Strategic Management: Detailed Analysis of Diversification Strategies

This report delves into the concept of strategic management, specifically focusing on diversification as a corporate strategy. It begins by defining diversification and its place within the Ansoff Matrix, highlighting its inherent risks due to a company's lack of experience in new markets. The r...Read More

Running Head: Strategic Management
Strategic Management

Strategic Management 1
Table of Contents
Introduction......................................................................................................................................2
Concept and types of diversification...............................................................................................2
Concentric diversification............................................................................................................2
Horizontal diversification............................................................................................................3
Conglomerate diversification.......................................................................................................3
Benefits and dangers of diversification...........................................................................................5
Critical comments............................................................................................................................7
Conclusion.......................................................................................................................................8
References........................................................................................................................................9

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Introduction
Diversification is a corporate strategy which is implemented in the workplace with the objective
of entering into a new market through launching a new product or service. This strategy is
included in the Ansoff Matrix model and it is also considered as the most risky section of this
model. This is because; company does not have much experience regarding new market
conditions which also decreases the chances of product’s growth and success. Diversification
strategy is one of the growth strategies defined by Igor Ansoff. With the help of diversification in
workplace, organization could expand its business through launching new products or services in
the new markets. It is considered as the most crucial strategy in business environment as it has
the capability to develop an effective image in the target market. This is the reason,
diversification is known as the perfectly logical development. Apart from the expansion of the
business, this strategy also utilise the available resources of the organization in an efficient
manner so that the desired outcomes could be acquired (Bae, Kwon & Lee, 2011).
Concept and types of diversification
Strategies involved in the diversification procedure are effective in relation with the utilisation of
available resources for development of new products in new markets, modifications in existing
products for existing and new markets, acquisition of firm, licensing of new and upgraded
technologies and for adopting unique techniques in relation with gaining competitive advantage.
In order to implement diversification strategy in workplace, it is required for the organization to
evaluate its business’ nature so that the perfect diversification strategy could be adopted and
implemented with the view to generate expected outcomes. There are three types of
diversification strategies i.e. horizontal, conglomerate and concentric (Shim, 2013).
Concentric diversification
Concentric diversification defines that there should be a similarity between the companies in
terms of technology through which the firm will be able to gain appropriate profits. For instance,
technology adhesives manufacturing firm enters into retail market for selling their adhesives by
their own. In this scenario, technology used by the firm will remain same while other efforts such
as marketing and promotion of the company will be changed with regards to gain success in the

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retail market. This will help the organization to uplift its market share along with gaining desired
outcomes (Nath, Nachiappan & Ramanathan, 2010). Under this strategy of diversification,
companies could also launch new products in new and existing markets with the objective of
earning sufficient amount of profits as well as to increase their market share and customer base.
For example: Nestle Company modifies it’s one of the famous products i.e. Maggi in relation to
tap those market segments which were untapped yet. This will help the organization to increase
its customer base and market share which will ultimately organizational business as well as
opportunity to earn higher profits will also be increased (George & Kabir, 2012).
Horizontal diversification
Under Horizontal diversification strategy, company diversify its products range by launching
new products which are unrelated with the existing products. This is done to appeal new market
segments which will ultimately increase market share and customer base. For instance,
organization which was earlier manufacturing pens enters into market with the objective of
manufacturing note books in relation with targeting new market segments as well as to expand
its business. This strategy will generate positive results as per management’s expectation only
when the existing products are performing well in the target market as well as the quality of the
new products will be good as compared to the competitors. Apart from the quality of the
products, company should also consider other factors which affects the demand of a new product
i.e. price and promotional strategies adopted by organization (Kumar, Gaur & Pattnaik, 2012).
Apart from this, horizontal diversification also occurs when a company enters into a new
industry. For example, a cycle manufacturing firm enters into jewellery industry. In order to gain
success through this strategy, organization needs to adopt appropriate promotional and marketing
strategies which cold be able to develop appropriate image in the target audiences’ mind-set.
Along with the promotional and marketing strategies, organization is also required to focus over
the quality, price and other factors of the new industry which could affect its performance (Zhou,
2011). Consideration of all these factors will help the organization to acquire a sustainable place
in the target market.

