Related Diversification Is a More Successful Strategy for Growth Among Firms Than Unrelated Diversification. Essay Example For Students

Related Diversification Is a More Successful Strategy for Growth Among Firms Than Unrelated Diversification. Essay Abstract This paper proves the hypothesis of marketing: Related diversification is a more successful strategy for growth among firms than unrelated diversification. It explains the concept of diversification, the rationale of diversification, types of diversification, diversification strategies, and dimensions of diversification. This paper analyses the given hypothesis using various examples and reaches a conclusion. Keywords Related, unrelated, diversifact, diversification, diversifame, diversifad, diversifriction Hypothesis Related diversification is a more successful strategy for growth among firms than unrelated diversification. Diversification is a form of growth marketing strategy for a company. It seeks to increase profitability through greater sales volume obtained from new products and new markets. Diversification can occur either at the business unit or at the corporate level. At the business unit level, it is most likely to expand into a new segment of an industry in which the business is already in. At the corporate level, it is generally entering a promising business outside of the scope of the existing business unit. Diversification is part of the four main marketing strategies defined by the Product/Market Ansoff matrix: Ansoff pointed out that a diversification strategy stands apart from the other three strategies. The first three strategies are usually pursued with the same technical, financial, and merchandising resources used for the original product line, whereas diversification usually requires a company to acquire new skills, new techniques and new facilities. Therefore, diversification is meant to be the riskiest of the four strategies to pursue for a firm. Rationale of diversification There are two dimensions of rationale for diversification. (i)The first one relates to the nature of the strategic objective: Diversification may be defensive or offensive. †¢Defensive reasons may be spreading the risk of market contraction, or being forced to diversify when current product or current market orientation seems to provide no further opportunities for growth. †¢Offensive reasons may be conquering new positions, taking opportunities that promise greater profitability than expansion opportunities, or using retained cash that exceeds total expansion needs. ii)The second dimension involves the expected outcomes of diversification: Management may expect great economic value (growth, profitability) or first and foremost great coherence and complementarities with their current activities (exploitation of know-how, more efficient use of available resources and capacities). In addition, companies may also explore diversification just to get a valuable comparison betwee n this strategy and expansion. Types of diversifications Moving away from the core competency is termed as diversification. Diversification involves directions of development which take the organisation away from its present markets and its present products at the same time. Diversification is of two types: (i) Related diversification: Related diversification is development beyond the present product and market, but still within the broad confines of the ‘industry’ (i. e. value chain) in which a company operates. For example, an automobile manufacturer may engage in production of passenger vehicles and light trucks. (ii)Unrelated diversification: Unrelated diversification is where the organisation moves beyond the confines of its current industry. For example ,a food processing firm manufacturing leather footwear as well. The different types of diversification strategies The strategies of diversification can include internal development of new products or markets, acquisition of a firm, alliance with a complementary company, licensing of new technologies, and distributing or importing a products line manufactured by another firm. Generally, the final strategy involves a combination of these options. This combination is determined in function of available opportunities and consistency with the objectives and the resources of the company. There are three types of diversification: concentric, horizontal and conglomerate: (1) Concentric diversification The company adds new products or services which have technological or commercial synergies with current products and which will appeal to new customer groups. The objective is therefore to benefit from synergy effects due to the complementarities of activities, and thus to expand the firm’s market by attracting new groups of buyers. Concentric diversification does not lead the company into a completely new world as it operates in familiar territory in one of the two major fields (technology or marketing). Therefore that kind of diversification makes the task easier, although not necessarily successful. (2)Horizontal diversification The company adds new products or services that are technologically or commercially unrelated to current products, but which may appeal to current customers. In a competitive environment, this form of diversification is desirable if the present customers are loyal to the current products and if the new products have a good quality and are well promoted and priced. Moreover, the new products are marketed to the same economic environment as the existing products, which may lead to rigidity and instability. In other words, this strategy tends to