business strategic assignment

7/30/2019 Business Strategic Assignment

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Business Strategic Assignment

Additional assignment on

Growth throughDiversification

Submitted to Submitted by:

Prof. G. Jaswal Atul Sharma

(501104006)


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Growth Through Diversification

Diversification strategies are used to expand firms' operations by adding markets, products,

services, or stages of production to the existing business. The purpose of diversification is to

allow the company to enter lines of business that are different from current operations. When

the new venture is strategically related to the existing lines of business, it is called concentric

diversification. Conglomerate diversification occurs when there is no common thread of

strategic fit or relationship between the new and old lines of business; the new and old

businesses are unrelated.

Why Diversification?

The two principal objectives of diversification are1.improving core process execution, and/or

2.enhancing a business unit's structural position.The fundamental role of diversification is for corporate managersto create value for stockholders in ways stockholders cannot do

better for themselves1. The additional value is created through synergetic integration of anew business into the existing one thereby increasing its competitive advantage.

Forms and Means of Diversification

Diversification typically takes one of three forms:

1.Vertical integrationalong yourvalue chain2.Horizontal diversificationmoving into new industry

3.Geographical diversificationopen up new marketsMeans of achieving diversification include internal development,acquisitions, strategicalliances, and joint ventures. As each route has its own set of issues, benefits, andlimitations, various forms and means of diversification can be mixed and matched to createa range of options.

Capitalizing on Core Competencies

Your company's core competenciesthings that you can do better than your competitors

can often be extended to products or markets beyond those in which they were originallydeveloped. Such extensions represent excellent opportunities for diversification.

Any core competence that meets the following three requirements provides a viable basisfor your corporation to create or strengthen a new strategic business unit (SBU)

1.The core competence must translate into a meaningfulcompetitive advantage.

2.The new business unit must have enough similarity to existing businesses to benefitfrom your corporation's core competencies.

3. The bundle of competencies should be difficult for competition to imitate .

How diversification may reduce risks
http://www.1000ventures.com/info/sca_brief.htmlhttp://www.1000ventures.com/business_guide/im_value_chain_main.htmlhttp://www.1000ventures.com/business_guide/m_and_a_main.htmlhttp://www.1000ventures.com/business_guide/strategic_alliances_main.htmlhttp://www.1000ventures.com/business_guide/strategic_alliances_main.htmlhttp://www.1000ventures.com/business_guide/jv_main.htmlhttp://www.1000ventures.com/business_guide/crosscuttings/core_competencies.htmlhttp://www.1000ventures.com/business_guide/sbu.htmlhttp://www.1000ventures.com/business_guide/crosscuttings/sca_main.htmlhttp://www.1000ventures.com/business_guide/crosscuttings/sca_main.htmlhttp://www.1000ventures.com/business_guide/sbu.htmlhttp://www.1000ventures.com/business_guide/crosscuttings/core_competencies.htmlhttp://www.1000ventures.com/business_guide/jv_main.htmlhttp://www.1000ventures.com/business_guide/strategic_alliances_main.htmlhttp://www.1000ventures.com/business_guide/strategic_alliances_main.htmlhttp://www.1000ventures.com/business_guide/m_and_a_main.htmlhttp://www.1000ventures.com/business_guide/im_value_chain_main.htmlhttp://www.1000ventures.com/info/sca_brief.html


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As mentioned earlier, applying a diversification strategy involves conquering new marketsand/or developing new products. A broader market helps to minimize risks considering forexample cyclical fluctuations or, for farmers etc., weather bound conditions (Proctor).Related diversification can, in best case, lead to synergies when functions that are alreadydeveloped within the company can be used of the new product as well and thereby increase

cost efficiency. Related products can for example take advantage in using the samedistribution channels, facilities, production processes, staff needs or in efforts in amongother things sales and advertising or research and development. Also, if the company grows

bigger, it might get more power and be more able to influence suppliers and so on. If thecompany uses related diversification there will most probably be a positive correlation of the

profitability between the diversified parts of the company, which truly will increase revenue(Proctor).Unrelated diversification lacks these synergies, but, if successful, it tends to reducefluctuations in cash flow. Also, for a corporation to rely on only one or a couple of productlines is united with large risks as the market fluctuates over time. Therefore, both related andunrelated diversification can be motivated as risk reducing factors. A corporation that usesunrelated diversification can in the best case get a negative correlation of the probability

between the diversified parts in the corporation, which hopefully leads to increased stability(Grant). It is not clear whether the related or unrelated diversification reduces risk in the bestway. With unrelated diversification you might get a negative correlation of the return but onthe other hand it is harder to diversify into a new market where you cant use the knowledgeand experience of the related market that is within the corporation (Grant).

