Diversification: How do companies diversify their businesses?
- New Product
- Old Product in New Market
- Acquire Business
Reason Why:
- Growth
- Risk
Four Strategies:
- Concentric - Expand into new markets with same product
- Conglomerate - Operate new business that are not related
- Veritical - Buy businesses along the production line - Control
- Horizontal: Buy competition
:
Why Diversify
McDonald's Diversification Strategy.
What is a conglomerate?
Group on should have sold
Agriculture
Farms diversify by expanding product lines and using items both to sell and to use in production of other goods. Dairy farms produce milk as their core product, but from this root, a farm can branch into making related products such as cheese or ice cream. A farm with enough space can grow different crops, thus having multiple product lines. Some farms raise cattle for sale and use the cattle’s organic matter to fertilize and support the growth of crops; similarly, wheat or corn can go to market or into the mouths of livestock.
Restaurants
A restauranteur can tap revenue streams beyond serving meals in the restaurant. Grocery stores can carry the restaurant's line of salad dressings, marinades, or sauces, for example. A restaurant might have a gift shop to sell gifts tailored to the restaurant, its menu, or community, such as cookbooks, travel books and videos, souvenirs, and postcards.
Sporting Goods
The sporting goods market encompasses a customer base with diverse sports and recreational interests. Many retailers will have an assortment of choices to meet these needs. For example, a store may carry shoes for runners, basketball players, golfers, soccer players, and baseball players. Sports and outdoor equipment includes balls, bats, gloves, shin guards, golf clubs, camping gear and fishing poles. Diversification has led outdoor stores to include outdoor apparel, GPS devices, and cameras along with the more traditional fishing poles, rifles, and tents.
Construction Equipment
Construction equipment dealers diversify by branching out their goods, services and locations. Geographic diversity can help a dealer hedge against a slowdown in construction or industrial activity in one region. Other dealers have added safety consultation, training, and construction materials such as pipes to their staples of maintenance and rentals. Dealers may choose farm equipment to counterbalance significant drops in construction equipment sales and rentals. For example, by one estimate, construction machinery sales in 2009 dropped 40 percent against only a 5-percent decline in farm equipment sales.
Conglomerate Diversification
Some businesses merge with or acquire other businesses. Congolmerate diversification can involve related or often unrelated enterprises. For example, an entrepenuer might operate a restaurant, a car dealership, and a land development business under one umbrella. Financial considerations, rather than similarities among lines of business or other strategic concerns, predominate mergers and acquisitions.
April 19, 2017 - Class #23
The Process
1) When to consider Diversification
a) Building Stockholders Wealth
b) Risk Adverse
Mistake - Myspace
2) Approach to Diversification
a) Acquisition
b) New Internal Business
c) Joint Venture
3) Diversification Path
a) Related
- Transfer competitive Advantage
- Cost Sharing - Economies of Scale
- Brand
b) Unrelated
- Growth Industry
- Undervalued Stocks
- Struggling Companies
4) Evaluation
a) Attractiveness
b) Position Strength in new market
c) Strategic Fit
d) Resource Fit
e) Rank Options and allocate resources
f) Update new corporate Strategy with addition(s)
Absolutely love the whole concept of this article. For people who are not aware of diversification strategies , can get the best definition by reviewing this article. The reasons why companies even have the strategies in place and most of the outcomes are listed and or talked about as well. Growth and risk have four strategies for using diversification within companies. That information was also displayed in a fundamental way for people to be informed and also remember the concepts.
ReplyDeleteThe information given in this article was definitely helpful and important to me. I've always known about a conglomerate and its meaning, but didn't know it was considered a diversification strategy, along with the other three strategies; concentric, vertical and horizontal. Because of the diversification strategies, I now see how companies operate and why they choose to expand their business.
ReplyDeleteThis article was very informative and helped me to better understand different diversity strategies. I've always known many business to use these strategies, but now I actually know the names of them and how to differentiate them. In my opinion, utilizing any one of the strategies is one of the easiest ways to grow your business.
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