"Serious Empirical Studies Found That Diversification Really Did Seem To Destroy Value In The 1980's, Though Not In Earlier Decades. Credible Evidence Shows Diversification Really Was Associated With Higher Value In The 1960's." Explain And Discuss These
Submitted by rustyc on 06/30/2008 05:21 PM
- Category: Business
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"Serious Empirical Studies Found That Diversification Really Did Seem To Destroy Value In The 1980's, Though Not In Earlier Decades. Credible Evidence Shows Diversification Really Was Associated With Higher Value In The 1960's." Explain And Discuss These
In answering the question, this paper will firstly explain what diversification is, the different types; why do it and the potential costs and benefits associated with the choice made. By utilising the Hanson case study as a role model, the paper will then go onto cover the differences between diversification pre and post 1980. The paper will then conclude by summarising the points discussed.
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Diversification stems from the corporate level strategy, in essence it is the direction that the firm wishes to go in. The simple definition for diversification is "a move into a new product and market". Rumelt's view supported this simplistic approach; but he went further by stating that diversification should also increase the managerial competencies within a firm.
Once a company has decided to follow a diversification strategy, according to Rosen, there are four types of diversification that a firm can then choose; Vertical integration that involves control over the inputs to the firm; Horizontal integration where control is gained over competitors or related businesses; Concentric diversification where new and related businesses are added and finally Conglomerate diversification where new businesses are added that are unrelated to the firm's existing portfolio. Wrigley determined that the degree of diversification can be measured by the extent of relatedness to the existing business. This can be best summarised by the following diagram.
Diagram to show the choice of diversification and the relatedness of competencies
Product
Market Existing
Competencies New
Competencies
Existing
Competencies Market penetration
Consolidate
Withdraw Product Development
Related Diversification
New
Competencies Market Development
Related Diversification Diversification
Unrelated Diversification
Modified Ansoff Growth Vector Matrix
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