Risks related to diversificationEven though the method of diversification can be used to decrease the dependence of themarket fluctuations, a company that diversifies their business often exposes itself to otherrisks. There are many puzzle pieces that have to fall into place to get a diversification to be

successful. One issue is that a corporation that diversifies might lose commitment to its corebusiness, and a possibleconsequence is therefore that it harms the core business (Grant).

Another risk is that the corporation will need new proficiency, new facilities and theorganization may have to change rapidly in order to make a diversification successful. Thisrisk is extra big when a corporation diversifies into new, unrelated markets. This means thatcorporations must have an initial capital that weigh up the startup costs that arise when theyexpand their business. If not, the diversification risks being a failure and the corporationmight experience major losses (Grant). A risk of diversification into a related market is thatexpected synergies dont arise, which might lead to increased, unexpected costs. Another

problem that can occur is that the brand reputation gets damaged. If for example a

corporation that is associated with luxury products starts to sell lowbudget products, theluxury association might disappear (Grant). According to Does corporate diversificationreduce firm risk?, a study made by Randy I Anderson, John D Stowe and Xuejing Xing, it isnot clear that diversification reduces risk. The findings of their study was that diversificationin many cases seemed to increase the risk, even though it sometimes worked successfully asa risk reducing method. The study showed that corporate diversification had different effectson risks in different firms, but that one cant say that it reduces risks in general. Some of thereasons for this are that it seldom is managers alone who have the power to determinediversification strategies; it often requires shareholders approval. Risk-increasing strategiesare in general more preferred by shareholders, because it often takes risks to earn big (Xing).The companies that seemed to decrease their risks when diversifying were those who

prediversification was high risk companies. One reasons for this is that diversification in


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those cases leads to less fluctuation in cash flow but also that leaders of such companies inaddition to thediversification implement other risk reducing actions (Xing). Findings show thatdiversification in companies associated with low growth opportunities and weak cash flowoften leads to bad consequences (Chiu).

How to analyze the consequences of diversificationA way to investigate whether a diversification was successful or not from a risk reducing

point of view, is to calculate the variation of the profits from a corporation before and afterthe diversification. Before a company decides to diversify it is reasonable to theoreticallyestimate what consequences it will have on the variance of the profit of the company. Oneway to do that is to estimate the correlation between the new business and the present. Afterthat, one can estimate the expected variance of the present and new businesses. The varianceformula for a sum of random variables can be used to estimate the risk reduction, which ifthe correlation isnt one gives that the risk will be reduced. The biggest risk associated withdiversification lay in connection with the time of the diversification and the period after that.At the time of diversification money is invested and it takes some time before yourdiversified business can stand on its own, this is associated with great risks. So in a short

period diversification is most likely to increase risk (variance), and those risks (variance) aredifficult to estimate (Xing).When measuring the variance of the return (or log return) before and a time after the periodusing data you can see how the deviation changed. If the variance is lower after thediversification that might indicate that the diversification was successful, but it is importantto remember that deviations of the returns might vary in time and there are several factorsthat affects this variance (Xing).

DIVERSIFICATION IN THE CONTEXT OF GROWTH STRATEGIES

Diversification is a form of growth strategy. Growth strategies involve a significant increase

in performance objectives (usually sales or market share) beyond past levels of performance.

Many organizations pursue one or more types of growth strategies. One of the primary

reasons is the view held by many investors and executives that "bigger is better." Growth in

sales is often used as a measure of performance. Even if profits remain stable or decline, an

increase in sales satisfies many people. The assumption is often made that if sales increase,

profits will eventually follow.

Rewards for managers are usually greater when a firm is pursuing a growth strategy.

Managers are often paid a commission based on sales. The higher the sales level, the larger

the compensation received. Recognition and power also accrue to managers of growing

companies. They are more frequently invited to speak to professional groups and are more

often interviewed and written about by the press than are managers of companies with greater

rates of return but slower rates of growth. Thus, growth companies also become better known

and may be better able, to attract quality managers.

Growth may also improve the effectiveness of the organization. Larger companies have anumber of advantages over smaller firms operating in more limited markets.


