Under what conditions would business diversification be appropriate for a supermarket chain? Which option of diversification (related or unrelated) would you recommend? Discuss.

Analysis of the direction:

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Approaches to Diversify

Three ways to diversify

Acquisition of an existing business

Internal development

Joint ventures

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Diversification by Acquisition

This is a quick and effective way to overcome

target market entry barriers

Need to decide whether to

? Pay a premium price to buy a successful firm

? Pay a bargain price to buy a struggling firm

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Types of Acquisition Candidates

These three types of candidates are usually

considered for acquisition

Bright growth prospects

Undervalued firms

Struggling firms

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Diversification by Internal

Development

This might be a better option if

? The parent firm has the necessary resources

? There is ample time for a new startup

? It costs less than the acquisition option

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Diversification by Joint Ventures

This option is often considered when the new

expansion opportunity is complex and risky

Need to be prepared for challenges such as

conflicting objectives and culture clashes

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Diversification Path

Related Diversification

? Able to achieve synergy

? Sharing of resources and network

Unrelated Diversification

? Hard to achieve synergy

? Able to spread risks

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Stages of Diversification

1. Dominant-Business Firms

? Depend on one major business (>50% of revenues)

2. Narrowly Diversified Firms

? Diversify into a few businesses (2-5)

3. Broadly Diversified Firms

? Diversify into a wide collection of businesses (>5)

4. Multibusiness Enterprises

? Diversify into several unrelated groups of related

businesses