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Conglomerate diversification
Conglomerate diversification occurs when more than two companies enters into a totally
different industry in respect of their existing business to form a new or existing product of the
chosen industry. For example, Coca-Cola and PepsiCo, together opens a supermarket. Generally,
conglomerates are multinational companies from multi-industries. The main advantage of
conglomerate diversification is that it reduces investment risk because when two or more well-
known companies manufacture a unique or existing range of products, its credibility increases as
well as the companies engaged in the conglomerate type of industry, organization will be able to
gain its desired goals and objectives (Kali & Sarkar, 2011).
Behind adaptation of diversification strategy, there is a strong evidence i.e. every product and
services needs to face all stages of product life cycle i.e. introduction, growth, maturity and
decline. Thus, for the purpose of sustainable development and for existing in the market for a
long run, organizations need to launch new range of products so that they could survive in the
target market appropriately. In this procedure, it is required for an organization to utilise the
available resources efficiently. Thus, organizations adopt resource management strategies
(Bobillo, López-Iturriaga & López-Iturriaga, 2010).
This strategy is useful in effective management of organizational internal as well as external
resources. Financial, technological, production, inventory and human resources are certain
crucial elements of resource management technique (Gomez‐Mejia, Makri & Kintana, 2010).
Resource management technique plays crucial role in the execution of a project. For
accomplishment of a project, it is required to manage all resources in an efficient manner so that
the desired goals of the organization could be acquired in an effective manner. For example, a
manufacturing firm has capable candidates to uplift organizational productions to the peak with
the utilisation of available resources and machineries only. But they are not assigned such duties
through which talent is hidden and organization is not able to reach on that position which could
easily be attained. Thus, every organization is required to adopt appropriate strategies such as
evaluation techniques which could determine available employees’ talent, skills and knowledge.
After gaining appropriate information, allocation of the tasks should be executed so that the
appropriate responsibility and task could be assigned to the desired candidate, this will help the

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organization to uplift its performance as well as attainment of desired goals and objectives will
be an easy task (Wan, et. al., 2011).
Multinational Corporations generally adopt corporate resource management technique so that the
desired outcomes could easily be attained along with the execution of tasks in appropriate
manner. Primary motive of resource management technique is to fulfil demands of the
organization by utilising the available resources in an effective manner. Apart from this, every
organization wishes to accomplish the tasks along with minimising the costs (Chen & Yu, 2012).
In strategy of diversification, it is required to manage all activities which plays essential role in
attaining success and growth in the dynamic business environment. Management of strategies is
a crucial element in diversification. While diversifying the business, it is required for the
organization to ascertain the scope of the product or service which is planned to launch in the
target market. Along with the determination of scope, market research activities should also be
executed with the objective of establishment of an effective image in the target market. Market
research activities include demand for the product or services, existing companies in the target
market and tastes and preferences of target audiences (Berry‐Stölzle, et. al., 2012).
Benefits and dangers of diversification
In diversification strategy, investment is another crucial segment through which an organization
could successfully expand its business in the target market. For entering into a new business and
in new market, companies need to invest a huge capital. While making a huge investment, it is
required to analyse every single aspect so that the desired outcomes could be attained easily.
Investment leads to face an organization to the ups and downs of the market and in relation to
reduce the effects of market downturn, diversification of business is must (Singh, Gaur &
Schmid, 2010). Following are advantages of diversification in relation with minimising the risk
factor related to investment:
 Risk reduction: Elimination of risk is impossible but it could be reduced and while
investing into a new business, it leads to various types of risks. Thus, organizations
should determine each and every aspect before making investments. For example,
PepsiCo is planning diversify their business and for this, they are planning to launch a

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unique type of drink. Before launching of the planned product, demand will be analysed
along with determination of several other aspects such as investment required for
producing that drink (Demil & Lecocq, 2010).
 Capital preservation: some investors use capital preservation as investment strategy
while some strive for capital appreciation. Capital preservation focuses over protecting
the invested capital rather than focusing on earning high returns over invested capital.
Diversification is an effective strategy for protecting the capital along with originating
various ways to invest. Making investments on assets in a low variety firm is useless
because it will unnecessarily increase their cost of production while the same is required
for a multinational corporation as it will help the organization to uplift its performance
along with gaining desired goals and objectives (Dunning, 2012).
 Hedging portfolio: With the help of diversification in business, it provides an option to
the investors and to the company itself to invest small amount of capital in several areas
rather investing huge capital in one section. This will help the investors to increase rate of
returns over capital invested along with preserving their capital invested (Whittington,
2014).
There are two dimensions of rationale of diversification and the first rationale relates to the
nature of strategic objective which describes that diversification could be offensive and
defensive. Defensive strategies are those which are implemented for maintaining the acquired
position in the market while offensive strategies are used for developing an effective image in
the market. Under diversification perceptive, defensive strategies are used to introduce new
products and services in the target market so that the existing position of the organization could
be maintained. Every product has a limited life but organization does not operate for a limited
time period, thus it is essential for an organization to diversify its business so that new range of
products and services could be introduced. This will help the organization to gain sustainable
growth in the target market. While offensive strategies in relation to diversification states that
organization needs to gain new positions in new fields and for this reason, organization
introduces new products out of their expertise area in new markets so that an effective image
could be developed (Kim, Kim & Hoskisson, 2010).