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1. Large size or large market share can lead to economies of scale. Marketing or production

synergies may result from more efficient use of sales calls, reduced travel time, reduced

changeover time, and longer production runs.

2. Learning and experience curve effects may produce lower costs as the firm gains

experience in producing and distributing its product or service. Experience and large sizemay also lead to improved layout, gains in labor efficiency, redesign of products or

production processes, or larger and more qualified staff departments (e.g., marketing

research or research and development).

3. Lower average unit costs may result from a firm's ability to spread administrative

expenses and other overhead costs over a larger unit volume. The more capital intensive

a business is, the more important its ability to spread costs across a large volume

becomes.

4. Improved linkages with other stages of production can also result from large size. Better

links with suppliers may be attained through large orders, which may produce lower

costs (quantity discounts), improved delivery, or custom-made products that would be

unaffordable for smaller operations. Links with distribution channels may lower costs by

better location of warehouses, more efficient advertising, and shipping efficiencies. The

size of the organization relative to its customers or suppliers influences its bargaining

power and its ability to influence price and services provided.

5. Sharing of information between units of a large firm allows knowledge gained in one

business unit to be applied to problems being experienced in another unit. Especially for

companies relying heavily on technology, the reduction of R&D costs and the time

needed to develop new technology may give larger firms an advantage over smaller,

more specialized firms. The more similar the activities are among units, the easier thetransfer of information becomes.

6. Taking advantage of geographic differences is possible for large firms. Especially for

multinational firms, differences in wage rates, taxes, energy costs, shipping and freight

charges, and trade restrictions influence the costs of business. A large firm can

sometimes lower its cost of business by placing multiple plants in locations providing

the lowest cost. Smaller firms with only one location must operate within the strengths

and weaknesses of its single location.

CONCENTRIC DIVERSIFICATION

Concentric diversification occurs when a firm adds related products or markets. The goal of

such diversification is to achieve strategic fit. Strategic fit allows an organization to achieve

synergy. In essence, synergy is the ability of two or more parts of an organization to achieve

greater total effectiveness together than would be experienced if the efforts of the

independent parts were summed. Synergy may be achieved by combining firms with

complementary marketing, financial, operating, or management efforts. Breweries have been

able to achieve marketing synergy through national advertising and distribution. By

combining a number of regional breweries into a national network, beer producers have been

able to produce and sell more beer than had independent regional breweries.


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Financial synergy may be obtained by combining a firm with strong financial resources but

limited growth opportunities with a company having great market potential but weak

financial resources. For example, debt-ridden companies may seek to acquire firms that are

relatively debt-free to increase the lever-aged firm's borrowing capacity. Similarly, firms

sometimes attempt to stabilize earnings by diversifying into businesses with differentseasonal or cyclical sales patterns.

Strategic fit in operations could result in synergy by the combination of operating units to

improve overall efficiency. Combining two units so that duplicate equipment or research and

development are eliminated would improve overall efficiency. Quantity discounts through

combined ordering would be another possible way to achieve operating synergy. Yet another

way to improve efficiency is to diversify into an area that can use by-products from existing

operations. For example, breweries have been able to convert grain, a by-product of the

fermentation process, into feed for livestock.

Management synergy can be achieved when management experience and expertise is applied

to different situations. Perhaps a manager's experience in working with unions in one

company could be applied to labor management problems in another company. Caution must

be exercised, however, in assuming that management experience is universally transferable.

Situations that appear similar may require significantly different management strategies.

Personality clashes and other situational differences may make management synergy difficult

to achieve. Although managerial skills and experience can be transferred, individual

managers may not be able to make the transfer effectively.

CONGLOMERATE DIVERSIFICATION

Conglomerate diversification occurs when a firm diversifies into areas that are unrelated to its

current line of business. Synergy may result through the application of management expertise

or financial resources, but the primary purpose of conglomerate diversification is improved

profitability of the acquiring firm. Little, if any, concern is given to achieving marketing or

production synergy with conglomerate diversification.

One of the most common reasons for pursuing a conglomerate growth strategy is that

opportunities in a firm's current line of business are limited. Finding an attractive investment

opportunity requires the firm to consider alternatives in other types of business. PhilipMorris's acquisition of Miller Brewing was a conglomerate move. Products, markets, and

production technologies of the brewery were quite different from those required to produce

cigarettes.

Firms may also pursue a conglomerate diversification strategy as a means of increasing the

firm's growth rate. As discussed earlier, growth in sales may make the company more

attractive to investors. Growth may also increase the power and prestige of the firm's

executives. Conglomerate growth may be effective if the new area has growth opportunities

greater than those available in the existing line of business.


