examples of companies that have diversified into unrelated business.
Theme parks
Disney Cruise Line
Resort properties
Move, video, and theatrical productions (for both children and adults)
Television broadcasting (ABC, Disney Channel, Toon Disney, Classic Sports, Network, EPSN and EPSN2, E!, Lifetime, and A&E networks)
Radio broadcasting (Disney Radio)
Musical recordings and sales of animation art
Anaheim Angles major league baseball franchise (25 percent ownership)
Books and magazine publishing
Interactive software and Internet sites
The Disney Store retail shops.
Auto & auto parts
Coach body building
Transport
Fasteners
Brake linings & clutch facings
A citation systems for commercial vehicles
Hire purchase
Wheel structure & parts
Foundation brakes
Two wheelers
Automobile electrical parts
Tyres & tubes.
There are three general types of diversification strategies: concentric horizontal, and conglomerate.
Concentric Diversification
Under concentric diversification new products and services are added to the line with the condition that these products and services are related to their existing products/services carried by the organization. For concentric diversification it becomes necessary that the products or services that ate added must be within the framework of the know how and experience in technology, product line, distribution channels or customer base of the organization.
When the industry grows, the organization will get strength where concentric diversification becomes an important strategy for its survival and growth. A study of 460 corporations accounting for two/thirds of the US corporate industrial assets concluded, “that diversification that has led to relatively rapid rates of corporate growth has been to markets that are related to the entering organization’s original market. Concentric diversification has been successfully practiced by a large number of organizations in India. For instance “Amul” has diversified in chocolates, Ice creams, Butter, Ghee etc. On the same pattern, “Milk Food” has diversified. Similarly, Honda has diversified into to Motor Cycles, Cars etc. In conclusion, it may be stated that concentric diversification has been quite successful in the past; it is expected to be successful in future also.
Horizontal Diversification
Where an organization adds unrelated products and services for existing customers, this is called horizontal diversification. The strategy is comparatively less risky because the customers are known. The organization is fully acquainted with their consumers’ preference and their expectations about the quality and price of the goods and services.
Horizontal diversification can be accomplished by acquiring the shareholding of the competitor, by the purchase of the assets or by pooling of the interests of two organizations. .Horizontal diversification seeks to eliminate competitors.
In our country a T.V. manufacturing company Uptron has created a new division for spreading computer education in the country. It is a combination of hardware and software.
Conglomerate Diversification
Conglomerate diversification is a growth strategy in which new products and services are added which are significantly different from the organization’s present product and services. Conglomerate diversification is effected in the hope that the addition of new products and services may bring about some turnaround by way of conversion of losses into profits. Mechanics for adopting conglomerate diversification has been summarized as follows:
1. Supporting some divisions with cash flow from other divisions during the period of development or temporary difficulty.
2. Using the profits of one division to cover the expenses of another division without payment of taxes from the first division.
3. Encouraging growth for its own sake or to satisfy the values and ambitions of management or the owners.
4. Taking advantage of unusually attractive growth opportunities.
5. Distributing risk by serving several different markets.
6. Improving overall profitability and flexibility of the organization by moving into industries that have better economic prospects than those of the acquiring organizations.
7. Gaining better access to capital markets and better stability or growth in the earnings.
8. Increasing the price of an origination’s stock
9. Reaping the benefits of synergy. Synergy results from “a conglomerate merger when the combined organization is more profitable than the two organizations operating independently.
The scheme of Conglomerate Diversification should be implemented with caution and patience. It will create big business and will bring in turn, the problems of management associated with big businesses. Big businesses involve greater risk in the event of abnormal economic situation like recession or stagflation. In the light of the above, the success of the conglomerate diversification will depend on the following factors:
1. A clear definition of organizational objectives.
2. A determination of the organization’s ability to diversify, which includes an analysis of its present operations (internal organizational analysis) and resources available for diversification.
3. Establishment of specific criteria for purchasing other organizations
4. A comprehensive search for organizations and their evaluation against the criteria.
Examples of companies that have diversified into related business concentric diversification
GILLETTE
Blades and razors
Toiletries (Right Guard, Foamy, Dry Idea, Soft & Dry , White Rain)
Oral-B toothbrushes
Braun shavers, coffeemakers, alarm clocks, mixers, hair dryers, and electric toothbrushes
Duracell batteries.
JOHNSON & JOHNSON
Baby products (powder, shampoo, oil, lotion)
Band-Aids and other first-aid products
Women’s health and personal care products (Stay free, Carefree, Sure & Natural)
Neutrogena and Aveeno skin care products
Nonprescription drugs (Tylenol, Motrin, pepcid AC, Mylanta, Monistat)
Prescription drugs
Surgical and hospital products
Accuvue contact lenses
PEPSICO
1. Soft drinks (Pepsi, Diet Pepsi, Pepsi One, Mountain Dew, Mug, Slice)
2. Fruit juices (Tropicana and Dole)
3. Sports drinks (Gatorade)
4. Other beverages (Aquafina bottled water, SoBe, Lipton ready-to-drink tea, Frappucino-in partnership with Starbucks, international sales of 7UP)
5. Snacks foods (Fritos, Lay’s Ruffles, Doritos, Tostitos, Santitas, Smart Food, Rold Gold pretzels, Chee-tos, Grandma’s cookies, Sun Chips, Cracker jack, Frito-Lay dips and salsas)
6. Cereals, rice, and breakfast products (Quaker oatmeal, Cap’n Crunch, Life, Rice-A-Roni, Quaker rice cakes, Aunt Jemina mixes and syrups, Quaker grits)
Examples of companies that have diversified into unrelated business.
THE WALT DISNEY COMPANY
Theme parks
Disney Cruise Line
Resort properties
Move, video, and theatrical productions (for both children and adults)
Television broadcasting (ABC, Disney Channel, Toon Disney, Classic Sports, Network, EPSN and EPSN2, E!, Lifetime, and A&E networks)
Radio broadcasting (Disney Radio)
Musical recordings and sales of animation art
Anaheim Angles major league baseball franchise (25 percent ownership)
Books and magazine publishing
Interactive software and Internet sites
The Disney Store retail shops.
THE TVS GROUP
Auto & auto parts
Coach body building
Transport
Fasteners
Brake linings & clutch facings
A citation systems for commercial vehicles
Hire purchase
Wheel structure & parts
Foundation brakes
Two wheelers
Automobile electrical parts
Tyres & tubes.
Tags : Strategic Management - Strategy Formulation
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