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Two Types of Diversification |
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Three Forms of Diversification |
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Vertical
Integration
– integrating business along your
value chain, both upstream and downstream, so that one efficiently
feeds the other
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Horizontal Diversification
– moving into more than one industry; the new business usually
somehow relates to the existing one, although a few conglomerates
instead pursue a strategy of unrelated diversification
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Geographical Diversification
– moving into new geographical area to overcome limited growth
opportunities in the local market and/or to gain global leadership
positions
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Means of Diversification |
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Do It
Yourself
Do It
with Others
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Why Diversification?
The two principal objectives of
diversification are
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improving core process execution,
and/or
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enhancing a business unit's
structural position.
The fundamental role of
diversification is for corporate managers to create value for stockholders
in ways stockholders cannot do better for themselves1. The
additional value is created through synergetic integration of a new business
into the existing one thereby increasing its
competitive advantage.
Forms and Means of
Diversification
Diversification typically takes
one of three forms:
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Vertical integration – along
your
value chain
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Horizontal diversification
–
moving into new industry
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Geographical diversification
–
open up new markets
Means of achieving diversification
include internal development,
acquisitions,
strategic alliances, and
joint ventures. As each route has its own set of
issues, benefits, and limitations, various forms and means of
diversification can be mixed and matched to create a range of options.
Capitalizing on Core Competencies
Your company's
core competencies –
things that you can do better than your competitors
– can often be extended to
products or markets beyond those in which they were originally developed.
Such extensions represent excellent opportunities for diversification.
Any core competence that meets the following
three requirements provides a viable basis for your corporation to create or
strengthen a new strategic business unit (SBU)2:
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The core competence must translate into a
meaningful
competitive advantage.
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The new business unit must have enough
similarity to existing businesses to benefit from your corporation's
core competencies.
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The bundle of competencies should be difficult for competition to
imitate.
Case in
Point Philip Morris
When it considered
diversification targets, Philip Morris believed that the
core
competence it had developed in marketing cigarettes
could apply to other, similar markets. Based on this belief,
the company purchased Miller Brewing and then used the
Philip Morris marketing skills to move the Miller
brand from seventh place to second in its market.2
Case in
Point Toyota,
Nissan, and Honda
In late 1980s, Toyota , Nissan,
and Honda moved into adjacent market segments. They launched
luxury cars Lexus, Infinity, and Acura respectively to
compete with BMW and Mercedes. The Japanese cars were priced
about one-third lower and had a superior service network.
The value
proposition was solid enough to win over potential and
current BMW and Mercedes customers, despite the power of
their brands. Yet the Japanese also expanded this profitable
segment as a whole.3
Case in
Point GE
Jack Welch transformed
GE from a purely manufacturing company into a more
diversified company with an increasingly important service
component. In his 1996 annual report, Welch wrote: "Services
is so great an opportunity for the Company that our vision
for the next century is GE that is 'a global service company
that also sells high-quality products.'" When asked if GE
was going to become a more product-oriented or
service-oriented company, Welch replied, "It's got to be a
big combination... It's an integrated game."
In 1996, GE Capital Services
earned US$4 billion. In 2005, GE services agreements
increased to $87 billion, up 15% from 2004. In particular,
financial services revenues increased 12% to $59.3 billion.
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