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Probably the biggest disadvantage of a conglomerate diversification strategy is the increase in

administrative problems associated with operating unrelated businesses. Managers from

different divisions may have different backgrounds and may be unable to work together

effectively. Competition between strategic business units for resources may entail shifting

resources away from one division to another. Such a move may create rivalry andadministrative problems between the units.

Caution must also be exercised in entering businesses with seemingly promising

opportunities, especially if the management team lacks experience or skill in the new line of

business. Without some knowledge of the new industry, a firm may be unable to accurately

evaluate the industry's potential. Even if the new business is initially successful, problems

will eventually occur. Executives from the conglomerate will have to become involved in the

operations of the new enterprise at some point. Without adequate experience or skills

(Management Synergy) the new business may become a poor performer.

Without some form of strategic fit, the combined performance of the individual units will

probably not exceed the performance of the units operating independently. In fact, combined

performance may deteriorate because of controls placed on the individual units by the parent

conglomerate. Decision-making may become slower due to longer review periods and

complicated reporting systems.

DIVERSIFICATION: GROW OR BUY?

Diversification efforts may be either internal or external. Internal diversification occurs when

a firm enters a different, but usually related, line of business by developing the new line of

business itself. Internal diversification frequently involves expanding a firm's product or

market base. External diversification may achieve the same result; however, the company

enters a new area of business by purchasing another company or business unit. Mergers and

acquisitions are common forms of external diversification.

INTERNAL DIVERSIFICATION.

One 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. A business could also pursue an internal diversification

strategy by finding new users for its current product. For example, Arm & Hammer marketed

its baking soda as a refrigerator deodorizer. Finally, firms may attempt to change markets byincreasing or decreasing the price of products to make them appeal to consumers of different

income levels.

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

Generally this strategy involves using existing channels of distribution to market new

products. Retailers often change product lines to include new items that appear to have good

market potential. Johnson & Johnson added a line of baby toys to its existing line of items for

infants. Packaged-food firms have added salt-free or low-calorie options to existing product

lines.


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It is also possible to have conglomerate growth through internal diversification. This strategy

would entail marketing new and unrelated products to new markets. This strategy is the least

used among the internal diversification strategies, as it is the most risky. It requires the

company to enter a new market where it is not established. The firm is also developing and

introducing a new product. Research and development costs, as well as advertising costs, willlikely be higher than if existing products were marketed. In effect, the investment and the

probability of failure are much greater when both the product and market are new.

EXTERNAL DIVERSIFICATION.

External diversification occurs when a firm looks outside of its current operations andbuys 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. These firms are usually of similar size. One goal of a

merger is to achieve management synergy by creating a stronger management team. This can

be achieved in a merger by combining the management teams from the merged firms.

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

its identity. The acquiring company absorbs it. The acquired company and its assets may be

absorbed into an existing business unit or remain intact as an independent subsidiary within

the parent company. Acquisitions usually occur when a larger firm purchases a smaller

company. Acquisitions are called friendly if the firm being purchased is receptive to the

acquisition. (Mergers are usually "friendly.") Unfriendly mergers or hostile takeovers occur

when the management of the firm targeted for acquisition resists being purchased.

DIVERSIFICATION: VERTICAL OR HORIZONTAL?

Diversification strategies can also be classified by the direction of the diversification. Vertical

integration occurs when firms undertake operations at different stages of production.

Involvement in the different stages of production can be developed inside the company

(internal diversification) or by acquiring another firm (external diversification). Horizontal

integration or diversification involves the firm moving into operations at the same stage of

production. Vertical integration is usually related to existing operations and would be

considered concentric diversification. Horizontal integration can be either a concentric or a

conglomerate form of diversification.

VERTICAL INTEGRATION.The steps that a product goes through in being transformed from raw materials to a finished

product in the possession of the customer constitute the various stages of production. When a

firm diversifies closer to the sources of raw materials in the stages of production, it is

following a backward vertical integration strategy. Avon's primary line of business has been

the selling of cosmetics door-to-door. Avon pursued a backward form of vertical integration

by entering into the production of some of its cosmetics. Forward diversification occurs when

firms move closer to the consumer in terms of the production stages. Levi Strauss & Co.,

traditionally a manufacturer of clothing, has diversified forward by opening retail stores to

market its textile products rather than producing them and selling them to another firm toretail.


