Business Networking Techniques Starbucks – Related Diversification Starbucks is a global coffee chain, originating from the U.S. . A related diversification is one in which the two involved businesses have meaningful commonalties, which provide the potential to generate economies of scale or synergies based upon the exchange of skills or resources. Disclaimer 9. Its share in the total retail pie is set to increase from the current 2 per cent to about 10 per cent by 2010. Western software companies had not historically introduced localized versions of software in China. Strategy | Another way to improve the ROI is to acquire a business at a ‘bargain’ price so the involved investment is low and the associated ROI is therefore high. Return from Related Diversification to More For Small Business Home Page. The reduction of risk can be another motivation for unrelated diversification. Policies | Privacy ft. in 2010. There are three major problems. This is called the market related to concentric diversification. Examples of Related Diversification? Diversification can be segmented into related diversification or unrelated diversification. Related diversification occurs when a firm moves into a new industry that has important similarities with the firm’s existing industry or industries ( Figure 8.10 The Sweet Fragrance of Success: The Brands That “Make Up” the Lauder Empire ). Because films and television are both aspects of entertainment, Disney’s purchase of ABC is an example of related diversification. C. Very High Level of Diversification: This level is applicable to companies that have unrelated diversification. Likewise, a company might create related diversification by integrating into the existing value network. The type of tactical planning you complete as you strategize is important because it forces you to make difficult choices and difficult decisions. It is when a business adds or expands its existing product lines or markets. Request Quote. For example, the same phone company might decide to go into the television business or into the radio business. You must ensure that you are managing the direction you take. Diversification mitigates risks in the event of an industry downturn. TOS 7. As an example, an automotive dealership that purchases a detailing company (cleans, washes, polishes vehicles – both inside and outside) features involved with related diversification. Statista An increase in diversification transactions has been recorded since 2013 Due to the financial crisis, the realization of new construction projects has become more difficult. It is a complicated process, which involves various tasks. (iv) Configure the software so that it can support locally available software and hardware. If such a meaningful commonality is lacking, the diversification may still be justifiable, but the rationale will need to be different. For example, a shoe producer starts a line of purses and other leather accessories; an electronics repair shop adds to its portfolio of services the renting of appliances to the customers for temporary use until their own are repaired. The third is to ascertain whether the organizational integration needed to accomplish the exchange is feasible. Because your print services can be combined with graphic design services upstream (same end client) and be combined with packaging services downstream (same end client and/or same destination). The software vendors were the next category. Second, potential synergy may exist but is never realized because of implementation problems. Even related diversification can be risky. You will have saved your client time and money by enabling the client to 'shop' in one-stop (providing you can excel at delivering those services). Answer and Explanation: Diversification can be of two types related and unrelated. Five years later Microsoft opened an office in China. Unrelated diversification can balance the cash flows of SBU entities. One commonly found resource that is exportable is a strong established brand name like Coca-Cola, Microsoft, Pepsi, Puma, BMW, or Nivea. Image Guidelines 5. A business owner needs to consider efficient diversification strategies to build a competitive advantage, to achieve economies of scale or scope, and/or to take advantage of a financial opportunity that aligns with the business' strategic plan. When the business-units of a company share the inputs, production technologies, distribution channels, etc. You can reach us through our contact page or Usually a firm will either possess or lack a strong skill in marketing for a particular market. Product Diversification Example Some very famous stories of product diversification are that of General Electric, Disney, Tata Group. For example, if you are a commercial printer and you add basic graphic design services and packaging services to your product line, you will have a leveraged diversification opportunity. Report a Violation, Product Diversification: Limitations of a Firm to Undertake Addition of a New Product, Business Strategies: Internal Growth and External Growth Strategies, Increasing Share of Products in Existing Markets. Does your capital investment plan leverage diversification? Example : A cloth manufacturing firm enters into the distribution of clothes. New markets and new products or services are usually good diversification opportunities; but consider these opportunities in the context of integrating benefits into a much stronger overall unique value proposition. Related diversification provides the potential to attain synergies by the exchanged or sharing of skills or resources. The business has been pursuing a long-term strategy of diversifying its core offering beyond beverages; this is designed to help differentiate the brand, which is very important considering coffee is almost a commodity. Agriculture, science and technology, industry and defence were targeted for modernization. The study further says retail space is