Essay on Profitability of Unrelated Diversification Strategy.

11/23/2015

Essay on Profitability of Unrelated Diversification Strategy.

- Gayatri Subramanian.

Most companies are moving towards internationalization, implementation of corporate strategies for globalization is not the same as the strategies in the native markets. Developing and underdeveloped countries possess institutional voids caused by lack of intermediaries and regulatory systems. It is important to understand the customer preferences in order to customize products. The willingness to pay increases with reduction in costs. Costs are directly proportional to infrastructure available. At most instances infrastructure is not globally uniform. Developed countries have a better infrastructure and therefore strategies that work for developed countries may not work for developing or underdeveloped countries.

Developing countries have a lot of opportunities. Investments could be highly profitable. Multinational companies can exploit the low labor costs and increase production. Mass production can result in lowering the cost of goods. Low cost strategies have worked well for a numerous transnational companies. ‘While companies can’t use the same strategies in all developing countries, they can generate synergies by treating different markets as part of a system.’ (Khanna.T.et.al, 2005). Efficient diversification strategy is essential to build a higher competitive advantage. It also helps to gain economies of scope and scale.

Illinois tool works sets a good example for unrelated diversification. ITW buys any the firm in the auto, welding, construction and food industries. ITW restructures the firms that it acquires and focuses on most profitable product line in order to increase its profit margins. It works on the 80/20 strategy. It tries to make 80% of its profits from 20% of infrastructure. ITW is poorly run however it has established a good position in the market. According to the diversification curve, for developed countries related diversification increases profitability. However unrelated diversification decreases profitability over time. Based on the Boston Consultation Group Matrix, Unrelated diversified business tend towards ‘dog’ state from the ‘cash cow’ state. This indicates that the business model with unrelated diversification is not suitable for higher life expectancy of business.