Strategies for Diversification - Summary

A business has four basic growth alternatives open to it:

1. Market Penetration: It is an effort to increase company sales without departing
from its product marketing strategy.
2. Market Development: Strategy in which the company attempts to adapt its
present product lines to new missions.
3. Product Development: It retains the present mission and develops products that
have new and different characteristics.
4. Diversification: it calls for a simultaneous departure from the present product line
and present market structure.

A product-market strategy is a joint statement of the product line and the corresponding
set of missions which the products are designed to fulfil.

Companies diversify to compensate for technological obsolescence, to distribute risk, to

utilize excess productive capacity, to reinvest earnings, to obtain top management, etc.
In deciding whether to diversify, management shall analyze the future growth prospects
i.e.,Long Term trends, Contingencies and Unforeseeable and Unknown events.

After deciding on to diversify, the next important question that arises is where should it
look for diversification opportunities? There are three types of opportunities:
● Vertical diversification: To branch out into production
of components, parts and materials. This implies both
catering to new missions and the introduction of new
products.
● Horizontal diversification: This can be described as
the introduction of new products which, while they do
not contribute to the present product line in any way,
cater to missions which lie within the company’s
know-how and experience in technology, finance and
marketing.
● Lateral diversification: To move beyond the confines
of a industry to which a company belongs.

Management should state the objectives of growth and stability in quantitative terms as
long-range sales objectives.
Growth: Management’s first aim in diversification is to improve the growth pattern of the
company. The growth objective shall be to have a higher growth rate after diversification
than the growth rate of sales of the original product line by a specified margin (under
trend conditions).

Stability: The second effect desired of diversification is an improvement in company

stability under contingent conditions. The stability objective can be stated as: under
contingent conditions, the percentage decline in sales which may occur without
diversification should exceed the percentage drop in sales with diversification by an
adequate margin.

Below are the two steps that shall be taken into consideration for evaluating the
diversification opportunities:
1. Applying the qualitative standards to narrow the field of diversification.
2. Applying the numerical criteria to select a preferred strategy or strategies.

Group 3 - Section D