Enterprise Strategy:

Competitive Strategies

Diversification Strategies

Creating Additional Value Through Synergetic Integration of a New Business Into the Existing One

By: Vadim Kotelnikov

Founder, Ten3 Business e-Coach Inspiration and Innovation Unlimited!


"Wide diversification is only required when investors do not understand what they are doing." ~ Warren Buffett

Two Types of Diversification

  • Related

  • Unrelated

Three Forms of Diversification

  • Vertical Integration integrating business along your value chain, both upstream and downstream, so that one efficiently feeds the other

  • 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

  • Geographical Diversification moving into new geographical area to overcome limited growth opportunities in the local market and/or to gain global leadership positions

Means of Diversification

Do It Yourself

Do It with Others



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Innovation Strategy

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  1. 'Value-Creating Mergers: Fact or Folklore?', Michael Lubatkin

  2. Strategic Management, Alex Miller

  3. Every Business is a Growth Business, Ram Charan and Noel. M. Tichy

  4. 'Venture Acquisitions by Google', Vadim Kotelnikov

  5. Strategic Management, Vadim Kotelnikov

  6. Venture Acquisitions by Apple,' Vadim Kotelnikov

  7. 3 Strategies of Market Leaders, Vadim Kotelnikov

  8. Innovation Strategies, Vadim Kotelnikov

  9. SMART Business Architect, Vadim Kotelnikov

Why Diversification?

The two principal objectives of diversification are

  1. improving core process execution, and/or

  2. 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:

  1. Vertical integration along your value chain

  2. Horizontal diversification moving into new industry

  3. 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:

  1. The core competence must translate into a meaningful competitive advantage.

  2. The new business unit must have enough similarity to existing businesses to benefit from your corporation's core competencies.

  3. The bundle of competencies should be difficult for competition to imitate.

 Case in Point  Google

Google acquires innovative companies to diversify Into new areas or to add value to existing technologies and services.

From 2001 to 2011 Google acquired over 100 companies based in USA, Australia, Brazil, Canada, China, Finland, Germany, Greece, Ireland, Israel, South Korea, Spain, Sweden, Switzerland, UK. Thanks to these acquisitions the company created new profitable businesses as context advertising, mobile advertising, video advertising, Internet-boutiques and business e-mail.... More

 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.