Mba 14

Chapter Fourteen
Diversification
© 2005 John Wiley & Sons
Diversification PPT 14-1

“Indecision and delays are the parents
of failure.”
- George Canning

Diversification
• The strategy of entering product markets different
from those the firm is currently engaged.
• Related Diversification – new business shares

meaningful commonalities with the core business.
Involves exporting or exchanging assets and
competencies
• Unrelated Diversification – lacks shared

commonalities. Financially motivated: to generate
larger, less uncertain or more stable profit streams.
Related Diversification Can
Involve Sharing of:
• Customers
• Sales Force or Channel of Distribution
• Brand Name and its Image
• Facilities
• R&D
• Staff and Operating Systems

• Marketing and Marketing Research

Leveraging Assets and Competencies
(Figure 14.1)
Three Steps to Take In Evaluating

Related Diversification
Assess Assets, Identify Business

Implement
Competencies, Plans that will
the
and Excess Leverage Assets

Capacity and Competencies Business Plans
Diversification Figure 14.1 PPT 14-5

Exporting or Exchanging Assets and Competencies
Brand Name – e.g., Disney, Sony, IBM, Virgin

1. Does the brand fit the new product context?
2. Does the brand add value to the offering in the

new product class?
3. Will the extension enhance the brand name and

image?

Exporting or Exchanging Assets and Competencies
• Marketing Skills – e.g., Black & Decker & Ernhart
• Capacity in Sales or Distribution - e.g., Nestle & Coke
• Manufacturing Skills - e.g., Honda with small motors; Sony

with small products
• R&D Skills - e.g., GE with turbines and light bulbs

• Achieving Economies of Scale

The Mirage of Synergy
• Potential synergy does not exist - e.g.,

General Foods & Burger Chef
• Potential synergy exists, but

implementation barriers make it
unattainable - e.g., Daimler-Benz & Chrysler
• Potential synergy is overvalued - e.g.,

Quaker Oats & Snapple

Unrelated Diversification
• Managing and Allocating Cash Flow - e.g., tobacco firms

buying General Foods, Nabisco, and Del Monte
• Entering Business Areas with High ROI Prospects -
e.g., Fuji Film and Kodak getting into digital cameras and accessories;
disastrous examples: Avon buying Tiffany’s and Giorgio Beverly Hills,
Quaker buying Snapple, Daimler-Benz buying Chrysler
• Obtaining a Bargain Price for a Business

• The Potential to Refocus a Firm - e.g., Esmark selling its

oil and gas business and Swift to focus on its core (consumer products).
• Reducing Risk - e.g., Hershey buying Friendly Ice Cream and
Skinner Macaroni Company
• Tax Implications
• Obtaining Liquid Assets - e.g., banks & insurance cos.

• Vertical Integration Motivations
• Defending Against a Takeover
• Providing Executive Interest

• Risks of Unrelated Diversification
– Attention may be diverted from the core business.
– Managing the new business may be difficult.
– The new business may be over valued.
• Performance of Diversified Firms
– McKinsey Study from 1990 to 2000 shareholder returns
(n = 412 of S&P 500)

• Focused 8%
• Moderately Diversified 13%
• Diversified 4%

Entry Strategies (Figure 14.3)
Entry Strategies Major Advantages Major Disadvantages

• Uses existing resources
• Time lag
Internal Development • Avoids acquisition cost
• Uncertain prospects
• Especially if unfamiliar
with product/market
• Uses existing resources • Mixed success record

Internal Venture
• May keep talented • Can create internal stresses
entrepreneurs
• costly-usually buy redundant
• Saves calendar time
Acquisition assets
• Overcomes entry barriers • Problem of integrating two
organizations
Joint Venture or Alliance • Technological/marketing • Potential for conflict in

unions can exploit operations between firms
small/large firm synergies • Value of one firm may be
• Distributes risk reduced over time

Entry Strategies (Figure 14.3)
Entry Strategies Major Advantages Major Disadvantages

