An alternative form of that Avon has also undertaken is selling its products by mail order e. In both cases, Avon is still at the retail stage of the production process. A clear definition of organizational objectives. This not only requires the acquisition of new skills and knowledge, but also requires the company to acquire new resources including new technologies and new facilities, which exposes the organisation to higher levels of risk. Have a Coupon Code? Selecting Business-Level Strategies 5.
Diversification strategies are used to extend the company’s product lines and operate in several different markets. The general strategies include concentric, horizontal and conglomerate diversification.
8.4 Diversification Strategies
The basic idea is to expand into a business activity that doesn't negatively react to the same economic downturns as your current business activity. If one of your business enterprises is taking a hit in the market, one of your other business enterprises will help offset the losses and keep the company viable.
A business may also use diversification as a growth strategy. There are different diversification strategies a company may employ. We'll take a look at some of the primary strategies. Our first strategy is concentric diversification.
A company may decide to diversify its activities by expanding into markets or products that are related to its current business. For example, an auto company may diversify by adding a new car model or by expanding into a related market like trucks. An advantage to this approach is the synergy that can be created due to the complementary products and markets. Additionally, expansion can be relatively easy because the skills and knowledge to run the new business are similar to those the company already possesses.
Another strategy is conglomerate diversification. If a company is expanding into industries that are unrelated to its current business, then it's engaging in conglomerate diversification. For example, the car company we've been discussing may decide to enter the computer business, the toothpaste business, the real estate business, and the furniture business.
Conglomerate diversification is a good means to manage risk as long as you can effectively manage each business, which leads us to the disadvantage. Management may not have the skills or experience to manage the new enterprises. While you can hire new management, there will still be administrative problems with running different types of businesses, such as competition between the different businesses for resources. Get access risk-free for 30 days, just create an account.
Businesses may also engage in vertical integration. This is when a company diversifies by purchasing or starting businesses that supply its original businesses with raw materials, equipment, parts, and services. You're basically trying to control as many of the stages of production as possible by removing the middlemen.
For example, our auto company may decide to purchase a tire company and various auto parts companies so that it controls all of its supply chain. A big disadvantage of vertical integration is the extreme risk.
If car sales plummet, the demand for auto parts will plummet, as well. Finally, we have horizontal diversification. Your company engages in horizontal diversification by expanding into a new business at the same stage of production as its primary business. The new business may be related or not.
For example, if you are an electronics retailer, you may purchase a retail store specializing in clothing or a grocery store. Even though the new business isn't related to the original business, it's still at the retail stage.
A business diversifies by expanding into a new product or market. Businesses may seek diversification as a means of growth or as a means to manage risk. Businesses can diversify by concentration, conglomeration, vertical integration, or horizontal integration. To unlock this lesson you must be a Study.
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By creating an account, you agree to Study. Explore over 4, video courses. Find a degree that fits your goals. What Is Diversification of Business? In this lesson, you'll learn about business diversification, different diversification strategies, and be provided some examples.
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What teachers are saying about Study. What Is a Market Segment? Are you still watching? Your next lesson will play in 10 seconds. Add to Add to Add to. Want to watch this again later? What is Growth Strategy? What is Vertical Integration? What Are Mergers and Acquisitions? Product Development and Business Growth: Different Types of Business Strategies. Intro to Public Relations. Companies sometimes diversify their business activities to manage risk or expand into new markets. Strategies for Diversification There are different diversification strategies a company may employ.
Try it risk-free No obligation, cancel anytime. Want to learn more? Select a subject to preview related courses: Lesson Summary A business diversifies by expanding into a new product or market. Learning Outcomes When you have finished this lesson on business diversification, you could be prepared to: Express knowledge of diversification, including its purpose Understand why a business might choose to diversify Discuss the four ways in which businesses can diversify.
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Browse Articles By Category Browse an area of study or degree level. How to Become an ER Doctor: You are viewing lesson Lesson 9 in chapter 6 of the course:. While Duryea was confident that a cross-promotional strategy between his advertising division and the other units within the Globodyne universe was a slam-dunk, Waterman employee Dan Foreman saw little congruence between advertisements in Sports America on the one hand and cell phones and breakfast cereals on the other.
Seeing little value in owning a failing publishing company, Globodyne promptly sold the division to another conglomerate. After the sale, the executives that had been rewarded for the initial purchase of Waterman Publishing, including Duryea, were fired. From competitive advantage to corporate strategy. Harvard Business Review , 65 3 , — The core competencies of the corporation.
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Learning Objectives Explain the concept of diversification. Be able to apply the three tests for diversification. Distinguish related and unrelated diversification. Three Tests for Diversification A proposed diversification move should pass three tests or it should be rejected Porter, How attractive is the industry that a firm is considering entering?
Unless the industry has strong profit potential, entering it may be very risky. How much will it cost to enter the industry?
Executives need to be sure that their firm can recoup the expenses that it absorbs in order to diversify. When Philip Morris bought 7Up in the late s, it paid four times what 7Up was actually worth. Making up these costs proved to be impossible and 7Up was sold in Will the new unit and the firm be better off? Unless one side or the other gains a competitive advantage, diversification should be avoided.
In the case of Philip Morris and 7Up, for example, neither side benefited significantly from joining together. Unrelated Diversification Table 8. They maintain capital strength at exceptionally high levels, which gives them an advantage even a cave man could understand. Their apparel businesses include well-known names such as Fruit of the Loom and Justin Brands.
Retail holdings include a number of furniture businesses such as R. Key Takeaway Diversification strategies involve firmly stepping beyond its existing industries and entering a new value chain. What role, if any, do you think executive pay plays in diversification decisions?
Identify a firm that has recently engaged in diversification. Do you find the reasoning to be convincing? Why or why not? Art and Science 1. Evaluating the External Environment 3. Managing Firm Resources 4. Other Views on Firm Performance 4. Selecting Business-Level Strategies 5. Supporting the Business-Level Strategy: Competitive and Cooperative Moves 6. Competing in International Markets 7. Selecting Corporate-Level Strategies 8.
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Diversification strategy take place, when business introduce a new product in the market. Diversification Strategy Definition | Types of Diversification Strategies. May 1, by zkjadoon. Discuss the Strategic Management Process in Detail Managerial Decision Making and Its Process Explain Classical Management Theory in Detail. Another strategy is conglomerate diversification. If a company is expanding into industries that are unrelated to its current business, then it's engaging in conglomerate diversification. For example, the car company we've been discussing may decide to enter the computer business, the toothpaste business, the real estate business, and the furniture business. Strategic Management - Diversification strategies - Notes - Business Management, Study notes for Business Administration. Conglomerate diversification Better management and high ROI. Reducing risk by spreading business. Diversification Strategies-Strategic Management-Lecture Handout.