Strategic Management Session 4

Strategic Management
Objectives
The participants will understand the following-
• Discuss various strategies companies prefer
• Understand what is diversification & why is it necessary
• Understand the Ansoff Matrix
• Understand Porter’s 3 tests for Diversification

What is diversification strategy?
A diversification strategy is a method of expansion or

growth followed by businesses. It involves launching a
new product or product line, usually in a new market. It
helps businesses to identify new opportunities, boost
profits, increase sales revenue and expand market share.
The strategy also gives them leverage over their
competitors.
Diversification Contd…
The diversification strategy is often opted for by companies

that have established a reputation domestically. This gives
them scope for growth and enables them to expand to new
markets or introduce new products. Usually, there are four
approaches to product expansion that businesses can follow.
Introducing any product into a new market involves a lot of

research to understand the people. If the new product does
not appeal to the local tastes, the business can face heavy
loss, considering that diversification is expensive.
Three Diversification Strategies
• #1 – Concentric diversification
• This method introduces closely related products to the existing market. That is,
similar products are added to the current product line. Such a type of
diversification brings the focus of a business to a center point, thus concentric.
For example, an automobile company adds a solar-powered car to its eco-friendly
auto line.
• #2 – Horizontal diversification
• Diversifying a product horizontally means introducing new but unrelated offerings
to the company’s product mix. Horizontal diversification can also be adapted to
launch complementary goods. For instance, a clothing company launching its
footwear line.
• #3 – Conglomerate diversification
• A business focuses on a completely different product line in this strategy. Hence,
this can be extremely risky. The company broadens its scope and targets a
different market. The Disney diversification strategy is a suitable example here.
Example of Diversification
• Amazon is a multinational company that provides
various online services such as e-commerce, cloud
computing, email delivery, online video, music
streaming, e-payment, and affiliate marketing. Apart
from this, Amazon also introduced a virtual assistant,
Alexa, in 2014. Further, it operates brick-and-
mortar stores in the United States.
• Thus, Amazon has been successfully following
a business diversification strategy that has been helping
it grow its profits. Therefore, e-commerce is no more the
only major source of income for Amazon.
Four Growth Strategies
Igor Ansoff (1918- 2002) was a strategist who has contributed
immensely to the field of Strategies & Diversification.
Four growth strategies were identified by Igor Ansoff

using a 2×2 matrix (now known as the Ansoff Matrix) and
was made up of new or existing products on one axis and
new and existing markets on the other. The Ansoff matrix
is a widely used strategic planning tool that provides a
simple, yet effective framework to help companies plan
and implement an effective growth strategy.
Ansoff Matrix
When does diversification make
sense
Single business strategies have a number of advantages
And also number of risks…. Like all eggs in one basket
The logic is to spread corporate risk to multiple strategies
To enhance shareholder’s value = Synergy

2+2=5
Related v/s Unrelated Diversification
Related Unrelated
• Strategic fit in operations, • Conglomerates… Spread risk

marketing, R&D, distribution, over multiple industries-
labour etc stabilizing corporate profitability
• Distinct businesses, but their • Allows opportunity to enter fast
value chains have synergies growth areas unrelated to
• Exploit economies of scope current business
• Immunity from industry specific
business cycles
Drawbacks of Unrelated
diversification
• Places enormous demand on corporate management viz shifting

resources & making moves to unchartered territory
• Cannot capture synergies- No strategic fit between SBUs
• The up & down cycle makes the sales & profit absolutely mythical &
the assets survive on thin ice.
Case Study– ITC Diversification
Strategy
Methods For Diversification
Acquire Existing Business Provides quick market entry. Avoids entry barrier
like technology, access to suppliers, economies of
scale, promotion, distribution etc
Create new businesses When company posses skills to be delivered at low

cost, Time consuming
Joint Venture When there is entry barrier or risk. Both the

companies benefit from each other’s know how.
However, leveraging on other’s experience can cause
conflict & JVs can break
Porter’s Three Tests For
Diversification
Attractiveness . Is the target industry attractive?
Use the Five Force Model to assess market
attractiveness.
Does the diversification move fit in with the grand
strategy of the firm?
Better Off . Does the diversification move produce opportunities

for synergies?
. Will the company be better off with the
diversification as it was before? How & Why?
Cost of Entry . Is the cost of diversification worth it?

. Will the diversified firm create enough value or
profits worth the diversification & justify the cost?
Shrink
What businesses to Exit?
• Low profit
• Low growth
• Poor strategic fit
• Lack of managerial bandwidth
• Needs investment beyond capacity
• ROI/ ROTI
Outsource
• Secondary activities on the Value Chain
• Focus on Strategic Activities to transform business
Summary
The diversification strategy is often opted for by
companies that have established a reputation
domestically & want to expand having been
established
Diversification makes sense when single business
strategies have a number of advantages
Concentric Diversification introduces closely

related products to the existing market. Similar
products are added to the current product line.
Self - Assessment Questions
Q1. True or False: The diversification strategy

is often opted for by companies that have not
yet established a reputation
Select the correct option.
A. True
B. False
19
Self - Assessment Questions
Q2. Concentric Diversification is-
Select the correct option.
A. This method introduces widely related
products to the existing market
B. Ensures sufficient availability of funds
C. This method introduces closely related
products to the existing market
D. None of the above
Reference List
• Taylor, The Principles of Scientific Management, Harper
& Brothers
• Drucker, The Practice of Management, Harper &
Brothers
• McGregor, The Human Side of Enterprise, McGraw-Hill
• Porter, Competitive Advantage: Creating and Sustaining
Superior Performance
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Strategic Management

The participants will understand the following-

• Discuss various strategies companies prefer

• Understand what is diversification & why is it necessary

• Understand the Ansoff Matrix

• Understand Porter’s 3 tests for Diversification

A diversification strategy is a method of expansion or

The diversification strategy is often opted for by companies

Introducing any product into a new market involves a lot of

Four growth strategies were identified by Igor Ansoff

And also number of risks…. Like all eggs in one basket

The logic is to spread corporate risk to multiple strategies

To enhance shareholder’s value = Synergy

• Strategic fit in operations, • Conglomerates… Spread risk

• Places enormous demand on corporate management viz shifting

Create new businesses When company posses skills to be delivered at low

Joint Venture When there is entry barrier or risk. Both the

Better Off . Does the diversification move produce opportunities

Cost of Entry . Is the cost of diversification worth it?

Concentric Diversification introduces closely

Q1. True or False: The diversification strategy

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