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Backward integration allows the diversifying firm to exercise more control over the quality of

the supplies being purchased. Backward integration also may be undertaken to provide a

more dependable source of needed raw materials. Forward integration allows a

manufacturing company to assure itself of an outlet for its products. Forward integration also

allows a firm more control over how its products are sold and serviced. Furthermore, acompany may be better able to differentiate its products from those of its competitors by

forward integration. By opening its own retail outlets, a firm is often better able to control

and train the personnel selling and servicing its equipment.

Since servicing is an important part of many products, having an excellent service department

may provide an integrated firm a competitive advantage over firms that are strictly

manufacturers.

Some firms employ vertical integration strategies to eliminate the "profits of the middleman."

Firms are sometimes able to efficiently execute the tasks being performed by the middleman

(wholesalers, retailers) and receive additional profits. However, middlemen receive their

income by being competent at providing a service. Unless a firm is equally efficient in

providing that service, the firm will have a smaller profit margin than the middleman. If a

firm is too inefficient, customers may refuse to work with the firm, resulting in lost sales.

Vertical integration strategies have one major disadvantage. A vertically integrated firm

places "all of its eggs in one basket." If demand for the product falls, essential supplies are

not available, or a substitute product displaces the product in the marketplace, the earnings of

the entire organization may suffer.

HORIZONTAL DIVERSIFICATION.Horizontal integration occurs when a firm enters a new business (either related or unrelated)

at the same stage of production as its current operations. For example, Avon's move to market

jewelry through its door-to-door sales force involved marketing new products through

existing channels of distribution. An alternative form of horizontal integration that Avon has

also undertaken is selling its products by mail order (e.g., clothing, plastic products) and

through retail stores (e.g., Tiffany's). In both cases, Avon is still at the retail stage of the

production process.

DIVERSIFICATION STRATEGY AND MANAGEMENT TEAMS

As documented in a study by Marlin, Lamont, and Geiger, ensuring a firm's diversification

strategy is well matched to the strengths of its top management team members factored into

the success of that strategy. For example, the success of a merger may depend not only on

how integrated the joining firms become, but also on how well suited top executives are to

manage that effort. The study also suggests that different diversification strategies (concentric

vs. conglomerate) require different skills on the part of a company's top managers, and that

the factors should be taken into consideration before firms are joined.

There are many reasons for pursuing a diversification strategy, but most pertain to

management's desire for the organization to grow. Companies must decide whether they want

to diversify by going into related or unrelated businesses. They must then decide whether


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they want to expand by developing the new business or by buying an ongoing business.

Finally, management must decide at what stage in the production process they wish to

diversify.


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CaseStudy


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Toyota, Nissan, and Honda

In late 1980s, Toyota , Nissan, and Honda moved into adjacent market segments. Theylaunched luxury cars Lexus, Infinity, and Acura respectively to compete with BMW andMercedes. The Japanese cars were priced about one-third lower and had a superior servicenetwork. The value proposition was solid enough to win over potential and current BMWand Mercedes customers, despite the power of their brands. Yet the Japanese alsoexpanded this profitable segment as a whole.

GE

Jack Welch transformed GE from a purely manufacturing company into a more diversifiedcompany with an increasingly important service component. In his 1996 annual report,Welch wrote: "Services is so great an opportunity for the Company that our vision for thenext century is GE that is 'a global service company that also sells high-quality products.'"When asked if GE was going to become a more product-oriented or service-oriented

company, Welch replied, "It's got to be a big combination... It's an integrated game." In1996, GE Capital Services earned US$4 billion. In 2005, GE services agreements increasedto $87 billion, up 15% from 2004. In particular, financial services revenues increased 12%to $59.3 billion.

Moserbear

Moser Baer India (Moser Baer), incorporated in 1983, started producing digital storagemedia (floppy disks) in the year 1986 and went on to become the second largest opticalstorage media (CDs, DVDs, etc.) company in the world by 2007 .

3M

3M is a diversified manufacturerwith one of the highest international presences of anymulti-industry company. With products such as Post-It Notes and Scotch Tape as well ashigh-tech LCD films, 3M develops innovative new products while turning a profit off ofold favorites. 3M operates in six business segments: Healthcare, Industrial &Transportation, Consumer & Office, Display & Graphics (D&G), Electro &Communications, and Safety, Security & Protection.

