Business Diversification Diversification Strategy Presented by: Farman Tahseen 10/30/20161

Introduction What is diversification? Why do firms diversify? How do firms enter a new business? Types of diversification 10/30/20162

What is diversification? Diversification consists of expanding the range of business activities carried out by a firm away from the present product line and market structure. Diversification involves:  Search and selection of new business areas.  Formulation and implementation of an entry strategy. 10/30/20163

What is diversification? Current product X New product X1 Another new product X2 New product Y.... Current market A New market A1 Another new market A2.... Market penetration Product development Market development Diversification 10/30/2016 4

What is diversification? Current product X Firm Supplier 10/30/20165

What is diversification? Firm Client 10/30/20166

Why do firms diversify? Diversification allows the firm to grow rapidly by expanding operations into new business fields. Why is (rapid) growth beneficial?  Economies of scale ( the cost per unit of production decreases as volume of product increases).  Lower average unit costs (running at full capacity).  More bargaining power with suppliers and customers.  Exploiting differences between diverse geographical areas. 10/30/20167

Why do firms diversify? Example: Tiscali ( ) * ADSL (Asymmetric Digital Subscriber Line) 1998 Internet (free) access 1999 Market entry Market development Product development Diversification Acquisitions in the EU Fixed phone lines, ADSL Virtual Mobile Network Operator Telecom in Italy and the UK 8

Example: Tiscali ( ) 2009 Product development Diversification Fixed phone lines, ADSL Virtual Mobile Network Operator Telecom in Italy and the UK 2011 UK division sold in 2009 Why do firms diversify? 10/30/2016 9

How do firms enter a new business? 1.Acquisitions of other companies that already operate in another business. 2.Internal start-ups by developing own business ideas, allocating capital and other resources, and venturing into a new business. 3.Joint ventures by partnering with other companies that already operate in another business and sharing assets, employees, know-how, etc. 10/30/201610

How do firms enter a new business? AcquisitionJoint ventureInternal start-up 10/30/

Types of diversification Two types of diversification: 1.Related: when the value chains of two businesses that are managed within the same firm (i.e., the same company or company group). 2.Unrelated: when the value chains of two businesses do not share any linkage, i.e., they are completely different and they do not offer any opportunities for competitive advantage if managed within the same firm. 10/30/201612

Examples – Related Johnson & Johnson Consumers products Baby care Skin and hair care Wound care Oral care Women's careMedicines Nutritionals Vision care 10/30/201613

Examples – Unrelated General Electrics Appliances Consumer products Energy Financial services Healthcare Aviation

Examples – Unrelated Virgin Radio Travel agent Telecom and media Radio Airlines Railways Megastore Soft drinks

10/30/201616Business Diversification Thank you