Chapter 7 Diversification

Diversification

Adding new businesses to the firm that are distinct from its existing operations.

Types of Diversification (2)

1. Product Diversification

2. Geographic Diversification

Approaches to Product Diversification

1. Internal development

2. Acquisition

3. Joint venture

Corporate venturing

Internal Development

An approach to product diversification that involves starting a new business subsidiary.

Acquisition

An approach to product diversification that makes sense when the entry barrier is high or speed is important; may be high cost.

Joint Venture

An approach to product diversification that may be less expensive than acquisition, but still invovles significant time and costs.

Corporate Venture

An approach to product diversification in which a company directly invests corporate funds in external startup companies.

Types of Product Diversification (4)

1. Single-business firm

2. Dominant-business firm

3. Related-diversfication

4. Unrelated diversification

Single-business Firm

All (or virtually 100 percent) of the revenues from one business.

Dominant-business Firm

The vast majority of the revenues from one business.

Related-diversification

Significant renvues from other businesses linked to the primary business activity.

Unerelated Diversfication

There are few linkages among businesses.

Rational Behind Related Diversification (2)

1. Economies of scale

2. Economies of scope

Economies of Scale

Cost savings that accrue directly from a larger-sized operation

Economies of Scope

Cost reductions that flow from sharing resources in multiple businesses.

3 Tests That a Diversification Move Must Pass

1. The industry attractivenss test

2. The cost entry test

3. The better-off test

Measures of Industry Attractiveness (5)

1. Market size and growth

2. Emerging SWOT

3. Industry profitability

4. Competitive intensity

5. Cross-business fits

Measures of Competitive Strengths (5)

1. Firm's market share

2. Profitability

3. Competitive ability

4. Brand image and reputation

5. Resources and capabilities

Nine-Cell Matrix

Protrays the strategic positions of each business in a diversified company.

Restructing

Adjustments to firm size and scope through either diversifcation, divestiture, or both

Downsizing

Reducing the number of employees through layoffs, early retirements, and outsourcing.

Downscoping

Reducing the scope of the firm through divestitures and spin-offs.

BCG Growth Matix