Google and diversification

Google were founded in 1998, and soon it became the leading search engine. Since then,Google have expanded, and have today a diversified business that includes YouTube,Picasa, Google+, Gmail, Google earth, chrome, Android and much more. Google also hasthe upcoming mobile phone Galaxy Nexus, manufactured by Samsung.Theirdiversification strategy includes both development of own products and services andacquaintances with companies like YouTube and Picasa. Even though Googles business iswidely diversified, they are still mainly in the internet market and almost 90 % of theirincome comes from the ads on their search engine (Wikipedia).

Is Google reducing their risks with the diversification strategy? Today it feels distant that

Google will not maintain its position as the leading web browser. In the late nineties theweb browser AltaVista was the leading web browser, but Google took the position from
http://www.1000ventures.com/business_guide/crosscuttings/customer_vp.htmlhttp://www.1000ventures.com/info/cs_jack_welch_brief.htmlhttp://www.1000ventures.com/business_guide/cs_inex_ge.htmlhttp://www.wikinvest.com/wiki/Manufacturinghttp://www.wikinvest.com/wiki/Manufacturinghttp://www.1000ventures.com/business_guide/cs_inex_ge.htmlhttp://www.1000ventures.com/info/cs_jack_welch_brief.htmlhttp://www.1000ventures.com/business_guide/crosscuttings/customer_vp.html


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AltaVista. In 2010 Yahoo, the owner of AltaVista, announced that AltaVista was to be shotdown. Today Yahoo search and AltaVista is practically the same search engine. Is thisscenario possible today, will there be a search engine that can outcompete Google? If so,their diversification strategy might be a good move in a risk reducing manner(Socialmachinery). Googles strategy makes it possible to move their focus into what they

find important. So if their search engine would fail in the future they have other servicesthey can focus on. As long as Google search is the leading search engine, they will not losefocus on this service and if someone starts a search engine war against them they have builtup a huge organization that can be mobilized to fight back. Two possibly great competitorsagainst Googles search engine in the long run might come from Apple or Microsoftmainly due to their big organizations and financial resources

Personal conclusions

Because the fact that portfolio diversification is in most cases a good way of reducing risks,one might believe that the even corporate diversification is a solid risk reducing strategy.Although it in these terms theoretically seems to be a successful strategy, it appears tooften not work out in practice. We believe that diversification under certain conditionsmight be a good way of reducing risks, for example for companies that are affected byexternal conditions such as season changes, weather and climate changes. But in even inthese cases, it is important for the company in mind not to lose focus on its core businessand always remember why it chose to diversify its business. This is to ensure that

the diversification doesnt damage the public view of the corporation if the new area forexample is inconsistent with what they normally stand for.

Also, for diversification as a risk reducing strategy to be successful, it is important for the

corporation to only focusing on those aspects, and not trying to combine the risk reducingbenefits with for example growth benefits. It seems like many diversifications fail becauseof mixed interests. The management might want to reduce risks, while shareholders wantto increase revenues. Shareholders therefore are more likely to prefer to enter businesseswith more growth potential. But where there is big growth potential, there are often bigrisks. This might lead to that a strategy aimed to reduce risks, actually turns out to increaserisks instead. Therefore, before a corporation diversifies it seems to be important tocarefully analyze for example the attractiveness of the new market, what mutually benefitsthat exists and what the cost of entry is. I further believe that diversification within the landarea might lead to simplification to relocate staff and maybe other resources from one kindof business to another if the market goes down in one area. The ability to keep theknowledge and resources within the corporation therefore increases, which hopefully willlead to that it will be easier to restart, or increase, production when the market changes and

better times comes along.

Different types of diversification lead to different kinds of risks. One risk consideringrelated diversification might be that the expected synergy gain simply does not exist, andtherefore the costs of the corporation rise. Risks with unrelated diversification might bethat the corporation lacks knowledge in the new industry and therefore fails. This mightlead to economic problems and, even worse, damage to the brand.

Sometimes consequences of diversification might be quite obvious, especially when crisisoccur. If the core business crashes due to for example the market of the core business

crashes an earlier, unrelated diversification can keep the company alive.


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References

Randy I Anderson, John D Stowe, Xuejing Xing. Does Corporate Diversification Reduce

Firm Risk? Evidence from Diversifying

Acquisitions.(2011)www.ssrn.com/abstract=1755654 (2011-11-09)

Google diversification strategy?

http://www.socialmachinery.com/2010/03/12/googlediversification-strategy/ (2011-11-20)

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