DIVERSIFICATION - STRATEGIES FOR MANAGING A BUSINESS

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1 64 DIVERSIFICATION - STRATEGIES FOR MANAGING A BUSINESS ABSTRACT P. KANNAN*; DR. R.SARAVANAN** *Head, Department of Management Studies, N.P.R. College of Engineering & Technology, Natham. *Research Scholar, Anna University of Technology Coimbatore, Coimbatore, Tamil Nadu, India. **Director, School of Management, Sri Krishna College of Technology, Kovaipudur, Coimbatore , Tamil Nadu, India. When thinking about building a diversified portfolio, remember the old adage, Don t put all your eggs in one basket. is not only about the number of investments in your portfolio, it s also about the relationships among those investments. becomes an attractive strategy when a company runs out of profitable growth opportunities in its core business. In a diversified company the strategy making challenge involves assessing multiple industry environments and coming up with a set of business strategies, in which it operates. Multinational diversification strategies feature a diversity of business and a diversity of national markets. Despite the complexity of having to devise and manage so many strategies, these strategies have considerable appeal and more competitive potential. The study focuses on the manner in which diversification strategy is applied for different sectors like IT, FMCG etc. It deals with the core concept of diversification strategy to succeed by companies. KEYWORDS: Investments, Related, Strategy, Unrelated. INTRODUCTION is a form of growth marketing strategy for a company. It seeks to increase profitability through greater sales volume obtained from new products and new markets. A diversification strategy stands apart from the other three strategies such as merger and acquisition, internal start up, Joint Venture. These are usually pursued with the same technical, financial, and merchandise resources used for the original product line, whereas diversification strategy usually requires a company to acquire new skills, new techniques and new facilities. Therefore, diversification is meant to be the riskiest of other strategies to pursue. Whenever a single business companies faced with diminishing market opportunities and stagnating sales in its principal business, it is the indication for diversification. And a Management quote about diversification is given by Andrew Campbell as below,

2 65 Fit between a parent and its business is a two edged sword; a good fit can create value and a bad one can destroy it. WHEN TO DIVERSIFY KEY FACTORS Whenever a single business companies faced with diminishing market opportunities and stagnating sales in its principal business, it is the signal for diversification. The other key factors are, a) When it has a powerful and well-known brand name that can be transferred to the product of other business. b) When diversifying into closely related business opens new avenue for reducing costs. c) When it can expand into industries whose technologies and products complement its present business? Judgments about the timing of a company s diversification effort are best made instance by instance, according to company s own unique situation. CORE CONCEPT PATH Once the decision is made to pursue diversification, the firm must choose whether to diversify into related business, unrelated business. Businesses are said to be related when their value chains possess competitively valuable cross business value chain matchups. Business are said to be unrelated when the activities comprising their respective value chains are so dissimilar that no competitively valuable cross business relationship are present. Most companies favor related diversification strategies because of the performance enhancing potential of cross business synergies. However, some companies opted to try to build shareholder value with unrelated diversification strategies. CASES FOR DIVERSIFYING INTO RELATED BUSINESS To present opportunity for the following, a) Combining the related activities of separate businesses into a single operation to achieve lower costs. b) Transferring valuable expertise, technology, marketing capabilities, managerial knowledge etc., c) Exploiting common use of a well known brand name. d) To create valuable resource strength and capabilities.

3 66 RELATED DIVERSIFICATION BUSINESS ACTIVITIES Related diversification thus has a strategic appeal from several angles. It allows a firm to reap the competitive advantage benefits of skills transfer, lower cost, common brand names, and stronger competitive capabilities over a broad business phase. It also provides sharper focus for managing diversification and a useful degree of strategic unity across the company s various business activities. COMPANIES THAT HAVE DIVERSIFIED INTO RELATED BUSINESS Samples of companies that have pursued a strategy of related diversification are illustrated below. TABLE 1 COMPANY IN RELATED DIVERSIFICATION JOHNSON & JOHNSON PEPSICO Baby products First aid products Medical devices Surgical & Hospital products Contact lenses Personal Care products GILLETTE Blades and Razors Tooth Brush (Oral B) Toiletries products Hair dryers, Shavers. Soft drinks Fruit juices (Tropicana) Other beverages (Aquafina bottled water etc.,) Sports drinks (Gatorade) Snack foods (Lays, Chee tos etc.,) Breakfast products Hair care products PROCTER & GAMBLE Household cleaning/care Beauty care products Laundry products

4 67 FIGURE 1 REPRESENTING VALUE CHAIN ACTIVITIES SUPPORT ACTIVITIES A Supply chain Techno logy operati ons Sales & marketing Distrib ution Customer services COMPETITIVE VALUE CHAINS OF A (BUSINESS A) AND B (BUSINESS B) B Supply chain Techno logy Operati ons Sales & marketing Distrib ution Customer services SUPPORT ACTIVITIES Table 1 it is inferred that the factors the companies adopted while going for related diversification. From the above samples, the Core areas that the companies pursue as under: Transfer of technology, Marketing Capabilities, Managerial Knowledge Shared Skills and Competencies Exploitation of by Products Reduction in unit cost Reduces risks

