Question

Strategic planning in dynamic environment

10. What are the reasons firms choose to diversify their operations? How do firms create value when using a related diversification strategy?

Answer 1

10.
There are different reasons that make firms to diversify their operations. The first reason is building of market presence in different segments. It builds branding in different product segment as well as it generates revenues. The second reason is the economy of scope; firms wants to utilize. It reduces the overhead cost and distributes it on different product categories. For example, PepsiCo manufactures different types of products diversity their operations. It helps to fully utilize the fixed cost coming to the operations and distributed on different product segments. The third reason is the firm’s strategy to nullify the slowdown in one business segment by making presence in another business segment that is growing fast. It also happens when firms enter into the international market. Each country goes through the different stages of the business cycle. So, building operations in different markets, insulate the firm from the slowdown or recessionary effects.
A firm creates value by using the related diversification strategy, because it utilizes the existing technological capabilities, available resources and existing capacities with the firm. Hence, with no excess additional cost, firm can begin producing the products of related category. For example, a computer manufacturer company, can produce computer monitors also as a related diversification product. Or, a textile producer firm can produce ready-made garments also. It can be done with available expertise, and already existing brand name supports to facilitate the building of a related diversification, so creates value.