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Enterprise Strategy

Diversification Strategies

by Vadim Kotelnikov & Ten3 East-West

 

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

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 - to 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.

 

Bibliography:

  1. "Value-Creating Mergers: Fact or Folklore?", Michael Lubatkin, 1988
  2. "Strategic Management", Alex Miller, 1998

Founder - Vadim Kotelnikov. © Copyright by Ten3 East-West.  | Copyright | Glossary | Links | Site Map |

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