expected to increase from 10 million sq. Horizontal diversification is a very popular growth strategy in business. Some firms that engage in related diversification aim to develop and exploit a core competency to beco… layoffs and terminations, promotions, and even recruitment. Where a business expands its activities into product lines that are similar to those it currently offers. The lending of many banks has become more stringent, and many companies are pushing their construction projects to procrastinate. The very concept of an unrelated business, where by definition there is no possibility to improve that business through synergy, suggests risk and difficulty. Sun silk shampoo of HUL is manufactured in SSI units of Pondicherry. Related diversification can sometimes provide economies of scale. Based on their earlier experience, it was understood that it was very difficult to parcel out a particular major software localization task to one SV and hence opted for a ‘consortia’ of SVs and set UP a product development centre. Honda Motor Company provides a good example of leveraging a core competency through related diversification. Because it leverages strategic fit, companies that engage in related diversification are more likely to achieve gains in shareholder value. PRC was moving from the socialistic pattern of society to market economy. The reservation system is a remarkable attempt to reposition the image of the Indian industry. Reducing risk can also lead to entering into businesses that will counter or reduce the cyclical nature of the existing earnings. Also write down your choices and decisions to plan the actions necessary to move forward (use samples to provide you with a model for your own action plan). Do you have resources for marketing planning? According to life style consumption study by Edelweiss Securities, organized retail trade in India is now finding its feet. During the 1990s, urbanization started increasing and a shift was seen from agriculture to the service sector. For example, when a company that sells good products expands to start selling kitchenware, it will supplyto the same customers in th… Significant growth in organized retailing during the next three years is expected in the metros and mini-metros through better performance of the existing stores, as well as opening of new stores. Add new products to the existing products in similar markets that will serve similar customers through the same distribution system. However, the two firms together may be able to operate at an efficient level. An example of conglomerate diversification would be Tata Group, which was founded in 1868 and diversified from its humble beginnings as a hotel company into a global multinational encompassing 100 individual companies. And remember that your plan for strategy in business needs to be reviewed on a regular basis and be adapted as market and economic conditions change. It is when a business adds new, or unrelated, product lines or markets. FAQs | Related diversification occurs when a firm moves into a new industry that has important similarities with the firm’s existing industry or industries. Example: The addition of tomato ketchup and sauce to the existing "Maggi" brand processed items of Food Specialties Ltd. is an example of Technology-related concentric diversification 15. In the Chinese computer hardware industry of 36 domestic vendors accounted for 82 per cent of the units of domestically manufactured PCs. Understand the differences between related diversification and unrelated diversification before you invest. Site Index | This shows that compatibility was improving to withstand the latest versions of the software. Two smaller consumer product firms, for example, may not be able to afford an effective sales force, new product development or testing programme, or warehousing and logistics systems. Thus, a frequent motive to diversify is to export or import a marketing talent. We are located in the Greater Vancouver area of British Columbia, Canada. 2. Entering business areas with high ROI prospects: A basic diversification motivation is to improve ROI by moving into business areas with high ROI prospects. Jet Airways and Sahara deal is a typical example. For example, a phone company that adds or expands its wireless products and services by purchasing another wireless company is engaging in related diversification. A firm may be highly skilled at R&D and new product development, but it may lack skills in either marketing or production. Managing | (ii) The interface needs to be translated in a form that is familiar to the local user. Similarly, Kingfisher acquired Air Deccan and symbolically kept the Kingfisher logo in the wings and POS outlets in the country, which includes all post offices and petrol pumps. If you are prepared (and able) to invest in your business during either good or challenging times, make sure that you develop business performance measures to track the costs and the benefits expected? Group(s):Key Terms & Concepts; Print page. For example, a phone company that adds or expands its wireless products and services by purchasing another wireless company is engaging in related diversification. The CAGR (16.5 per cent) of the World Computer Software and Programming Services Market is the highest in Asia. A firm, which has many SBUs that merit investment might buy or merge with a cash cow to provide a source of cash. To diversify in your business, your markets, or your products can be costly; therefore, invest in an efficient diversification strategy. that Work, Managing Time | Related Diversification: When the new business has some sort of connection with the existing business then it is known as related diversification. occurs when a firm moves into a new industry that has important similarities with the firm’s existing industry or industries (Figure 8.4 "The Sweet Fragrance of Success: The Brands That “Make Up” the Lauder Empire"). Godrej