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Diversification Strategy

Meaning of diversification Related & Unrelated

Diversification is defined as entry into new products or product lines, new services or new markets, involving substantially different skills, technology and knowledge. Diversification can be both related and unrelated. Company does diversification for utilizing their existing facilities and capabilities in a more effective and efficient manner. Company may use excess capacity or capability in manufacturing facilities. Company may diversify to use excess investable funds and other resources such as man, money, machine, material and motivation. And Strive to server more customers, increase size of organization, capture more market, use of existing intermediaries, more use of existing suppliers and outperform competitors.

Diversification is done for increasing synergy to improve sales, profit by adding suitably products which may be related or unrelated. When an established firm introduces a new product, which has little or no affinity with its present product line and which is meant for a new class of customers different from the firm’s existing customer groups, the process is known as conglomerate diversification. Both the technology of the product and the market are different from the firm’s present experience.

 

 

Diversification Strategy

 

 

Related Diversification   Unrelated Diversification

Related Diversification

Unrelated Diversification

Exchange or share assets or competencies by exploiting

REMBO

1 R&D and new product capability

2 Economies of scale

3 Manufacturing skills

4Marketingskills                                                                                                                

5 Brand name

6 OtherSales and distribution capacity

PERMIT

1.Product portfolio new   and investment

opportunities 

2.Employment of new technologies.

3. Reduce risk by operating in multiple product markets.

4. Multiple products experiences

5.Interest to executive

6. Takeover bids can be avoided

.

 

Vertical integration ‚Äď forward vs Backward

Vertically Integrated Diversification: In vertically integrated diversification, firms opt to engage in businesses that are related to the existing business of the firm. The firm remains vertically within the same process sequence moves forward or backward in the chain and enters specific product/process steps with the intention of making the milestone businesses for the firm. The characteristic feature of vertically integrated diversification is that there, the firm does not jump outside the vertically linked product-process chain.

Forward and Backward Integration: Forward and backward integration forms part of vertically integrated diversification. In vertically integrated diversification, firms opt to engage in businesses that are vertically related to the existing business of the firm. The firm remains vertically within the same process. While diversifying, firms opt to engage in businesses that are linked forward or backwardinthechainandenterspecificproduct/processstepswiththeintention of making them into new businesses for the firm.

Backward integration is a step towards, creation of effective supply by entering business of input providers. Strategy employed to expand profits and gain greater control over production of a product whereby a company will purchase or build a business that will increase its own supply capability or lessen its cost of production. For example, a large supermarket chain considers to purchase a number of farms that would provide it a significant amount of fresh produce.

On the other hand, forward integration is moving forward in the value chain and entering business lines that use existing products. Forward integration will also take place where organizations enter into businesses of distribution channels. For example, a coffee bean manufacture may choose to merge with a coffee cafe.

Horizontal diversification

Horizontal Integrated Diversification: Through the acquisition of one or more similar business operating at the same stage of the production-marketing chain that is going into complementary products, by-products or taking over competitors’ products.

Concentric diversification

Concentric diversification too amounts to related diversification. In concentric diversification, the new business is linked to the existing businesses through process, technology or marketing. The new product is a spin-off from the existing facilities and products/processes. This means that in concentric diversification too, there are benefits of synergy with the current operations. However, concentric diversification differs from vertically integrated diversification in the nature of the linkage the new product has with the existing ones. While in vertically integrated diversification, the new product falls within the firm’s current process-product chain, in concentric diversification, there is a departure from this vertical linkage. The new product is only connected in a loop-like manner at one or more points in the firm’s existing process/technology/ product chain.

Conglomerate diversification

Conglomerate Diversification: In conglomerate diversification, no such linkages exist. The new businesses/ products are disjointed from the existing businesses/products in every way; it is a totally unrelated diversification. In process/technology/function, there is no connection between the new products and the existing ones. Conglomerate diversification has no common threat at all with the firm’s present position. For example, a cement manufacturer diversifies into the manufacture of steel and rubber products.

 

Background of merger and acquisition

Merger and acquisition are process of combining two or more companies together. There is a thin line of difference between the two terms but the impact of combination is completely different in merger and acquisition. Mergers and acquisition is done in a systematic ways so that the marriage will be mutually beneficial, a happy and lasting affair.

Mergers and acquisition are done for purposes of achieving synergy. Synergy may be in terms physical facilities, technical skill, managerial skills, distribution channels, general administration, research and development and so on. Impact of positive effects of the merged resources is always greater than individual resources before merger or acquisition.

Meaning and Process of Merger

Basic background of Mergers and Acquisitions

1. Process of combining two or more companies together.

2. Thin line of difference between the two

3. Impact of combination is completely different in merger and acquisition.

3. Mergers and acquisition is done in a systematic ways

4. Purposes of achieving synergy.

5. Synergy in physical facilities, technical skill, managerial skills, distribution channels, general administration, research and development and so on.