5 68 CASES FOR DIVERSIFYING INTO UNRELATED BUSINESSES Companies that pursue a strategy of unrelated diversification generally exhibit a willingness to diversify into any industry where there is potential market for a company to realize consistently good financial results. CRITERIA TO KEEP OR DIVEST EXISTING BUSINESS a. Whether the business can meet corporate targets for profitability and return on investment b. Whether the business will require substantial infusions of capital to replace out-of-date plants and equipment, fund expansion etc., c. Whether the business is in an industry with significant potential growth d. Whether the business is big enough to contribute significantly to the parent firm s bottom line UNRELATED BUSINESS ACTIVITIES FIGURE 2 REPRESENTATIVE VALUE CHAIN ACTIVITIES SUPPORT ACTIVITIES A Product R & D Production Advt & Promotion Dealers ABSENCE OF COMPETITIVE VALUE CHAINS OF A (BUSINESS A) AND B (BUSINESS B) B Supply chain Assembly Distribution Customer services SUPPORT ACTIVITIES

6 69 From the below illustration of unrelated business activities says that, A strategy of unrelated diversification involves no deliberate effort to seek out businesses having strategic fit with the firm s other business. COMPANIES THAT HAVE DIVERSIFIED INTO UNRELATED BUSINESS A sample of companies that have pursued a strategy of unrelated diversification are illustrated below. TABLE 2 COMPANY IN UNRELATED DIVERSIFICATION WIPRO Electrical appliances Information technology Computer accessories Toilet soap (santoor) GE medical system Baby care products TATA GROUPS Home appliances Financial services Watches Telecom services Information technology Tea products LG Mobile Phones Television, Radio Projectors Home appliances Lamps Note books RELIANCE Telecom services Power Petro chemical products Mobile phones Construction Textiles Mutual funds, money

7 70 From the above table it is depicts that the following are the merits of Unrelated diversification strategy for the above companies: Superior skills of top management people Business risks is scattered over a set of diverse industries. Company s financial resources can be employed to maximum advantage investing in industries offers the best profit prospects. Building share-holder value Increasing Profitability by exploiting general organization competencies DISCUSSION & FINDINGS From the above analysis of both diversification strategies the below are the findings Why is related diversification only marginally profitable than unrelated? How can diversification dissipate rather than create value? Michael Porter s research (1) suggests that average related company is at best only marginally more profitable than the average unrelated company. He found that most of the companies had divested many more diversified acquisitions than they had kept. He and its team have concluded that the corporate diversifications strategies pursued by most companies can dissipate value rather than creating it. Accomplishments of unrelated diversification business are, Cutting unrelated cost Concentrating on core areas Seeking external markets

8 71 KEY BARRIERS OF UNRELATED DIVERSIFICATION Lack of Skills Planning controls Barriers for Unrelated Capacity to develop a business case Specialist business advisor Regulatory controls WHY RELATED DIVERSIFICATION MOSTLY PREFERRED BY THE COMPANIES? Boost profitability in numerous ways Involved fewer risks Top management has related knowledge about parent business KEY BARRIERS OF RELATED DIVERSIFICATION Access to finance Skilled Personnel Regulatory controls Barriers for Related Planning controls Validity of Marketing Research

9 72 RESULTS Strategies Characteristics Growth Profit Risk Related Unrelated Operates in a few related industries Operates in many unrelated industries Low High Low High Low Medium DIVERSIFICATION STRATEGY MATRIX Growth High Low High Mixed Related Profit Low Unrelated Divestment INFERENCE When companies mainly focusing on profit, they can prefer unrelated or mixed diversification strategy. When companies mainly focusing on growth, they can prefer related diversification or mixed diversification strategy. When the company s growth and profit are at low, suggest that they can go for disinvestment the business operations. CONCLUSION It is very tempting for a business leader to diversify with related or unrelated business activities carried out in a company. But it must be understood that it is a very complex task. Hence any such move must be planned & executed with great care. And diversification strategy matrix is given above for the business leader to help in choosing the strategy for diversifying the business activities.

10 73 REFERENCES (1) Charles W.L.Hill and Gareth R. Jones on Strategic Management, Volume- 06, Biztantra Publication. (2) Arthur.A. Thompson, A. J. Strickland, John. E. Gamble on Crafting and Execution Strategy, vol.14, Tata McGraw-Hill Publication. (3) George Stone House, David Campbell, Jim Hamill, Tony Purdie on Global and Transnational Business, 2 nd Edition, Wiley Publication. (4) Sukul Lomash abd P K Mishra on Business Policy and Strategic Management 3 rd Edition, Vikas Publication. WEBSITES Company websites for the following: i. Johnson & Johnson ii. iii. iv. Gillette Protector & Gamble PepsiCo v. Tata Groups vi. vii. viii. Reliance Wipro LG