C&BS8 - Diversification

UCAM MBA Programme
TÍTULO Diversification
Subtítulo
Nalin Anthony
MBA, M.Sc.(Fin), MCIM,ACMA,CFS,LLB
Focus of Corporate Strategies
Corporate Strategies focus on enterprise’s
1. Scale – How large ?
2. Scope – How diversified ?

Scope Scale
Competitive How to
Advantage Compete
Extent of Diversification
Single Multiple
Business Businesses
Firm Firm
Business Definition
Diversification
In a diversification strategy, the firm enters a new market with
a new product. There are two types of diversification a firm can
employ:
1. Related diversification: There are potential synergies to be
realized between the existing business and the new
product/market.
2. Unrelated diversification: There are no potential synergies

to be realized between the existing business and the new
product/market.
Why Do Firms Diversify
1. To Grow (revenue, profit , market share )
2. Maximize Existing Resources & Capabilities
3. Combat Competition & Increase Market Power
4. Optimize Industry Life Cycle
5. Utilize Surplus Cash

Types of Diversifications
1. Vertical (value Chain) Integration
• Backward Integration
• Forward Integration
2. Horizontal (Related) Diversification
3. Unrelated Diversification
Vertical Integration
A vertical integration is when a firm extends its operations
within its value chain.
It means that a vertically integrated company will bring in

previously outsourced operations in-house.
The direction can either be upstream (backward) or downstream

(forward).
This can be achieved either by internally developing an

extended production line or by acquiring vertically.
Types of Vertical Integration
1. Full Vertical Integration

Obtaining all the assets, resources and expertise needed to
replicate desired position of the supply chain.
2. Quasi Vertical Integration

Obtaining some stake in the supplier in the form of specialized
investments by increasing the ownership in the outcome.
Types of Vertical Integration
3. Long-term Contracts
A diluted form of vertical integration in which some elements of
procurement are held constant. Company's holding costs constant to a
certain extent in this way.
4. Spot Contracts
The point to which a firm is not vertically integrated is when the firm relies
on spot contracts to receive the immediate input necessary for its
production.
Vertical (value Chain) Integration
Backward Integration
A strategy of moving closer to the sources of raw material by
acquiring resource suppliers or by manufacturing the
components needed for the production of the final product.
Forward Integration
Refers to a strategy of moving closer to the customer or end-
user by acquiring or establishing sale, distribution or after-sales-
service of firm’s products or services
Vertical (value Chain) Integration
Case
MAS Apparels
Pros & Cons of Vertical Integration
Advantages Disadvantages
• Greater control over costs and • High overhead cost
supply of components
• Avoidance of transactional cost • Transfer pricing dilemma
• Protect proprietary technology • Demand variation could result in

capacity underutilization or
outsourcing
• Capitalize on outstanding • Rapid changes in technology can

technology or service make vulnerable
Horizontal integration
Is the process of acquiring or merging with
competitors, leading to industry consolidation.
Is a strategy where a company acquires, mergers

or takes over another company in the same
industry value chain.
Car Manufacturing & Oil production, refining and
Retailing distribution
Movie Making Global Pharmaceutical

Horizontal Integration may be an
effective strategy when:
• When the industry is growing
• When rivals lack the expertise that the company has already
achieved
• When economies of scale can be achieved
• When the company can manage the operations of the bigger

organisation efficiently, after the integration
Pros & Cons of Horizontal Integration
• Economies of scale and scope • Possible strict anti-monopoly laws
in many countries
• Increased differentiation • It might become too rigid, become
unfriendly to change
• Increased market power • Cultural incompatibility
• Ability to enter new markets • Management issues in a bigger

company
Unrelated Diversification
which occurs when a firm enters an industry that lacks any
important similarities with the firm’s existing / core industry or
industries.
Firms engage in extensive unrelated diversification are refereed
to as conglomerates
The main reason for moving into unrelated businesses is to allow

a firm to continue to grow after it’s core business has matured
or threatened by competitors or declining demand
Pros & Cons of Unrelated
Diversification
• Continue to grow after • Managers often lack technical
core business has matured expertise or detailed
or started to decline knowledge about their fair’s
many businesses
• To reduce cyclical • Growth-Greed syndrome
fluctuations in sales
revenue and cash flows

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UCAM MBA Programme

Corporate Strategies focus on enterprise’s

1. Scale – How large ?

2. Scope – How diversified ?

2. Unrelated diversification: There are no potential synergies

2. Maximize Existing Resources & Capabilities

3. Combat Competition & Increase Market Power

4. Optimize Industry Life Cycle

5. Utilize Surplus Cash

2. Horizontal (Related) Diversification

It means that a vertically integrated company will bring in

The direction can either be upstream (backward) or downstream

This can be achieved either by internally developing an

1. Full Vertical Integration

2. Quasi Vertical Integration

• Avoidance of transactional cost • Transfer pricing dilemma

• Protect proprietary technology • Demand variation could result in

• Capitalize on outstanding • Rapid changes in technology can

Is a strategy where a company acquires, mergers

Movie Making Global Pharmaceutical

• When economies of scale can be achieved

• When the company can manage the operations of the bigger

• Ability to enter new markets • Management issues in a bigger

The main reason for moving into unrelated businesses is to allow

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