DIVERSIFICATION STRATEGY

Modes of Diversifications
Diversification strategy involves entering into a completely
different product-market. It may be implemented through new
product expansion into the present markets or through new
market expansion with current products. It may be implemented
by starting a new business venture or through business
acquisition and mergers.
Diversification can be related or unrelated.
Related Diversification
If the expansion involves same product or market it is termed as
related diversification.
It is related because it uses the commonality in terms of
technology, production facilities, and distribution network.
Related diversification provides synergies when common facilities
are used.
Reasons for Related Diversification
Exporting or Exchanging Assets and Competencies
Brand Name (Brand Equity)
Marketing Skills
Capacity and Sales and Distribution
Manufacturing Skills
R&D Skills
Achieve Economies of Scale

Risks in Related Diversification

Related diversification is mainly targeted at achieving synergies
that may not be ultimately realized due to the following reasons:
Potential synergies may not exist: Due to lack of ability to manage
the new business or misfit in the new business culture the firm
may not achieve effective synergies.
Implementation barriers may make the synergies unattainable:
The firm may not be able to achieve effective synergies due to
implementation barriers resulting from different cultures, value
systems, and organization structures.
Overvaluation of Potential Synergies: A firm may overestimate the
potential synergies at the time of diversification and later find low
level of actual synergies.

Unrelated Diversification
When a firm diversifies without any commonality in markets,
technology, R&D or marketing network, it is termed as unrelated
diversification.
It is achieved mainly through business acquisitions and mergers.
The main objective of this form of diversification is to enhance the
financial capabilities of the firm.

Reasons for Unrelated Diversification

Manage Cash Flows
Achieve higher ROI
Take Advantage of the Bargain Price
Refocus the Firm
Reducing Risk
Tax Considerations
Obtain Liquid Assets

Risks of Unrelated Diversification

Unrelated diversification is a very risky strategy not only because
the firm faces the difficulty in managing a different type of
business but also due to a lack of synergies in the diversification.
If a firm attempts an unrelated diversification its attention may be
diverted from the core business. The chance of success of
unrelated diversification is very low as shown by the performance
of the diversified industries in U.S. in the 1960s and 1970s.
Compared to unrelated diversifications, related diversifications
have been more successful.
According to Peter Drucker all successful diversification requires a
common core or unity represented by common markets,
technology, or production processes, and without such unity,
diversification never works; financial ties alone are insufficient.

ENTRY STRATEGIES
Entry strategy is associated with the decision to enter into a new
product market.
There are eight alternative entry strategies.
1. Internal Development
This involves developing a new business internally.
This avoids acquisition cost and the problem of managing
imported organizational structure and culture.
However, internal development process may be slow.

2. Internal Venture
This involves creating a separate entity within the existing firm to
develop a new business venture. This entry strategy uses the

existing resources and entrepreneurship and is found to be fast in

developing new business venture.

3. Acquisition
The acquisition is a shortcut to entering into new business areas
with readymade markets and brand name.
However, managing acquired business with different structure,
norm and culture is very difficult.
4. Educational Acquisition
In educational acquisition a large firm takes over a small firm that
is yet to be established as a force in the market in order to get
access to a market or a new technology.
5. Joint Venture
In joint ventures two firms enter into an agreement to promote a
new business venture.
Here, there will be a sharing of costs and risks, as well as
complimentarily in assets and competencies thus resulting in
higher level of synergies.
6. Alliances
In alliances, two or more firms enter into a strategic alliance to
share assets and competencies to attack into a market.
This is a popular entry strategy of the current time.
7. Licensing
Under licensing, a firm receives authorization to use the
technology and brand name to sell the product or service in a
market area.

It is a popular entry strategy in the international market.

8. Venture Capital Investor
Often large firms make minor investments (venture capital) in
growing markets in order to establish their presence in the
market. (Microsoft in India).

SELECTING THE RIGHT ENTRY STRATEGY

The selection of the right entry strategy depends on the level of a
firms familiarity with the product market to be entered (Roberts
and Barry).
Familiarity of the product market is defined along two dimensions:
(a) Market and (b) technology or service involved in the product.
Market Familiarity
In terms of the market three levels of familiarity exist:
Base: Existing products are sold within this market
New/familiar: The market is new but the firm is familiar with the
market through research, experienced staff or links with the
market as a customer.
New/unfamiliar: The firm lacks knowledge and experience of the
market.
Product Familiarity
Similarly, in terms of the product three levels of familiarity exist:
Base: Existing products are based on the current technology
New/familiar: The technology is new but the firm is familiar with
the technology through past work in the technology, established
R&D in the technology etc.