• Rapid access to • Will lack proprietary technology
Licensing from Others
technology and technological skills
• Reduced financial risk • Will be dependent on licensor
Educational acquisitions • Provides window and initial • Risk of departure of

staff entrepreneurs
• Can provide window on • Unlikely alone to be a major

Venture Capital and

Nurturing new technology or market stimulus of firm growth
Licensing to Others • Rapid access to a market • Will lack knowledge/control of

• Low cost/risk market
• Will be dependent on licensee

Optimal Entry Strategies
Technologies or Services Embodied in the Product

Base
Base New/Familiar
New/Familiar New/Unfamiliar
New/Unfamiliar
New/
New/ Joint Venture capital or Venture capital or
Unfamiliar
Unfamiliar Ventures educational education
acquisitions acquisitions
Market Factors
Internal market Internal ventures Venture capital or

New/
New/ developments or or acquisitions or educational
Familiar
Familiar acquisitions (or licensing acquisitions
joint ventures)
Internal base Internal product Joint ventures

developments (or developments or
Base
Base acquisitions) acquisitions or
licensing

Key Learnings
• Related diversification involves the potential to attain synergies by exporting or
exchanging assets or competencies.
• The brand is one asset that often can be leveraged. Disney and Sony are
examples of brands that have provided the basis for a broad array of
businesses.
• A brand should fit a proposed new product market and add value. And,
importantly, the new product market context should enhance and reinforce the
brand (and certainly should not damage it).
• Synergy can be illusory, being perceived when in fact it does not exist,
implementation barriers make it unachievable, or it is overvalued.
• There are eleven motivations for unrelated diversification, including to manage

cash flow, to obtain attractive businesses, to refocus a firm and to reduce risk.
• Figure 14.3 illustrates eight approaches to market entry based on how new the
technology or market is to the organization.

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Chapter Fourteen

Diversification PPT 14-1

Diversification PPT 14-2

• Related Diversification – new business shares

• Unrelated Diversification – lacks shared

• Staff and Operating Systems

Diversification PPT 14-4

Three Steps to Take In Evaluating

Assess Assets, Identify Business

and Excess Leverage Assets

Diversification Figure 14.1 PPT 14-5

Brand Name – e.g., Disney, Sony, IBM, Virgin

2. Does the brand add value to the offering in the

3. Will the extension enhance the brand name and

Diversification PPT 14-6

• Marketing Skills – e.g., Black & Decker & Ernhart

• Capacity in Sales or Distribution - e.g., Nestle & Coke

• Manufacturing Skills - e.g., Honda with small motors; Sony

• R&D Skills - e.g., GE with turbines and light bulbs

Diversification PPT 14-7

• Potential synergy does not exist - e.g.,

• Potential synergy exists, but

• Potential synergy is overvalued - e.g.,

Diversification PPT 14-8

• Managing and Allocating Cash Flow - e.g., tobacco firms

• Obtaining a Bargain Price for a Business

• The Potential to Refocus a Firm - e.g., Esmark selling its

• Obtaining Liquid Assets - e.g., banks & insurance cos.

Diversification PPT 14-10

(n = 412 of S&P 500)

Diversification PPT 14-11

Entry Strategies Major Advantages Major Disadvantages

• Uses existing resources • Mixed success record

Joint Venture or Alliance • Technological/marketing • Potential for conflict in

Diversification Figure 14.3 PPT 14-12

Entry Strategies Major Advantages Major Disadvantages

Educational acquisitions • Provides window and initial • Risk of departure of

• Can provide window on • Unlikely alone to be a major

Venture Capital and

Licensing to Others • Rapid access to a market • Will lack knowledge/control of

Diversification Figure 14.3 PPT 14-13

Technologies or Services Embodied in the Product

Internal market Internal ventures Venture capital or

Internal base Internal product Joint ventures

Diversification Figure 14.4 PPT 14-14

• There are eleven motivations for unrelated diversification, including to manage

Diversification PPT 14-15

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