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"Diversification Is Fundamentally A Negative Strategy.. Diversifiers Are Always Running Away From Something." M.L. Kastens Discuss

2427 words - 10 pages

An essential part of corporate strategy is choosing the right portfolio of business to compete in especially when it concerns growth strategy and over the years this has become one of the key challenges faced by managers. It is highly imperative for business leaders to understand the different strategic options suitable for operating in various types of industries or markets. Suffice is to say that the business environment, which includes the competitive activity also plays a deep-seated role in deciding which strategic choice is most appropriate for the company or firm.According to Macmillan et al (2000), "choice and strategic choice refer to the process of selecting one for implementation."The essay has been structured into four parts: Firstly a brief definition of diversification and types with examples from IBM and Virgin Empire, Secondly, why companies decide to diversify and the implications with examples from Virgin Empire, British American Tobacco, Philip Morris and Lego, Thirdly, theorist views on diversification and why it is deemed as a poor strategy and concludes with that the success or failure of diversification depends on the prior performance of the company.Companies usually decide within the course of their business which products or services they offer in which market (Macmillan et al 2000).Different matrixes are used to determine which objectives they may use to achieve their desired outcome during the product life cycle. One of the objectives includes the Ansoff matrix, which entails four product/market combinations but our focus is on the last of the combinations which is the high-risk diversification strategy (Ansoff 1968 pg 99).This form of strategy is viewed as different from other strategies because, it moves the company away from its original products and services into new ones.(Pearce et al 2002) defines "diversification as representing a "distinct departure" from existing operations through acquisition or internal generation of separate business that are able to provide a synergy with the original firm by counter balancing strengths and weaknesses of the business."According to the definition above diversification can be pursued through internal generation and acquisition which may be described as the two types of diversification i.e. related diversification and unrelated.Related diversification is further divided into horizontal and vertical integration. Vertical integration can either take the form of backward or forward integration with adjacent activities in the value chain such as raw materials or customers for its outputs (finished products). To illustrate, IBM followed a vertical integration strategy when it entered new industries to strengthen its core businesses it performed backward vertical integration into disk drive industry, i.e. for their computer processing units and forward integration into consulting services and computer software industries where the finished products where sold (customers),(Hill et...

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