New/unfamiliar: The firm lacks knowledge and experience of the

technology.
Strategic Options for Market Entry
STRATEGIES IN DECLINING AND HOSTILE MARKETS

A declining market is characterized with a rapid fall in demand

caused by external factors such as a change in technology, or
major shift in buyer taste and preferences.
A market can be hostile when it is crowded with competitors, have
low profit margins, and characterized with over capacity.
A firm operating in such market situations can survive and make
some profit if it follows the right strategies.
STRATEGIES IN DECLINING MARKETS
Creating Growth Strategy
Profitable Survivor Strategy
Milk or Harvest Strategy
The Hold Strategy
Disinvestment or Liquidation Strategy

Creating Growth Strategy

Creating growth in a declining market is a real challenge.
This can be achieved only through industry revitalization programs.

Implementation of Growth Strategy

Industry revitalization can be created by the following methods:

New Markets: Enter into previously neglected or ignored markets.
New Products: Bring dynamic modifications to give life to a dying product.
New Applications: Find new applications for a dying product: Nylon
Revitalized Marketing: Follow fresh marketing approach by changing promotions and
distribution networks.
Government Stimulated Growth: Use government decisions to have tax exemptions
or put the product into government procurement list.
Exploitation of Growth Sub-markets: Concentrate in sub-markets where growth
possibility still exist.

Profitable Survivor Strategy

The most logical strategy in the declining market is to avoid investing and to milk
and exit as soon as possible.
An alternative strategy is to continue investing to attain a leadership position where
the profit potential still exists.
Implementation of Profitable Survivor Strategy
This strategy is targeted at making the competitors take an early exit through the
following methods:
Show to the world about its commitment and determination to stay in the business.
Raise the costs of competing for competitors by price reduction strategy.
Introduce new products and cover new market segments or find profitable market
niches.
Reduce competitors exit barriers by assuming some of their long-term business
contracts.
Reduce brand width and create a national brand to achieve economies of scale.
Takeover a competitors production capacity and market share.

Milk or Harvest Strategy

This strategy is targeted at generating cash flow by reducing investment and
operating expenses.
The firm operating in the declining market may be able to use the cash to invest on
more promising business areas.
The firm may follow a fast or slow milking plan.
Fast milking is achieved by rapid reduction in operating expenses and price
increases (if feasible) to maximize short-term cash flow.
Slow milking is achieved by gradual reduction in investment and expenditures. Slow
milking is targeted at maximizing total cash flow over time.
Implementation of Milking Strategy
The milking strategy can be feasible in the following conditions:
The decline rate is consistent and gradual.
The price structure during the decline is more or less stable.
There is enough customer loyalty in a part of the market to support sales and profit
for milking.
The business is not strategically critical for the firm.
The firm can effectively manage the milking strategy.

The Hold Strategy

The hold strategy is a slight variation of the milking strategy.
The firm avoids making long-term investments but spends enough funds to
maintain product quality, production processes, and customer loyalty.
This is a long-term strategy to hold on to the business to effectively manage a cash
cow.
This strategy is feasible if the decline is gradual, pockets of demand exist to support
sales, price pressures are not extreme, and if the firm has usable assets and
competencies.

Disinvestment or Liquidation Strategy

This is the ultimate strategy in the declining market where a firm chooses to take a
quick exit through disinvestment or liquidation.
A firm may choose to exit in the following conditions:
If the decline rate is very rapid and no pockets of enduring demand exist to support
sales.
If the price pressures put by competitors are very extreme.
If the business position of the firm in the competitive market is weak.
If the strategic focus of the firm has changed making the existence of the business
redundant.
If exit barriers are very low.
Selecting the Strategy for the Declining Environment

A firm needs to consider strategic uncertainties in the following five areas to

determine the optimal strategy in a declining market.
Market Prospects
Competitive Intensity
Performance/Strengths of the Firm
Interrelationships with other Businesses of the Firm

