business diversification
TRANSCRIPT
Introduction
• What is diversification?
• Why do firms diversify?
• How do firms enter a new business?
• Types of diversification
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What is diversification?
Diversification consists of expanding the range of business activities carried out by a firm away from the present product line and market structure.
Diversification involves:
Search and selection of new business areas.
Formulation and implementation of an entry strategy.
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What is diversification?
Currentproduct X
Newproduct X1
Another newproduct X2
Newproduct Y....
Currentmarket A
Newmarket A1
Another newmarket A2
....
Market penetration
Product development
Market development
Diversification
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What is diversification?
Currentproduct X
Firm
Supplier SupplierSupplierSupplier
Supplier
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What is diversification?
Firm
Client ClientClientClient
Client
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Why do firms diversify?
Diversification allows the firm to grow rapidly by expanding operations into new business fields.
Why is (rapid) growth beneficial?
Economies of scale (the cost per unit of production decreases as volume of product increases).
Lower average unit costs (running at full capacity).
More bargaining power with suppliers and customers.
Exploiting differences between diverse geographical areas.
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Why do firms diversify?Example: Tiscali (1998-2009)
* ADSL (Asymmetric Digital Subscriber Line)
1998
Internet (free) access
1999
Market entry
Market development
2003 2009
Product development
Diversification
Acquisitions in the EU
Fixed phone lines, ADSL
Virtual MobileNetwork Operator
Telecom in Italy and the UK
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Example: Tiscali (2009-2011)
2009
Product development
Diversification
Fixed phone lines, ADSL
Virtual MobileNetwork Operator
Telecom in Italy and the UK
2011
UK division sold in 2009
Why do firms diversify?
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How do firms enter a new business?
1. Acquisitions of other companies that already operate in another business.
2. Internal start-ups by developing own business ideas, allocating capital and other resources, and venturing into a new business.
3. Joint ventures by partnering with other companies that already operate in another business and sharing assets, employees, know-how, etc.
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How do firms enter a new business?
Acquisition Joint ventureInternal start-up
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Types of diversification
Two types of diversification:
1. Related: when the value chains of two businesses that are managed within the same firm (i.e., the same company or company group).
2. Unrelated: when the value chains of two businesses do not share any linkage, i.e., they are completely different and they do not offer any opportunities for competitive advantage if managed within the same firm.
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Examples – Related Johnson & Johnson
Consumers products
Baby care
Skin and hair care
Wound care
Oral care
Women's care Medicines
Nutritionals Vision care05/01/23 13
Examples – Unrelated General Electrics
Appliances
Consumer products Energy
Financial services
HealthcareAviation
Examples – Unrelated Virgin
Radio
Travel agent
Telecom and media
Radio
Airlines
Railways
Megastore
Soft drinks
05/01/23 16Business Diversification
Thank you