DIVERSIFICATION STRATEGIES

WHY To spread the business risk of being in a single industry Bijay KC, SAIM College WHY To spread the business risk of being in a single industry Ups and downs in the environmental and industry factors affect the industry Shareholders get high returns constantly despite of the fluctuations in the market trend of a particular industry

TYPES OF DIVRSIFICATION Bijay KC, SAIM College TYPES OF DIVRSIFICATION Diversification into related business: (Concentric Diversification) Value chains fit strategically across the businesses. e.g. Hotels, restaurants, travel agents, trekking, tours Diversification into unrelated business: (Conglomerate) Value chains are completely different across the businesses

DIVERSIFICATION INTO RELATED BUSINESS Bijay KC, SAIM College DIVERSIFICATION INTO RELATED BUSINESS Transferability of technical and other know-how Lower cost by combining activities into common operation Exploitation of common brand name Creating valuable resource strengths and capabilities

DIVERSIFICATION INTO RELATED BUSINESS Bijay KC, SAIM College DIVERSIFICATION INTO RELATED BUSINESS A firm needs to go for diversification when The industry growth is slow or zero Sales can be increased substantially Competitive price advantage can be obtained Technical and other knowhow can be enhanced Core competence can be strengthened

DIVERSIFICATION INTO UNRELATED BUSINESS Bijay KC, SAIM College DIVERSIFICATION INTO UNRELATED BUSINESS Companies go for unrelated business when: The other company’s assets are undervalued The other company is in financial distress The other company has high growth potential but is short of investment capital The other company has inefficient management

DIVERSIFICATION INTO UNRELATED BUSINESS Bijay KC, SAIM College DIVERSIFICATION INTO UNRELATED BUSINESS Increases revenue and helps shareholders to earn consistent high returns The existing industry has slow or no growth The sales across businesses are countercyclical The organization has strong management team and experience Financial synergies can be achieved between the acquiring and acquired firms

PROBLEMS Diversification into unrelated business has mostly failed Bijay KC, SAIM College PROBLEMS Diversification into unrelated business has mostly failed It is difficult to manage dissimilar business activities effectively Core competencies and activities can be diluted Vested interest of management can prevail ‘Stick to the knitting’ (In search of Excellence)