As a grand strategy, diversification usually has risk reduction as its purpose. A company involved in a number of businesses avoids having all its eggs in one basket. Ideally, when some of a conglomerate firm’s businesses decline, others will be on the increase. Some conglomerate firms are counter-cyclical; that is, they tend to see increasing sales when the economy in general is dec1ining. Such businesses are hard to find. The do-it-yourself hand-tool market is one of the rare exceptions. When times are tough, people tend to repair their own automobiles, for example; and they need tools to do so.
There are three general types of diversification strategies: concentric, horizontal, and conglomerate. Overall, diversification strategies are becoming less and less popular as organisations are finding it more and more difficult to manage diverse business activities. In die 1960s and 1970s, the trend was to diversify so as not to be dependent on any single industry, but the 1980s saw a general reversal of that thinking. Diversification is now on the retreat. Michael Porter of the Harvard Business School says, “Management found they couldn’t manage the beast.” Hence, businesses are selling, or closing, less profitable divisions in order to focus on core businesses. Peters and Waterman’s advice to firms is to “stick to the knitting” and not to stray too far firm the firm’s basic areas of competence. However, diversification is still an appropriate and successful strategy sometime.
- Concentric Diversification: Adding new, but related, products or services is widely called concentric diversification. An example of this strategy is the Prudential Insurance acquisition of Merrill Lynch’s residential real estate sales and relocation businesses for more than $300 million. A large insurance company, Prudential desires to become a dominant player in the residential brokerage industry. This acquisition adds 450 offices and 18,000 salespeople to Prudential’s ranks.
- Horizontal Diversification: Adding new, unrelated products or services for present customers is called horizontal diversification. This strategy is not as risky as conglomerate diversification, because a firm should already be familiar with its present customers.
- Conglomerate Diversification: Adding new, unrelated products or services is called conglomerate diversification. Some firms pursue conglomerate diversification based in part on an expectation of profits from breaking up acquired firms and selling divisions piecemeal.
About the best a conglomerate firm can hope for, in general, is a group of SBUs whose valleys and peaks occur at different times in the business cycle. Of course, concentric diversification may not appear to serve the risk reduction objective as well as conglomerate diversification does; however, this type of diversification tends to be more successful in improving profitability. This is probably because the managers of concentrically diversifying firms know something about the businesses they are buying. Diversification often occurs as a by-product of bargain hunting by corporate strategists. Even if the preference is for a related merger candidate, corporate-level strategists may opt for acquiring an SBU in an entirely different business because it is deemed to be greatly under priced. Diversification can also be a product of a desire for growth.
Market Penetration: The purpose of this strategy is to increase sales of product in an existing market through the use of more aggressive marketing tactics, especially pricing. This strategy is available in the following cases:
- When current markets are not saturated with your particular product or service;
- When the usage of present customers could be significantly increased;
- When the market shares of major competitors have been declining while total industry sales have been increasing;
- When the correction between dollar sales and dollar marketing expenditures has historically;
- When increased economy of scale provide major competitive advantages ;
Market Development: It consists on identifying and developing new markets for existing products. This strategy is available in the following cases:
- When new channels of distribution are available that reliable inexpensive and of good quality;
- When an organization is very successful at what it does;
- When an organization has the needed capital and human resources to manage expanded operation;
- When an organization basic industry is rapidly becoming global in scope ;
Product Development: It consists on radical modifications of existing product or the creation of new ones with new characteristics that satisfy newly defined needs. This strategy is available in the following cases:
- When an organization has successful products that are in the maturity stage of the product life cycle.
- When major organization competes in a industry that is characterized by rapid technological development
- When an organization competes in a high-growth industry
Credit: Advanced Strategic Management-MGU
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