Kozlov_SM_11_29_11_16_Diversification


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Strategy of Diversification. Definition Diversification is one of the four alternative growth strategies in the Ansoff Matrix, it is a business development strategy allowing a company to enter additional lines of business that are different from the current products, services and markets. * When it occurs? It occurs when a business develops a new product or expands into a new market. Businesses diversify to manage risk by minimizing potential harm to the business during economic downturns. The basic idea is to expand into a business activity that doesn't negatively react to the same economic downturns as your current business activity. If one of your business enterprises is taking a hit in the market, one of your other business enterprises will help offset the losses and keep the company viable. A business may also use diversification as a growth strategy. * Motives for Diversification GROWTH: The desire to escape stagnant or declining industries has been one of the most powerful motives for diversification (tobacco, oil, defense). But, growth satisfies management not shareholder goals. Growth strategies (esp. by acquisition), tend to destroy shareholder value * Motives for Diversification RISK SPREADING Diversification reduces variance of profit flows But, does not normally create value for shareholders, since shareholders can hold diversified portfolios. Capital Asset Pricing Model shows that diversification lowers unsystematic risk not systematic risk. PROFIT For diversification to create shareholder value, the act of bringing different businesses under common ownership must somehow increase their profitability. * Types of diversification strategies * Enlarging the production portfolio by adding new products with the aim of fully utilising the potential of the existing technologies and marketing system. The concentric diversification can be a lot more financially efficient as a strategy, since the business may benefit from some synergies in this diversification model. It may enforce some investments related to modernizing or upgrading the existing processes or systems. This type of diversification is often used by small producers of consumer goods, e.g. a bakery starts producing pastries or dough products. * Horizontal Diversification * Is moving to new products or services that have no technological or commercial relation with current products, equipment, distribution channels, but which may appeal to new groups of customers. T he major motive is the high return on investments in the new industry. Furthermore, the decision to go for this kind of diversification can lead to additional opportunities indirectly related to further developing the main company business - access to new technologies, opportunities for strategic partnerships, etc. * 2 extra types of diversification strategy *

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