DIVERSIFICATION

N. Harin Jeba Lydia

What is diversification? Diversification is a corporate

strategy to increase sales volume from new products and new markets.

Diversification can be expanding into a new segment of an industry that the business is already in, or investing in a promising business outside of the scope of the existing business.

Diversification is part of four main growth strategies

Diversification stands apart from the other three strategies.

Market penetration, product development and market development strategies are usually pursued with the same technical, financial, and merchandising resources used for the original product line.

Diversification usually requires a company to acquire new skills, new techniques and new facilities.

Why Diversification?

The two principal objectives of diversification are

improving core process execution, and/or

enhancing a business unit's structural position.

DIVERSIFICATION IN THE CONTEXT OF GROWTH STRATEGIES

Diversification is a form of growth strategy

Growth strategy involves increase in performance objectives

One of the primary reasons is the view held by many investors and executives that "bigger is better.“

TYPES OF DIVERSIFICATIONConcentric diversificationConglomerate diversificationInternal diversification.External diversification.

CONCENTRIC DIVERSIFICATIONWhen an organization takes up an activity

in such a manner that it is related to the existing business definition of one or more of a firm’s businesses.

There are three types of concentric diversification:

Marketing-related Technology-related Marketing and technology-related

MARKET-RELATED CONCENTRIC DIVERSIFICATION:

When a similar type of product is offered with the help of unrelated technology

TECHNOLOGY-RELATED: when a new type of product or service is

provided with the help of related technology

MARKET AND TECHNOLOGY RELATED: When a similar type of product is

provided with help of related technology.

CONGLOMERATE DIVERSIFICATIONWhen an organization adopts a

strategy which requires taking up those activities which are unrelated to the existing business definition

Examples: ITC- a cigarette company diversifying

into the hotel industryShriram Fibers Ltd (nylon industrial

yarn, synthetic fabrics, fluorochemicals, fluorocarbon refrigerators, etc)

INTERNAL DIVERSIFICATIONOne 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.

Another form of internal diversification is to market new products in existing markets.

EXTERNAL DIVERSIFICATIONExternal 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.

Acquisitions, a second form of external growth, occur when the purchased corporation loses its identity

Reasons for adopting diversification strategiesTo minimize riskTo capitalize on organizational

strengthWhen diversification is the only

way out if growth in existing businesses is blocked due to environmental and regulatory factors.