is marketing the mosquito repellent Good knight and mango juice Jumpin, which are typical products of small entrepreneurs. For instance, companies producing steel might go into the mining business, where it might control the supplies etc. It now employs 706,000 people across a variety of sectors such as chemicals, steel, automotive, engineering, telecommunications, information systems, and … He states that without such a unity, diversification can never work; financial ties alone are insufficient. Add aspirations and results to the SWOT (some do SOAR (strengths, opportunities, aspirations, and results) as a separate activity) to ensure that your vision for your business is incorporated in your goals and objectives. Unrelated diversification lacks commonality in markets, distribution channels, production technology, and R&D thrust to provide the opportunity for synergy through the exchange or sharing of assets or skills. Related diversification When a firm moves into a new industry that has important similarities with the firm’s existing industry or industries. among themselves, the diversification, is known as related-constrained. Jet Airways has extended its service to the mass market under Jet Lite. Thus, a first condition for successful related diversification is to identify skills or resources that are exportable or that are needed and can be ‘imported! Site For example, an auto company may diversify by adding a new car model or by expanding into a related market like trucks. Related diversification. Doing a thorough analysis and review will enable you to implement more effective strategies, tactics and techniques. Because there may be cost efficiencies. Typical example is Kingfisher Airlines, where the chairman and CEO Vijay Mallya himself routed the surplus cash from this liquor business to give the ‘Fly the good times’ experience to Indian aviation. Technology-related concentric diversification When a new type of product or service is provided with the help of related technology. ft. in 2002 to 80 million sq. In a related diversification the resulting combined business should be able to achieve improved ROI because of increased revenues, decreased costs, or reduced investment, which are attributable to the commonalties. With a related diversification strategy you have the advantage of understanding the business and of knowing what the industry opportunities and threats are; yet a number of related acquisitions fail to provide the benefits or returns originally … In addition to achieving higher profitability, there are several reasons for a company to diversify. Understanding the advantages and disadvantages of unrelated or related diversification strategies is important to the growth of your business. One business unit must have skills or resources that are ‘exportable’ to another company or business unit. However, many less successful examples of diversification have quickly faded from memory: Coco-Cola began an ill-fated wine business in 1977; Kodak’s foray into pharmaceuticals lasted just six years; and the less said about Cosmopolitan’s range of yoghurts, the better. It involves adding new products to your portfolio for markets that are similar or related to your existing customer base, with the ultimate aim of making your business bigger, increasing revenues and, above all, creating a more versatile, resilient, and future proof organisation. Why would a company want to engage in unrelated diversification? The benefit of this related method is it gives simpler expansion: you already … Through competing in this business, Honda developed a unique ability to build small and reliable engines. Third, possible violations of antitrust laws in the west and MRTP (Monopolies and Restrictive Trade Practice) law in India create an additional risk when an acquisition or merger is involved. Concentric Diversification is a form of horizontal diversification where the companies perform the following: 1. Diversification allows for more variety and options of products and services. Sales | Website Building | Start with your SWOT (strengths, weaknesses, opportunities and threats) analysis. Concentric diversification strategies are rampant in the food production industry. Related Diversification. An analysis of the practices of various diversified companies reveals that they seek related diversification in either of the two ways or a combination of the two. Horizontal Diversification. If done correctly, request a quote for services here. Related diversification can sometimes provide economies of scale. Once you begin this planning process you will need to ensure that the plan you develop is do-able; make sure you include effectiveness measures in your plan. (Make sure you understand the definition business model - the practices, and focus, of the business on delivering the value proposition - to engage in a strong and successful strategic planning process). One type of resources that is often easily exchanged is excess capacity. In the software industry, State Owned Enterprises (SOEs) dominated the market. Because films and television are both aspects of entertainment, Disney’s purchase of ABC is an example of related diversification. It is easy to understand why a new industry, with its potential new customers, might prove attractive to a business, … Overseas Chinese were anxious to participate in the resurgence of’ Great China’. About Us | Content Filtrations 6. Unrelated diversification occurs when an organization attempts to diversify into the industries and businesses that hold the promise of the most financial gain for an organization. The technically competent software vendors were few in number, often associated with ministries or universities or both. The second condition is to find a partner or business unit that can either provide or use them. It is usually because the diversification analysis under-estimates the cost of some of the softer issues: change