Business Development Strategies: Diversification and Integration
Defining a Company’s Field of Activity
A company defines its field of activity, or business portfolio, by establishing its scope of action and differentiating between strategic segments. The scope refers to the range of functions, customer groups, or technologies it will employ. Strategic segment differentiation considers the various combinations of functions, customers, and technologies. A company’s definition depends on its mission, objectives, operating environment, and resource allocation. The greater the differentiation and scope, the more complex the business portfolio management will be.
Ansoff’s Development Strategies: A Critique
Ansoff’s classification of development strategies has a key limitation. While growth implies increases in size (assets, production, sales), development encompasses both quantitative and qualitative changes in a company’s internal characteristics. Ansoff’s classification equates development with growth, overlooking strategies that don’t involve growth, such as business portfolio restructuring.
Market Penetration Strategy: Optimal Use Cases
Market penetration, an expansion strategy, aims to increase sales volume by targeting existing customers or attracting similar new customers with existing products. It represents specialization, as it doesn’t alter the field of activity, but it does imply growth. Market penetration is best suited for industries in rapid growth or with high growth expectations. It can also work in mature industries with unmet demand or in declining industries where a company can grow by outcompeting others.
Product Development Strategy: Two Approaches
The product development strategy involves staying in the traditional market but creating products with new characteristics. These products fulfill the same function but improve customer satisfaction. This can be achieved by:
- Technological Innovations: Introducing improvements, either incremental (e.g., software updates) or substantial (replacing obsolete products).
- Product Line Extension: Adding features to a basic product (e.g., aspirin in tablets, effervescent, and chewable forms).
Market Development Strategy: Motivations and Example
Market development involves introducing traditional products into new markets, leveraging existing or new technology and production capabilities. New markets can mean new segments, applications, or geographic areas. Reasons for this strategy include:
- Emergence of high-quality, cost-effective distribution channels.
- High efficiency in current markets, seeking unsaturated ones.
- Underutilized production facilities.
- Sufficient resources for expansion.
Example: A beverage company supplying food retailers expands to catering companies.
Diversification Strategy: Definition and Motivations
Diversification involves adding new products *and* new markets. This expansion places the company in new competitive environments, often requiring new knowledge, techniques, facilities, and organizational changes. Reasons for diversification include:
- External Reasons: Traditional market saturation, or opportunities in high-profitability, high-growth activities.
- Internal Reasons: Reducing overall company risk (“not putting all eggs in one basket”), utilizing surplus resources, and generating synergies (in related diversification).
- Other Motives: Presence in technologically changing activities (window diversification) or improving company image (image diversification).
Related Diversification: Synergy and Risks
Related diversification occurs when there are similarities between businesses (resources, channels, markets, technologies). The main reason is to generate synergies, where joint development yields better results than individual operation. Synergies arise from sharing resources/capabilities and transferring knowledge. A key risk is coordination costs, which increase with the number and variety of businesses. Synergies require deliberate management effort.
Unrelated Diversification: Methods, Reasons, and Risks
Unrelated diversification is the most drastic growth form, with no connection between the traditional activity and new businesses. Businesses are viewed as an investment portfolio for financial synergies. Due to high uncertainty, mergers and acquisitions are commonly used. Reasons include:
- Pursuit of high profitability.
- Managerial objectives (growth may align more with manager utility than shareholder profitability).
Risks include:
- Absence of synergies, making value creation difficult.
- Dispersion of interests due to high activity diversity, potentially harming the core business.
Vertical Integration: Competitive Advantages
Vertical integration can improve profitability and competitive position. Besides cost advantages, it offers:
- Protection of Technology: In-house component manufacturing protects technology.
- Reinforcement of Differentiation: Controlling component quality enhances product quality and brand image.
- Facilitated Access: Ensures access to production factors or product outlets, especially important when facing powerful suppliers or customers (e.g., oil companies accessing oil fields).
Business Portfolio Restructuring: Options and Considerations
Business portfolio restructuring redefines a company’s field of activity when the entire company, not just isolated businesses, underperforms. It can involve divestment, new business entry (often related to the core business), and revitalization of underperforming businesses. Reasons include excessive diversification, strong competitors, or managerial objectives overriding value creation. Exit strategies include sale, harvest, and liquidation. Liquidation is the least attractive, involving ceasing activities and selling assets. Management resistance to acknowledging failure can hinder a planned liquidation.