Merger is a process in which one company merges into another company or both or all companies are merged into newly created company. In this process one of entity has to be dissolved or both or all company will be dissolved and merged into newly created entity. In the process of merger acquisition is one of the element, along with other elements such as swap of share, transfer of assets, approval of debtors and lenders. In process of merger entity of merged company will be liquidated. All assets and liabilities will be transferred to another existing entity or newly created entity. Expansion through Merger strategy is followed to expand market, product or operation of the company. Many time company follow expansion through merger strategy to acquire the rival company instantly and dominate market rather waste money and other resources on advertisement and branding. Many time two company merge together to share profit and dominate market. Like Vodafone and idea.

Acquisition: Meaning of Acquisition

Acquisition is a process in which one stronger company acquire stake in another company. In acquisition strategy, company acquire controlling share in another company and start controlling operation of acquired company. In acquisition, generally financially strong company overpowers the weaker one. Acquisitions often happen during recession in economy or during declining profit margins. Generally acquisition is more or less a forced association. In Acquisition powerful company either consumes the operation of weak company or force  them to sell their company. Fundamental is clear either be sold or be ready to be finished from map of business world

Types of Mergers

There are following four types of merger

1.            Horizontal Merger

2.            Vertical Merger

3.            Conglomerate Merger

4.            Co-Generic Merger

Horizontal Merger

The types of mergers are similar to types of diversification.

Horizontal merger is a combination of firms engaged in the same industry. It is a merger with a direct competitor. The principal objective behind this type of merger is to achieve economies of scale in the production process by shedding duplication  of installations and functions, widening the line of products, decrease in working capital and fixed assets investment, getting rid of competition and soon. For example, formation of Brooke Bond Lipton India Ltd. through the merger of Lipton India and Brooke Bond.

Vertical Merger

It is a merger of two organizations that are operating in the same industry but at different stages of production or distribution system. This often leads to increased synergies with the merging firms. If an organization takes over its supplier/producers of raw material, then it leads to backward integration. On the other hand, forward integrationhappenswhenanorganizationdecidestotakeoveritsbuyerorganizations or distribution channels. Vertical merger results in many operating and financial economies. Vertical mergers help to create an advantageous position by restricting the supply of inputs to other players, or by providing the inputs at a higher cost.

Conglomerate Merger

Conglomerate mergers are the combination of organizations that are unrelated to each other. There are no linkages with respect to customer groups, customer functions and technologies being used. There are no important common factors between the organizations in production, marketing, research and development and technology.  In practice, however, there is some degree of overlap in one or more of these factors.

Co-Generic Merger

In Co-generic merger two or more merging organizations are associated in someway or the other related to the production processes, business markets, or basic required technologies. Such merger include the extension of the product line or acquiring components that are required in the daily operations. It offers great opportunities to businesses to diversify around  a common set of resources and strategic requirements. For example, an organization in the white goods category such as refrigerators can diversify by merging with another organization having business in kitchen appliances.

 

Meaning of Strategic Alliance

A strategic alliance is a relationship between two or more businesses that enables each to achieve certain strategic objectives which neither would be able to achieve on its own. The strategic partners maintain their status as independent and separate entities share the benefits and control over the partnership, and continue to make contributions to the alliance until it is terminated. Strategic alliances are often formed in the global market place between businesses that are based in different regions of the world.

Advantages of Strategic Alliance

Economic Advantages: There can be reduction in costs and risks by distributing them across the members of the alliance. Greater economies of scale can be obtained in an alliance, as production volume can increase, causing the cost per unit to decline. Finally, partners can take advantage of co-specialization, creating additional value, such as when a leading computer manufacturer bundles its desktop with a leading monitor manufacturer’s business.

Political Advantages: Sometimes strategic alliances are formed with a local foreign business to gain entry into a foreign market either because of local prejudices or legal barriers to entry. Forming strategic alliances with politically-influential partners may also help improve your own influence and position.

Strategic Advantages: Rivals can join together to cooperate instead of compete. Vertical integration can be created where partners are part of supply chain. Strategic alliances may also be useful to create a competitive advantage by the pooling of resources and skills. This may also help with future business opportunities and the development of new products and technologies.  Strategic alliances may also be used to get access to new technologies or to pursue joint research and development.

Organizational Advantages: Strategic alliance helps to learn necessary skills and obtain certain capabilities from strategic partners. Strategic partners may also help to enhance productive capacity, provide a distribution system, or extend supply chain. Strategic partners may provide a goods or service that complements, thereby creating a synergy. Having a strategic partner who is well-known and respected also helps add legitimacy and creditability to a new venture.

Disadvantages of Strategic Alliance

Strategic alliances do come with some disadvantages and risks. The major disadvantage is strategic alliances require sharing of resources and profits, and also sharing knowledge and skills that otherwise organizations may not like to share. Sharing knowledge and skills can be problematic they involve trade secrets. Agreements can be executed to protect trade secrets, but they are only as good as the willingness of parties to abide by the agreements or the courts willingness to enforce them.

Strategic alliances may also create a potential competitor. An ally may become a competitor in future when it decides to separate out.

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