management, integrating two cultures, handling employees. Since, the SOEs were answerable to the government, all their revenues accrued directly to national government. Obtaining a ‘bargain’ price for a business. The heavy reliance upon a single product line can stimulate a diversification move. The smaller firm might then consider joining forces with a larger firm which has a service organization that can be adapted to the involved product. Planning | Diversification is the art of entering product markets different from those in which the firm is currently engaged in. Before publishing your articles on this site, please read the following pages: 1. Conduct a market opportunity analysis and look for unmet needs that align with your objectives. From 25 operational malls in 2003, the country is expecting over 600 malls by 2010. This strategy of diversification refers to an entity offering new services or developing new products that appeal to the firm’s current customer base. Microsoft had worked with SV earlier on a smaller project and so it agreed to work with them on P-DOS project. Privacy Policy 8. Ensure that you build those business measures, set up reporting (even if it's a manual process), and make sure that someone is accountable for the planned results. The other kinds of players were original equipment manufacturers. And on the other side, the diversification analysis might over-estimate the benefits to be gained in synergies. Voice Marketing Inc. They were partially government run or had significant ties with the government. An important issue in any diversification decision is whether, in fact, there is a real and meaningful area of commonality that will benefit the ultimate ROI. The acquisition of the cash cow may reduce the need to raise debt or equity over time, although if the cash cow is acquired, resources will need to be expected. The driver for this acquisition decision is profit; it needs to be a low risk investment, with high potential for return. Typical example is the Bluetooth technology of Blackberry. Service | Reliance entered into retailing by allocating Rs25, 000 crore in a phased manner is a typical example. So, in order to capture the market Microsoft had to introduce the software in local versions. It includes the exchange of business assets by exploiting marketing skills, manufacturing skills — economies of scale, brand name, research and development, etc. For example, BIC is said to follow a related- constrained diversification, as all of its products (razors, cigaret… Peter Drucker claims that all successful diversification requires a common core or unity represented by common markets, technology, or production processes. The typical case in this regard is the introduction of Microsoft products into the People’s Republic of China (PRC). For example, a ketchup manufacturer starts producing salsa, using its current production facilities. Bottling plants of SDC (Soft Drink Concentrates) are now widely engaged in bottling fresh juices of orange, apple, mango, pineapple, grapes, tender coconut and lemon juice for MNCs Pepsi and Coke in India. Likewise, clothes manufacturers might create their own brand shops, in which they sell their clothes. Retail space development in leading centres will provide high impetus to retail growth as about 38 per cent of India’s high income households live in the top five cities (Mumbai, Delhi, Kolkata, Chennai and Bangalore), and an additional 28 per cent stay in mid-sized cities. From the Reference Library. Does adding the new products or services provide you with a leveraged opportunity? Two smaller consumer product firms, for example, may not be able to afford an effective sales force, new product development or testing programme, or warehousing and logistics systems. Ironically, as the degree of relatedness and the synergy potential increase so does the possibility of an antitrust or MRTP problem. A small company can often create or enter a market area and do well with an innovative product. Samsung Related and Unrelated Diversification Samsung Group started out as a grocery store and then transitioned into the wool trade and various other trading markets until it finally found its niche building television sets in the 1970s (Samsung Group, 2018). The following are the types of diversification strategies: Horizontal Diversification. Money | For example, a dairy company producing cheese adds a new variety of cheese to its product line. But there have been occasions where brands have failed where the diversifications have been quite off-color. Because it enables you to more clearly understand what you need to do to more your operation in the direction you need, and want, to go. Networking | Why is strategizing important to your business? They were the principal suppliers to the software industry. You need to ensure that the advantages of diversification and the expected benefits from investment are met as you planned. Because films and television are both aspects of entertainment, Disney’s purchase of ABC is an example of related diversification. Campbell Soup Company  Engages in the manufacture and marketing of branded convenience food products worldwide  4 segments  U.S. Soup, Sauces, and Beverages  Baking and Snacking  International Soup, Sauces, and Beverages  North America Foodservice 11. For instance, Puma extended its presence to the sunglass market in 2008-9 (Figure 8.17). The Path to Diversification If the scope and breadth of company types and diversification strategies above are any indication, this is a journey that can vary dramatically from business to business. Or the acquisition might provide an offsetting cash flow during a seasonal lull. Accordingly Videocon Industries spotted organized retailing as the bright spot for future investments to the tune of Rs25, 000 crore by 2010. Localization is the concept of adaptation of software to specific locales. 3. 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