Business Strategy and Policy- Diversification Past Paper Questions

a. Done prior

b. The two broad categories of diversification strategy options available to companies are; related
diversification and unrelated diversification.

- Related diversification involves sharing or transferring specialized resources and

capabilities. Related businesses possess competitively valuable cross-business value chain
and resource commonalities.
One main reason for engaging in related diversification is so that the business can transfer
specialized expertise, technological know-how, or other competitively valuable strategic
assets from one business’s value chain to another’s.
Another reason is so that the business can exploit the common use of a well-known brand
name.
- Unrelated diversification involves the act of entering into a new line of business usually
through the acquisition of an existing company rather than forming a startup subsidiary.

Industry Importance Industry Weighted Industry Weighted Industry Weighted

attractiveness Weight A score B score C score
measure Weighting Weightin Weightin
g g
Market size 0.15 8 1.2 5 0.75 2 0.3
Intensity of 0.20 8 1.6 7 1.4 3 0.6
competition
Emerging 0.10 3 0.3 10 1 5 0.5
opportunities
and threats
Presence of 0.05 5 0.25 6 0.30 8 0.4
substitutes
Cross-industry 0.15 8 1.2 8 1.2 4 0.6
strategic fit
Resource 0.05 7 0.35 7 0.35 7 0.35
requirements
Seasonal and 0.05 8 0.4 9 0.45 10 0.5
cyclical
influences
Social, 0.05 9 0.45 7 0.35 7 0.35
political,
regulatory,
and
environmental
factors
Industry 0.15 10 1.5 8 1.2 6 0.9
profitability
Industry 0.05 5 0.25 8 0.4 8 0.4
uncertainty
and business
risk
Sum of 1.00 6.5 7.4 4.9
importance
weights
Overall
weighted
industry
attractiveness
scores

INDUSTRY B- 1ST
INDUSTRY A- 2ND
INDUSTRY C- 3RD

Interpreting the Industry-Attractiveness Scores

Industries with a score much below 5 probably do not pass the attractiveness test. If a company’s
industry-attractiveness scores are all above 5, it is probably fair to conclude that the group of
industries the company operates in is attractive as a whole.

Discuss in detail, the advantages and disadvantages of ‘unrelated diversification’. Use examples.
[20 marks]

Advantages:
 In some cases of company acquisition, this diversification can secure funds on hand
during a seasonal slowdown, adding to the cash flow for the main business activity.
 Spreading the risk through different sectors of the economy. It is very important to
identify industries in which the business activity slowdown does not coincide with the
slowdowns in the main business of the company.

Disadvantages:
 Achieving successful unrelated diversification requires good management skills, closely
following each of the business activities and timely identifying and solving even the
smallest problems. The greater the number of business activities, the more difficult is the
total management task.
 In many instances the overall performance of the unrelated business activities does not
exceed the individual ones. Sometimes it is even worse, unless the managers are
exceptionally talented and focused.
 As a rule, the implementation of unrelated diversification strategy requires allocation of
significant financial and human resources and there is always the risk of harming the
main company business.

Explain the reasons why a firm should pursue a diversification strategy

[10 marks]

Discuss in detail the ways in which it could enter new businesses.

[10 marks]

- Acquisitions
- Internal development
- Joint ventures