Unrelated diversification provides an opportunity to enter into any business in any industry which has profit prospects. The company may acquire a business in another industry having high-profit potentials. Because of investment in diverse areas of business activities, there is a possibility of offsetting losses in one business with the gains in another business in another industry.
Cross-industry offsetting of losses is very dim in related diversification due to the operation of businesses in the same industry. In a diversified company, the cyclical downswing in one business can be counterbalanced by a cyclical upswing in another business. Skilled corporate mangers can increase shareholder-value by taking over highly prospective businesses in different industries.
There are opportunities for quick financial gain if the parent company resorts to diversification through acquisition of businesses having under-valued assets that have good profit potential.
Financial gain can also be achieved if the new businesses can be acquired with a bargain-price. Unrelated diversification offers greater earnings stability over the business cycle. Management experts are of the view that unrelated diversification is an unreliable approach to building shareholder value unless corporate mangers are exceptionally talented.
Difficulties may abound in selecting right mangers, undertaking appropriate measures when problems; arise, and making decisions when a business unit stumbles. Unrelated diversification through acquisition of other firms requires a sound screening from among the available firms.
Concentric Diversification - Monash Business School
Screening out requires an assessment of the firms to be acquired by using different criteria such as expected return on investment, growth potential, cash flow, environmental issues, government policies, etc. In reality, only companies with undervalued assets and companies that are financially distressed are good candidates for unrelated diversification. A new business, acquired by the diversifier-company is an unknown entity to the corporate managers. This may pose a risk to them. Experience shows that a strategy of unrelated diversification cannot always create competitive strength in the individual business units.
Google founded in is a leading search engine. Google wrested its dominant position in the search engine from Alta Vista, which was taken over by Yahoo. Almost 90 percent of its revenue comes from advertising on Google. So far Google does not face any major imminent threat in this area. The slowdown of the economy does indicate that Internet advertising will be down and the revenues for Google may dip.
Google may fail as Gmail and Chrome business as risky, data privacy and customer support as being inefficient concerning customer demand.
Google is also planning a foray into the mobile handset and e-books market. Does Google have the capacity to out-compete rivals such as Apple?
Levels of Diversification
Is its diversification into the smartphone a smart move? Would this diversification make Google lose focus on its core business? Should Google rather focus attention on the search engine and scale up its capabilities for better services and privacy? The house of Armani is an Italy-based international fashion house whose products spell ultra-luxury. Armani clothes and other allied products are sold through Armani Exclusive Stores spread over most cities associated with glitz and glamour and very high-end departmental stores.
The U. The economic downturn and the rising rate of unemployment in its main markets forced Armani to look for new markets. The Chinese luxury market growing at 30 percent per annum may be the new Armani market and attention area. Can Armani, who is older than the new crop of designers, hold his own? In , Armani opened his first hotel at Burj Khalifa having guest rooms and suites and residences.
The idea was to extend the association of luxury to houses to somehow make it appear that your address can also spell luxury. Armani plans to associate with the aesthetics and interior design of ultra-premium properties across the world. It already has a tie-up with Lodha Builders for their upcoming property in South Mumbai.
Types of diversification strategies
Can the foray of Armani in the ultra-luxury housing segment pay off? Is luxury the criteria for a buyer or is it an idea with novelty appeal. If Armani was to be associated with luxury housing across the emerging economies, would the appeal last? The phone was available at outlets different from other Armani products.
Perhaps the concept of luxury to a mobile phone was better captured by Apple.
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The luxury appeal did not work. Armani is a closely family-held company, its patriarch is old and the world around it is changing. Is entry business high?
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Are competitive conditions favorable? Is the market conducive to growth? Is the cost of entry low? What is the sunk cost of specific equipment? Horizontal diversification. Film production houses also distribute movies through DTH networks. Walt Disney movies and distribution. Vertical integration. Lower costs lead to lower prices which leads to higher market share.
Excess power is sold to either state-run utilities or other industries. As they made further inroads into the children's market they began offering companion low-tech offerings to protect and personalize their hardware offerings. PepsiCo adopted a related diversification strategy when it broadened its product line from soft drinks to fast food franchises and snack foods.
The fast food restaurants --including Burger King and Pizza Hut -- purchased large quantities of soft drinks because their patrons often drank Pepsi and other soft drinks with their meals. Similarly, soft drinks often served as the companion to snack foods --including the Frito Lay brand. This strategy broadened PepsiCo's consumer base and helped it sell more of its core product. All of the largest public accounting companies in the United States entered the business consulting industry as part of a related diversification strategy.
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Many of the firms' large corporate clients encountered a variety of accounting-related financial and operational issues. Accounting firms now offer business consulting in disciplines including human resources, information technology and business process engineering. This allows accounting firms to leverage their accounting and auditing relationships with their clients to drive additional revenue from those same clients.
The diverse offerings also make the accounting firms more valuable to their clients, deepening the relationships. Without some form of strategic fit, the combined performance of the individual units will probably not exceed the performance of the units operating independently. In fact, combined performance may deteriorate because of controls placed on the individual units by the parent conglomerate. Decision-making may become slower due to longer review periods and complicated reporting systems.
Diversification efforts may be either internal or external. Internal diversification occurs when a firm enters a different, but usually related, line of business by developing the new line of business itself. Internal diversification frequently involves expanding a firm's product or market base. External diversification may achieve the same result; however, the company enters a new area of business by.