increase the firm’s dependence on certain market segments. (3) Conglomerate diversification (or lateral diversification) The company markets new products or services that have no technological or commercial synergies with current products, but which may appeal to new groups of customers. The conglomerate diversification has very little relationship with the firm’s current business. Therefore, the main reasons of adopting such a strategy are first to improve the profitability and the flexibility of the company, and second to get a better reception in capital markets as the company gets bigger. Even if this strategy is very risky, it could also, if successful, provide increased growth and profitability. Risks in diversification Diversification is the riskiest of the four strategies presented in the Ansoff matrix and requires the most careful investigation. Going into an unknown market with an unfamiliar product offering means a lack of experience in the new skills and techniques required. Therefore, the company puts itself in a great uncertainty. Moreover, diversification might necessitate significant expanding of human and financial resources, which may detracts focus, commitment and sustained investments in the core industries. Therefore a firm should choose this option only when the current product or current market orientation does not offer further opportunities for growth. In order to measure the chances of success, different tests can be done: †¢The attractiveness test: the industry that has been chosen has to be either attractive or capable of being made attractive. The cost-of-entry test: the cost of entry must not capitalize all future profits. †¢The better-off test: the new unit must either gain competitive advantage from its link with the corporation or vice versa. Five dimensions of diversification (i) Diversifact: Fact is a situation, a reality, a kind of compulsion because of which company has to diversify. †¢Negative overtone of compulso ry diversification-ITC and Manikchand are examples of negative overtones of compulsory diversification because tobacco business was under pressure,cigarette advertising was banned and both these companies found new revenue streams. Products of Manikchand: Manikchand pan masala, Manikchand Parimal tea,Manikchand constructions,Oxyrich mineral water ? Products of ITC:Wills cigarette,Wills lifestyle stores,John Players(men’s and women’s apparels),e-chaupal,bingo,sunfeast,kitchens of India,Aim matchboxes etc. †¢Positive overtone of compulsory diversification-India Today group is an example of positive overtone of compulsory diversification. As the definition of media business changed in India,India Today group moved from Magazines to television(Tims Now). ii)Diversifiction: Fiction is an illusion,non-reality ,certain business assumptions which are proved wrong. Brand extentions into other categories have proved to be big failure fo following companies: †¢BPL telev ision which was a success to BPL washing machines which was a failure †¢Onida television which was a success to onida audio systems which were a failure. (iii)Diversifrition: It involves the concept of cannabalisation according to which a company’s own product is eating the market share of another product of the same company in the same category. Example: Tide and Ariel (P G) Aristotle's Concept of Teleology EssayIn developing these practices, the federation and the unions have adapted successful models from around the world. It could be the implementation of small group activities or quality circles at the federation. Or a TQM program at the unions. Or housekeeping and good accounting practices at the village society level. Technology and e-initiatives GCMMFs technology strategy is characterized by four distinct components: new products, process technology, and complementary assets to enhance milk production and e-commerce. GCMMF was one of the first FMCG (fast-moving consumer goods) firms in India to employ Internet technologies to implement B2C commerce. Today customers can order a variety of products through the Internet and be assured of timely delivery with cash payment upon receipt. Another e-initiative underway is to provide farmers access to information relating to markets, technology and best practices in the dairy industry through net enabled kiosks in the villages. GCMMF has also implemented a Geographical Information System (GIS) at both ends of the supply chain, i. e. milk collection as well as the marketing process. AMUL’s business strategy is getting closer to the customer by linking itself with the latest happening in all the fields of the society. Bollywood superstar Sanjay Dutt popularly known as Sanju Baba given six-year jail term by TADA Court (Terrorism and Disruptive Activities (Prevention)) being guilty under Arms Act for illegally possessing prohibited arms ammunition in the 1993 Bombay (now Mumbai) blasts case August 07. CHAKDE! INDIA, the Bollywood movie with focus on womens hockey featuring star-actor Shah Rukh Khan playing coach of the Indian Womens Hockey Team to bring fame to India August 07. Political parties oppose ruling UPA Governments Indo-US civilian nuclear deal August 07. Awards and honours won by AMUL †¢Ramkrishna Bajaj National Qality Award-2003 †¢Amul The Taste Of India (Gcmmf)Receives International Cio 100 Award For Resourcefulness †¢Rajiv Gandhi National Quality Award 1999 Example of unrelated successful diversification-ITC ITC is one of Indias foremost private sector companies with a market capitalisation of nearly US $ 15 billion and a turnover of over US $ 4. 