Question

Identify and briefly discuss each of the three options for diversifying into another industry. Include in your answer the driving forces behind each option AND which one is used most frequently.

Answer 1

Following are the three options by which a company can diversify into another infustty:

(i) Diversification through acquisition:

It is most popular means used of diversification used by the companies to diversify into new industry. Through acquisition diversification, companies are able to take controlling interest in another company and expand its service or product offerings. It is one of the quickest methods to launch a product and even offers an effective way to hurdle such entry barriers as acquiring technological know-how, achieving scale economies, establishing supplier relationships, building brand awareness and securing adequate distribution.

(ii) Diversification through internal development

Diversification through internal development means opening a new business subsidiary from scratch. Usually, internal development of a new business has appeal only in cases when (1) the parent company already has abundance of resources and capabilities need to bring together a new business and compete effectively. (2) there is enough available time to launch a new business. (3) Additional production capacity must not greatly impact the balance of Supply and demand in the market. (4) The cost of entry must be less than cosy of entry through acquisition and (5) Current organizations are likely to be ineffective or slow in responding to the efforts of a new entrant to crack the market.

(iii) Diversification through joint venture

Diversifying via a joint venture can be beneficial in at at least three types of situations. First, a joint venture is a optimal for pursuing an opportunity that is uneconomical, too complex, or risky for an organization to pursue alone. Second, joint ventures can be adopted when the opportunities in industry require a wide range of competencies and know-hows that a company can marshal on its own. Thirdly, companies sometimes use joint ventures for diversifying into a new industry when the diversification move requires having operations in a foreign country.