Examples of Business Diversification.
A restaurant can diversify by adding a gourmet food shop.
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1 [Product Development Strategy] | Examples of Product Development Strategy 2 [Penetration Strategies] | Examples of Penetration Strategies 3 [Product Diversification Strategy] | Product Diversification Strategy 4 [Backward Vertical Integration Strategies] | Examples of Backward Vertical Integration Strategies.
A business diversifies by offering assorted goods and services, participating in new industries, or finding multiple uses for its products. You might chart this course to hedge against threats to your current business or expand your customer base and revenue sources. Companies that diversify take advantage of their expertise in an industry or line of business, or of an abundance of financing or physical assets.
Agriculture.
Farms diversify by expanding product lines and using items both to sell and to use in production of other goods. Dairy farms produce milk as their core product, but from this root, a farm can branch into making related products such as cheese or ice cream. A farm with enough space can grow different crops, thus having multiple product lines. Some farms raise cattle for sale and use the cattle’s organic matter to fertilize and support the growth of crops; similarly, wheat or corn can go to market or into the mouths of livestock.
Restaurants.
A restauranteur can tap revenue streams beyond serving meals in the restaurant. Grocery stores can carry the restaurant's line of salad dressings, marinades, or sauces, for example. A restaurant might have a gift shop to sell gifts tailored to the restaurant, its menu, or community, such as cookbooks, travel books and videos, souvenirs, and postcards.
Sporting Goods.
The sporting goods market encompasses a customer base with diverse sports and recreational interests. Many retailers will have an assortment of choices to meet these needs. For example, a store may carry shoes for runners, basketball players, golfers, soccer players, and baseball players. Sports and outdoor equipment includes balls, bats, gloves, shin guards, golf clubs, camping gear and fishing poles. Diversification has led outdoor stores to include outdoor apparel, GPS devices, and cameras along with the more traditional fishing poles, rifles, and tents.
Construction Equipment.
Construction equipment dealers diversify by branching out their goods, services and locations. Geographic diversity can help a dealer hedge against a slowdown in construction or industrial activity in one region. Other dealers have added safety consultation, training, and construction materials such as pipes to their staples of maintenance and rentals. Dealers may choose farm equipment to counterbalance significant drops in construction equipment sales and rentals. For example, by one estimate, construction machinery sales in 2009 dropped 40 percent against only a 5-percent decline in farm equipment sales.
Conglomerate Diversification.
Some businesses merge with or acquire other businesses. Congolmerate diversification can involve related or often unrelated enterprises. For example, an entrepenuer might operate a restaurant, a car dealership, and a land development business under one umbrella. Financial considerations, rather than similarities among lines of business or other strategic concerns, predominate mergers and acquisitions.
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About the Author.
Christopher Raines enjoys sharing his knowledge of business, financial matters and the law. He earned his business administration and law degrees from the University of North Carolina at Chapel Hill. As a lawyer since August 1996, Raines has handled cases involving business, consumer and other areas of the law.
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Conglomerate Diversification /unrelated Diversification/ Strategies.
Conglomerate diversification is growth strategy that involves adding new products or services that are significantly different from the organization's present products or services. Conglomerat diversification occurs when the firm diversifies into an area(s) totally unrelated to the organization current business.
Most conglomerate diversifications are based on the rationale that expansion into unrelated industries has a very attractive potential:
". the basic premise of unrelated diversification is that any company that can be acquired on good financial terms represents a good business to diversify into" (Thompson and Strickland ).
Typically, corporate strategists screen candidate companies using such criteria as:
Whether the business can meet corporate targets for profitability and return on investment. Whether the new business will require substantial infusions of capital to replace fixed assets, fund expansion, and provide working capital. Whether the business is in industry with significant growth potential. Whether the business is big enough to contribute significantly to the parent firm's bottom line. The potential for union difficulties or adverse government regulations concerning product safety or the environment. Industry vulnerability to recession, inflation, high interest rates, or shifts in government policy.