75 billion. ITC is rated among the Worlds Best Big Companies, Asias Fab 50 nd the Worlds Most Reputable Companies by Forbes magazine, among Indias Most Respected Companies by BusinessWorld and among Indias Most Valuable Companies by Business Today. ITC also ranks among Indias top 10 `Most Valuable (Company) Brands, in a study conducted by Brand Finance and published by the Economic Times. Products of ITC †¢Wills cigarettes †¢Wills lifestyle stores †¢John Players appare ls †¢E-choupal †¢Chupal sagar †¢Sunfeast biscuits †¢Bingo wafers †¢Aashirwaad atta †¢Mandal deep agarbatti †¢Aim matchboxes †¢Kitchens of India †¢Classmates notebooks †¢Expressions greeting cards †¢Minto confectionaries ITCs diversified status originates from its corporate strategy aimed at creating multiple drivers of growth anchored on its time-tested core competencies: unmatched distribution reach, superior brand-building capabilities, effective supply chain management and acknowledged service skills in hoteliering. Over time, the strategic forays into new businesses are expected to garner a significant share of these emerging high-growth markets in India. The Companys e-Choupal initiative is enabling Indian agriculture significantly enhance its competitiveness by empowering Indian farmers through the power of the Internet. This transformational strategy, which has already become the subject matter of a case study at Harvard Business School, is expected to progressively create for ITC a huge rural distribution infrastructure, significantly enhancing the Companys marketing reach. ITC Profile Fundamentals Market Capitalization ( Rs cr )62,937. 49 Book Value27. 58 Debt / Equity0. 01 P/E23. 31 Dividend Yield %1. 85 EPS7. 17 Return on Net Worth25. 64 Current Ratio1. 37 Quick Ratio0. 58 Interest Cover268. 33 Latest Quarterly Results Rs. Cr Year2007/062006/06var % Sales Income3,325. 232,849. 7516. 68 Other Income101. 5784. 9419. 58 Expenditure2,197. 671,879. 1816. 95 Interest-0. 830. 72-215. 28 Gross Profit1,229. 961,054. 7916. 61 Depreciation101. 0387. 6415. 28 Tax346. 06314. 879. 91 PAT782. 87652. 2820. 02 Equity376. 22375. 520. 19 OPM (%)33. 9134. 06-0. 15 GPM (%)33. 9334. 03-0. 10 NPM (%)23. 5422. 880. 66 Honours ITC constantly endeavours to benchmark its products, services and processes to global standards. The Companys pursuit of excellence has earned it national and international honours. ITC is one of the eight Indian companies to figure in Forbes A-List for 2004, featuring 400 of the worlds best big companies. Forbes has also named ITC among AsiasFab 50 and the Worlds Most Reputable Companies. ITC has several firsts to its credit: †¢ITC is the first from India and among the first 10 companies in the world to publish its Sustainability Report in compliance (at the highest A+ level) with the latest G3 guidelines of the Netherlands-based Global Reporting Initiative (GRI), †¢ITC is the first Indian company and the second in the world to win the prestigious Development Gateway Award. It won the $100,000 Award for the year 2005 for its trailblazing ITC e-Choupal initiative which has achieved the scale of a movement in rural India. †¢ITC has won the inaugural World Business Award, the worldwide business award recognising companies who have made significant efforts to create sustainable livelihood opportunities and enduring wealth in developing countries. The award has been instituted jointly by the United Nations Development Programme (UNDP), International Chamber of Commerce (ICC) and the HRH Prince of Wales International Business Leaders Forum (IBLF). ITC has won the Golden Peacock Awards for Corporate Social Responsibility (Asia) in 2007, the Award for ‘CSR in Emerging Economies 2005’ and ‘Excellence in Corporate Governance in the same year. †¢ The Companys Green Leaf Threshing plants at Chirala and Anaparti in Andhra Pradesh are the first units of their kind in the world to get ISO 14001 environment management systems certification. ITCs cigarette factory in Kolkata is the first such unit in India to get ISO 9000 quality certification and the first among cigarette factories in the world to be awarded the ISO 14001 certification †¢ ITC Maurya in New Delhi is the first hotel in India to get the coveted ISO 14001 Environment Management Systems certification. †¢ ITC Filtrona is the first cigarette filter company in the world to obtain ISO 14001 †¢ITC Infotech finds pride of place among a select group of SEI CMM Level 5 companies in the world. ITCs Green Leaf Threshing plant in Chirala is the first in India and among the first 10 units in the world to bag the Social Accountability (SA 8000) certification Conclusion: This paper proved the hypothesis Related diversification is a more successful strategy for growth among firms than unrelated diversification wrong by giving the example of ITC which has very successful unrelated diversifications. So, there are no fixed rules about related or unrelated div ersification of a company being a failure or success. References 1. †¢Chisnall, Peter: Strategic Business Marketing, 1995 Day, Georges: Strategic Marketing Planning †¢Jain, Subhash C. :International Marketing Management, 1993 †¢Jain, Subhash C. : Marketing Planning Strategy, 1997 †¢Lambin, Jean-Jacques: Strategic Marketing Management, 1996 †¢Murray, Johan ODriscoll, Aidan: Strategy and Process in Marketing, 1996 †¢Weitz, Barton A. Wensley, Robin: Readings in Strategic Marketing †¢Wilson, Richard Gilligan, Colin: Strategic Marketing Management, 1992 Retrieved from http://en. wikipedia. org/wiki/Diversification_(marketing_strategy) Category: Marketing 2. official website of ITC 3. Official website of AMUL