Diversification

Diversification is a corporate level strategy.It takes the organization away from its existing and products.It exploits core competencies in new business.The aim is to create value for shareholders with better returns and high risks.It can be of two forms.

a.Related diversification :It is within the industry.Existing skills and facilities are shared.For example,Unilever is diversified in consumer goods industry in similar areas.

• Vertical integration :Backward or forward integration into adjacent activities of current business.
• Horizontal integration :Integration into activities which are competitive or complementary with present activities.It entails moving into more than one industry.

b.Unrelated diversification :It is moving beyond the industry in new business areas.It can be in new markets or already existing markets.It builds a portfolio of unrelated business.
Advantages of vertical integration

• Cost saving through economics of scale.
• Added technological capabilities.Better coordinated operations.
• Increased differentiation capabilities for products.
• Increased certainly in supply of inputs.
• In ceased profitability.Reduced costs of buying and selling.

Disadvantage of vertical integration

1. Increase risk through

• Added capital investment.
• Looking up resources.
• Vested interests in protecting present technology and production facilities.

2.Over dependence on in house sources of supply.
3.Problem of balancing skills and capacity in value chain.
4.Radically different skills and capabilities may not be needed.
5.Reduces flexibility.Outsources may not be possible.
6.Difficulties arise in integrating various specialisations.