Three types of companies make particularly attractive acquisition targets:
Companies whose assets are "undervalued" - opportunities may exist to acquire such companies' for less than full market value and make substantial capital gains by reselling their assets and businesses for more than their acquired costs. Companies that are financially distressed. Companies that have bright growth prospects but are short on investment capital.
Unrelated diversification has appeal from several financial angles:
Business risk is scattered over a variety of industries, making the company less dependent on any one business. Capital resources can be invested in whatever industries offer the best profit prospects; cash from businesses with lower profit prospects can be diverted to acquiring and expanding businesses with higher growth and profit potentials. Corporate financial resources are thus employed to maximum advantage. Company profitability is somewhat more stable because hard times in one industry may be partially offset by good time in another. To the extent that corporate managers are astute at spotting bargain-priced companies with big upside profit potential, shareholder wealth can be enhanced.
However, there are two biggest drawbacks to unrelated diversification: the difficulties of managing broad diversification and the absence of strategic opportunities to turn diversification into competitive advantage.
Despite these drawbacks, unrelated diversification can be a desirable corporate strategy.
An Example of a Company Conglomerate.
Hemera Technologies/Photos/Getty Images.
Related Articles.
1 [Backward Vertical Integration Strategies] | Examples of Backward Vertical Integration Strategies 2 [Forward Integration] | Example of a Company's Forward Integration 3 [Vertically Integrated Companies] | Examples of Vertically Integrated Companies 4 [Concentric Diversification] | What Are the Benefits of Concentric Diversification?
A conglomerate is a large, often multinational, corporation that owns companies in different industry sectors. Conglomerates gained popularity in the 1960s as companies that generally engaged in one line of business began diversifying their business models through leveraged buyouts and mergers and acquisitions.
Acquisitions.
Initially, companies engaged in vertical combinations, whereby they merged with companies in similar lines of business (suppliers merged with distributors) for financial synergy. However, the acquisitions trend transitioned from supply-chain mergers to horizontal mergers, whereby companies acquired competitors in the same industry. As companies grew profitable, banks grew more lax in lending. This resulted in large corporations creating ingenious ways to generate synergy, and profits, by purchasing companies in completely different business sectors.
General Electric.
An example of a successful conglomerate is General Electric, popularly known as "GE." General Electric, formed by Thomas Edison in 1890, began as a lighting business and has since transformed into a conglomerate that is more synonymous with "general" than "electric." Shortly after the company was formed, it engaged in horizontal mergers and other forms of expansion that resulted in producing radios, refrigerators and wind turbines. GE developed World War I aircraft and eventually became the largest manufacturer of jet engines through GE Aviation, a new line of business.
Lines of Business.
Besides successfully acquiring television networks, financial services firms and aerospace companies, General Electric has also engaged in oil drilling and computer manufacturing, among other ventures. The notable distinction between GE and other conglomerates is its success rate. General Electric is the only company from the original 12 companies listed on the Dow Jones Industrial Average that remains. Moreover, it has sold companies for billions of dollars, as well as purchased underperforming companies engaged in similar conglomerate activities and successfully improved and expanded these businesses.
Industry Leaders.
General Electric currently offers products and services in the following sectors: air, water, oil and gas, financial services, healthcare, electric, energy, aviation, rail, software and lighting. The business model is a successful one because General Electric conducts extensive market research and analysis, and retains market leaders in the relevant industries.
References (3)
About the Author.
Shàa Hudson is a corporate finance attorney and business consultant who specializes in mergers and acquisitions, private equity and other investment transactions. Hudson drafts and reviews investment contracts and provides advice on the risks associated with private placements and acquisitions. She received her Juris Doctor from the University of Iowa College of Law and has a Master of Laws in transnational business.
Photo Credits.
Hemera Technologies/Photos/Getty Images.
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[Conglomerate Company] | Characteristics of a Conglomerate Company.
[Business Diversification] | Examples of Business Diversification.
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[Conglomerate] | What Is Considered a Conglomerate?
4 give recent examples of concentric diversification.
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