Strategies of Related

Diversification Group 18

Rahul Anand FT183072

Raghav Sharma FT182069
NITHYAPRIYA VEERARAGHAVAN FT181052
Tushar Mittal FT184104
Mohit Khandelwal FT181045
Sandeep Gupta FT181075
Abhishek Awasthi FT182004
DHRUV SHARMA FT181034
SHRUTI MISHRA FT183089
KRISHNA PRABHAT EMANI FT184037
 EVALUATION OF SCOPE EXPANSION

1. Timing
Motive of company to expand
Offensive by leveraging existing strengths
Defensive by escaping its core strength

2. Industry
Attractiveness of the industry
Porters Five forces to predict profitability and also competitor analysis
Fierce competition

3. Synergies
Scope economies of the existing business
Common resources
Sharing activities
Cross selling
 EVALUATION OF SCOPE EXPANSION (Cont.)

4. Implementation
Organizational mechanisms required to exploit scope economies
Front end or back end Integration approach
Informal organization structure can be more powerful

5. Ownership
Choice of ownership
Creating a larger pie
Capturing a larger share of an existing pie
 JUSTIFICATION OF OWNERSHIP

1. Absence of Markets
Vertical integration by industry
2. Relationship specific investments
Customization is an example
3. Coordination
Internal coordination is necessary
4. Double marginalization
Both upstream and downstream have monopoly powers.
5. Enhancing market power
Integration grows the pie

Rely on hybrid ownership rather than outright ownership

 Flawed Reasons for Expansions

Misplaced Motives:-
1. To escape problems in core business
2. Internal slack
3. External Pressures
Incorrect Interpretation of Industry Analyses:-
1. Interpret threats as opportunities
2. Ignore impact of competitive forces
3. Identify similarities with existing business
Flawed Synergy Logic
1. Overestimate core competencies
2. Ignore commonalities in activities
3. Rely on Revenue Enhancement
Ignoring Organizational Considerations
1. Mismatch with existing Organization
Pitfalls around ownership choices
1. Own to reduce risk
2. Own to capture profit elsewhere
3. Own to stabilize input prices
 Solutions

Full ownership is not a single option for related diversification. Following points can be
considered :-

1) Detailed Contract can be an option to avoid relationship specific investments.

2) Co-ordination between two companies can be established by a detailed strategy.
3) Double mark-up problem can be solved by appropriate contract.
4) Informal Norms or Trust may be a strategy to avoid vertical integration.