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Growth and Diversification Strategies

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on 11 July 2014

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Transcript of Growth and Diversification Strategies

Growth and Diversification Strategies Growth Strategies Concentration Diversification Vertical Integration What Is Diversification? a growth strategy employed by businesses with a strong core business allows a company to extend its range of products or services or gain entry into new markets Growth through diversification is when a company or organization obtains or invests in different business areas. Are There Different Forms Of Diversification? Related: Unrelated: Vertical: Horizontal: Geographical: involves growth by acquiring new businesses or entering business areas that are related to the current one involves growth by acquiring businesses or entering business areas that are not related to the current one growth along the existing value chain moving into new industries opening new markets Diversification can put a company of the growth fast track. HOWEVER Diversification is probably one of the riskiest growth strategies to pursue and requires careful investigation Going into an unknown market with an unfamiliar product offering means a lack of experience in the new skills and techniques required. Diversification initiatives will require a company to acquire new skills, new techniques, and possibly new facilities. Diversification initiative can weaken a company resources such as technical, financial, and management Therefore, What must companies ask themselves before proceeding with diversification? Do they have enough management to support the new product lines? Does the company have the financial strength to survive until the diversification is profitable? Can the company manage the distraction of diversification? What Strategies Can Help Achieve Diversification? Internal development of new products Acquisitions Strategic alliances Joint ventures What Is Vertical Integration? Growth through vertical integration is when a company expands its business into areas that are at different points on the same production path, such as when a manufacturer owns its supplier and/or distributor. Examples: A mortgage company that both originates and services mortgages, meaning that it both lends money to home buyers and collects their monthly payments. A solar power company that produces photovoltaic products and also manufacturers the cells, wafers and modules to create those products would be considered vertically integrated. The merger of Live Nation and Ticketmaster created a vertically integrated entertainment company that manages and represents artists, produces shows and sells event tickets. What Are The Different Types Of Vertical Integration? Backward Vertical Integration: Forward Vertical Integration: expanding a company or business by acquiring suppliers expanding a company or business by acquiring distributors What Should Companies Consider When Deciding To Vertically Integrate? Cost and Control: Cost deals with cost of market transactions from firm to firm against/versus the cost of performing the same transactions internally within one single firm. Control deals with asset control Asset control can impact barriers to entry which can assure cooperation of key value adding players. Benefits Drawbacks Transportation costs can be reduced. This can be the case if common ownership results in closer geographic proximity Benefits Coordination of the supply chain is improved Capture upstream or downstream profit margins By means of increased control over inputs it gives more opportunities for differentiation You can make it harder for potential competitors by increasing entry barriers like If your firm can acquire sole access to a scarce resource Gain access to downstream distribution channels that you would otherwise not have Drawbacks Increased bureaucratic costs, which are costs for the structures and regulations in place to control activity for large organizations and government operations Decreased ability to increase product variety if significant in-house development is required Potentially higher costs due to low efficiencies resulting from the lack of supplier competition. Capacity balancing issues. Example being the firm may need to build excess upstream capacity to ensure that its downstream operations have sufficient supply under all demand conditions Factors Of Vertical Integration Favoring Factors Factors Against Favoring Factors Taxes and regulations on market transactions Obstacles to the formulation and monitoring of contracts Reluctance of other firms to make investments specific to the transaction Sufficiently large production quantities so that the firm can benefit from economies of scale which is the increase in efficiency of production as the number of goods being produced increases Factors Against The quantity required from a supplier is much less than the minimum efficient scale for producing the product The vertically adjacent activities are in very different types of industries. An example being that manufacturing is very different from retailing The product is a widely available commodity and its production cost decreases significantly as cumulative quantity increases What Is A Growth Strategy? A growth strategy is when a company purses an increase in size and the expansion of the current operations. Growth is viewed as necessary for long-run survival in some industries Three approaches of Growth Strategies: Concentration Diversification Vertical Integration In Conclusion: Growth is not always necessarily effective Any growth method must be planned and well managed to achieve desired results Increased size of and operation of any form adds challenge to the management process Diversification brings difficulties of complexity when unrelated diversification is used for growth Unrelated diversification can decline a business' performance if used to much Questions? Who Wants To Be A Millionaire? What Is Concentration? Growth through concentration is when the expansion of a company is through the same business area. involves a company choosing to focus most of its resources on the development of a specific product or a small group of products that are aimed at a specific market Pros Cons Pros of Concentration Cons of Concentration being so invested in one market that a sudden economic turn down could lead to failure known as an expert in a certain field sets a standard/benchmark in the industry that competitor's need to live up to
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