Market Prospects
The rate of decline.
Pockets of enduring demand
Reasons for decline: temporary or permanent
Competitive Intensity
Existence of dominant competitors with higher level of assets and competencies

Competitors unwilling to take an exit

Customers who are brand loyal
Extent of product differentiation
Extent of price pressure
Performance/Strengths of the Firm

Profitability of the business

Future prospects
Market share and its trend
SCA of the business
Cost management capability of the business
Interrelationships with other Businesses of the Firm
Extent of synergy with other businesses
Compatibility to the firms current strategic thrusts
The firms ability to support the cash needs of the business
Implementation Barriers
Type of exit barriers
Firms ability to manage all the investment options
STRATEGIES IN HOSTILE MARKETS
Hostile markets are characterized by over capacity, low profit margins, intense
competition, and many management problems.
Most hostile markets are found in the saturation, declining maturity and decline
stages of the product life cycle.
Sometimes, hostile market situations are also found during the growth stage when
many venture capitalists, lured by the high profit prospects, enter into a growing
industry with low entry barriers (e.g., carpet and pashmina industry of Nepal).

Phases of Hostile Industry

An industry to turn hostile may take different periods of time.

Some may take decades (tea and coffee) and some others may take shorter period
of time (video library, photocopy business etc.).
There are six phases (not necessarily hierarchical) of the hostile industry as
suggested by the Windemere Associates study of 40 hostile industries.
Phase 1: Margin Pressure
When competitors reduce their price to gain market share the firm faces the
problem of reducing price and feels the margin pressure.
In such a situation, the firm either has to seek market niches at higher price
segment or reduce price to protect the market share.
Phase 2: Share Shifts
In this phase, competitors will find a change in their market share (1 to 5 percent).
A firm will either lose or gain share depending on its strategy.
Mostly, the leading firm is likely to lose as it does not prefer to reduce the price and
fall into the leaders trap (Nebico in the biscuit industry in Nepal.
Phase 3: Product Proliferation
As part of the competitive strategy, many firms increase the length and breadth of
their product line.
They also implement major modifications on the existing products with a view to
attract new buyers and snatch market share of competitors.
The result will be too many product varieties in the market.
Phase 4: Self-defeating Cost Reductions
Due to the excessive margin pressure many firms launch radical cost reduction
schemes limiting investments and thus affecting product and service quality.
This action will adversely affect the firms market share as buyers move to
competitors products with stable quality standards.
Phase 5: Consolidation and Shakeout

In this phase, firms in the hostile industry restructure their business by reducing
their workforce, closing operations and reducing the size of their business.
Mergers and acquisitions also take place in this phase.
International business groups may also emerge to form big mergers and
acquisitions.
Phase 6: Rescue
In the last phase, some part of the industry may be rescued through mergers and
consolidation and intra-industry agreements.
Sometimes, a hostile industry is rescued by a sudden growth in demand through
government or foreign (export) contracts.
Successful Hostile Market Strategies
There are two types of firms Gold Competitors and Silver Competitors that have
achieved success (sales growth and profitability) in the hostile markets (The
Windemere Study).
The Gold Competitors are large leading companies that have occupied the first or
second position in the market.
The Silver Competitors are small companies that are number three or lower in the
market share rankings.
The Study has identified the following successful strategies for the hostile market.
Focus on Large Customers
A firm can be successful if it focuses on large customers.
Firms intensely practice relationship marketing to maintain long-lasting relations
with large customers and also move into higher volume channels.
Differentiate on Reliability
A firm should change its differentiation focus from product features, benefits and
other attributes to intangible factors such as reliability, trust and confidence.
Broader Coverage of Price Points
As part of the hostile market strategy, a firm should try to cover most of the price
points and avoid leaving any market niches for competitors.
Turn Price into a Commodity

The hostile market is characterized by an intense price war.

A successful strategy in the hostile market is not to compete on the price and
remove price from the customers buying criteria.
Firms should focus on delivering superior performance value to their large
customers.
Adopt an Effective Cost Structure
The most important strategy in the hostile market is to reduce cost without
compromising on the quality of products and services delivered to the customers.
Therefore, the cost reduction strategy should be focused on achieving higher
productivity, focused promotions and economies of scale rather than on
indiscriminate cost reductions.