Diversification Strategies

 

Diversification Strategies

 

Diversified companies vary according to two factors: the level of diversification and connection or linkages between and among business units. Five levels of diversification are listed and each is defined in figure below.

 

 

 

FIGURE: Levels of Diversification

 

Companies that follow single- or dominant-business strategies have low levels of diversification. A single business is a company where more than 90% of its revenues are generated by the dominant business.  A dominant business is a company that generates between 70 and 95% of their sales within a single category.

 

Companies classified as dominant businesses also tend to be vertically integrated to some extent, with many having begun as a single business and evolving over time into a dominant business through vertical integration (a topic that will be discussed later in this course).

 

A diversified company is one that earns at least 30% of its revenues from sources outside of the dominant business and whose units are linked to each other by the sharing of resources, and by product, technological, and distribution linkages. Moderately Diversified companies also earn at least 30% of their revenues from the dominant business and all business units share product, technological, and distribution linkages, as illustrated in Figure 5.4. Unrelated diversified companies generate at least 30% of their total revenues from the dominant business but there are few linkages between key value-creating activities. Unrelated-diversified companies do not share resources or linkages as illustrated in Figure 5.4. Companies that pursue unrelated diversification strategies are often known as conglomerates.

 

Conglomerates (companies following unrelated diversification strategies) dominate the private sector economy in several countries such as Latin America, South Korea and India while US has more highly diversified companies.

 

As has been mentioned earlier in our discussion of diversification, some companies that have pursued unrelated high diversification strategies are restructuring to focus on a less diversified mix of businesses that may reflect an inability to manage high levels of diversification. This is because of the recognition that a lower level of diversification would improve the match between the company’s core competencies and environmental opportunities and threats