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Apart from the nature of strategic objective dimension of diversification, second dimension
involves the expected outcomes of diversification. Expectations of management increases with
implementation of diversification and companies also seek to get appropriate criteria for
comparing strategy and expansion. Apart from this, diversification is one of the factors involved
in the Ansoff Matrix and it is considered as the highly risky and it requires appropriate
investigation before its implementation in the workplace. This is because launching a new
product in a new market without any experience and knowledge regarding that field is not an
easy task. Therefore, it can be said that company put itself into a great uncertainty by adopting
diversification strategy. But the fact cannot be denied that it is a useful element for an
organization in terms of sustainable growth. Thus, this strategy is being adopted when
organizational current products and services are not providing appropriate outcomes as well as
when organization seeks to expand its business (Aspara, et. al., 2011). Before implementing
diversification, it is must to measure chances for success. Following are methods and tools which
could be used for measuring chances of success:
 The cost of entry test: Under this test, all future profits are not capitalised.
 The attractiveness test: Industry chosen for expansion must be attractive or it should
have the capability to make it attractive in future.
 The better off test: Organization should gain competitive advantage from its link.
Critical comments
Vaara & Whittington (2012) researched on the ability of an organization in order to develop
strategies with the objective of prevailing organizational and societal practices. In their research,
they also found several tools and methods for development of strategies. Strategy-as-Practice
(SAP) is a distinctive and effective approach strategic management, decision making and for
strategy making. Authors have determined that Sap focuses over micro-level social functions,
practices and processes which describes and characterises the strategies of organization. With the
help of this strategy, organizational perceptive, their decision making procedures and capabilities
are examined for organising the strategies in an effective manner as well as to execute decision
making process in an efficient manner. SAP could be considered as an alternative to mainstream
strategy and it also helps the organization to shift the focus over developing strategies and

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estimating their outcomes. While Strategy-as-Practice approach focuses over micro-level study,
thus, it plays crucial role in drawing appropriate theories and concepts that differs from common
practices. As a result, Strategy-as-Practice helps the organizations to develop appropriate
strategies through new theories and effective approaches. Performance of strategic management
concept of an organization could be improved through SAP approach and it will also help the
organization to gain its desired goals and objectives (Vaara & Whittington, 2012).
As diversification involves high level of risk, various organizations have face failure while there
are some companies who have successfully expanded their business through diversification
technique (McElwee & Bosworth, 2010). Following are certain examples:
 Apple Inc. shifted towards manufacturing mobile phones instead of PCs.
 Virgin Group moved towards travel and production of mobile phones from producing
music.
 Walt Disney was initially involved in production of animated movies while afterwards
they shifted towards vacation properties and theme parks.
 Canon is now producing new range of office equipment while initially they were
engaged in producing camera.
Conclusion
From the aforesaid discussion and arguments in relation with diversification, it can be concluded
that diversification acts as an asset allocation plan which could be used for allocating assets to
different departments of an organization with the objective of attaining success and growth.
Diversification involves huge risk factor while it also consists of an exit strategy which could be
applied when expected outcomes are not generated. Under this essay, various aspects of
diversification, advantages, disadvantages, risk factor involved, etc. has been concluded. Apart
from this, this essay also includes the Strategy-as-Practice approach for making appropriate and
effective decisions so that the desired goals could be acquired.

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References
Aspara, J., Lamberg, J.A., Laukia, A. and Tikkanen, H., 2011. Strategic management of business
model transformation: lessons from Nokia. Management Decision, 49(4), pp.622-647.
Bae, S.C., Kwon, T.H. and Lee, J.W., 2011. Does corporate diversification by business groups
create value? Evidence from Korean chaebols. Pacific-Basin Finance Journal, 19(5), pp.535-553.
Berry‐Stölzle, T.R., Liebenberg, A.P., Ruhland, J.S. and Sommer, D.W., 2012. Determinants of
corporate diversification: evidence from the property–liability insurance industry. Journal of
Risk and Insurance, 79(2), pp.381-413.
Bobillo, A.M., López-Iturriaga, F. and López-Iturriaga F., 2010. Firm performance and
international diversification: The internal and external competitive advantages. International
Business Review, 19(6), pp.607-618.
Chen, C.J. and Yu, C.M.J., 2012. Managerial ownership, diversification, and firm performance:
Evidence from an emerging market. International Business Review, 21(3), pp.518-534.
Demil, B. and Lecocq, X., 2010. Business model evolution: in search of dynamic
consistency. Long range planning, 43(2-3), pp.227-246.
Dunning, J.H., 2012. International Production and the Multinational Enterprise (RLE
International Business). Routledge.
George, R. and Kabir, R., 2012. Heterogeneity in business groups and the corporate
diversification–firm performance relationship. Journal of business research, 65(3), pp.412-420.
Gomez‐Mejia, L.R., Makri, M. and Kintana, M.L., 2010. Diversification decisions in family‐
controlled firms. Journal of management studies, 47(2), pp.223-252.
Kali, R. and Sarkar, J., 2011. Diversification and tunneling: Evidence from Indian business
groups. Journal of Comparative Economics, 39(3), pp.349-367.