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INTRODUCTION

Diversification is a strategy that takes a company into new markets with new

products or services. Companies may choose a diversification strategy for

different reasons.

Firstly, companies might wish to create and exploit economies of scope, in

which the company tries to utilize its exciting resources and capabilities in

other markets. This can oftentimes be the case if companies have under-

utilized resources or capabilities that cannot be easily disposed or closed.

Using a diversification strategy, companies may therefore be able to utilize

all its capabilities or resources, and able to attract new business from market

segments not catered to earlier.

Secondly, managerial skills found within the company may be successfully

used in other markets, where the dominant logic and managerial procedures

of management can be successfully transferred to other markets.

Thirdly, companies pursuing a diversification strategy may be able to cross-

subsidize one product with the surplus of another. This way, companies with

a very diverse portfolio of products catering to different markets may

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potentially grow in power, and be able to withstand a prolonged period of

price competition etc. When having subsidized one product for a substantial

period of time, the company might possibly be able to win a monopoly,

making it the only supplier in the respective market.

Fourthly, companies may also want to use a diversification strategy to

spread financial risk over different markets and products, so that the entire

success of the company is not reliant on one market or product only.

There may however be other reasons for companies to use a diversification

strategy than the four listed above, and companies may very well benefit

from a diversification strategy for other reasons.

However, it is important for companies to realize the possible danger of

diversifying its scope of operations to much. Companies might risk

neglecting its core capabilities and become too diversified, where too many

different products supplied to different markets might have negative effects

on products and services, where e.g. product quality or uniqueness might

suffer due to the shift in focus on different products and markets.

The diversification strategy can be split into two different types:

Related diversification

Unrelated diversification

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Please click the links above to read more.

I have noticed many concept pages for China as an investment. For

investors, however, India may be a better choice as there is less of a

correlation with the developed world. China was a good investment story

several years ago, but may be too much of a speculative bubble at this time.

If you are new to investing in emerging markets, I would wait until after the

2008 Beijing Olympics before getting into China and only then via a closed-

end fund such as the Templeton Dragon Fund (TDF) or others of similar

styles.

One way of getting a grasp of a country's level of domestic demand versus

export demand is using the Trade-to-GDP ratio. A low ratio indicates that

the local economy consumes a proportionally larger amount of goods and

services, whereas a high ratio indicates an economy that is more export-

driven.

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MUTUAL FUNDS VERSUS INDIVIDUAL

COMPANIES

When investing in emerging markets, the question is whether to go with a

closed-end or mutual fund, or to select individual companies that trade on

overseas markets. Closed-end funds are often the only way to get involved in

the newest of emerging markets (e.g., Vietnam) and trade on exchanges like

stocks (i.e., can be bought or sold during the day, may be shorted). The

disadvantage is that the price can differ from the Net Asset Value due to

demand-supply considerations. Buying at a discount to the NAV is not

always advisable since it may indicate a lack of liquidity or that the fund is

out-of-favour for good reasons.

Over the past several years Indian companies have become listed on U.S.

exchanges, usually asAmerican Depository Receipts (ADRs) and provide

albeit narrow exposure to the Indian market. For example, one can buy Tata

Motors (TTM), an ADR which gives exposure to the growing demand for

automobiles by Indian consumers. With recently announced plans to set up

production facilities in Thailand, TTM will also provide investors with

exposure to another emerging market. The growing worldwide reach of

Indian companies will also provide investors with one might call "back-

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investing". If Tata is successful with their plans to purchase the Land Rover

and Jaguar units from Ford, shareholders in TTM will gain additional

exposure to western, developed world markets. Infosys Technologies

Ltd (INFY) is an Indian company that is a play on the global outsourcing

movement. They also have plans to move into Southeast Asian countries

which will give shareholders further exposure to other emerging markets.

The India Fund (IFN) provides exposure to some of India's best companies

and passes through dividends, giving a very nice dividend yield, unlike most

U.S. mutual funds.

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INDIAN APPAREL AND TEXTILE INDUSTRY

HISTORY

The history of apparel and textiles in India dates back to the use of mordant

dyes and printing blocks around 3000 BC. The foundations of the India's

textile trade with other countries started as early as the second century BC.

A hoard of block printed and resist-dyed fabrics, primarily of Gujarati

origin, discovered in the tombs of Fostat, Egypt, are the proof of large scale

Indian export of cotton textiles to the Egypt in medieval periods.

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During the 13th century, Indian silk was used as barter for spices from the

western countries. Towards the end of the 17th century, the British East

India Company had begun exports of Indian silks and several other cotton

fabrics to other economies. These included the famous fine Muslin cloth of

Bengal, Orissa and Bihar. Painted and printed cottons or chintz was widely

practiced between India, Java, China and the Philippines, long before the

arrival of the Europeans.

The diversity of fibers found in the country, intricate weaving on its state-of-

art manual looms and its organic dyes has attracted buyers from all across

the world for centuries. Before the introduction of mechanized ways of

spinning in the early 19th century, all Indian silks and cottons were hand

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spun and hand woven, a highly popular fabric, called the khadi. Independent

India saw the development and building up of textile strength,

diversification of its product range, and its emergence, once again, as an

important player in the world industry.

The Indian Textile Industry Overview

Today, the Indian apparel and textile industry employs around 35.0 million

people (and is the 2nd largest employer), yields 1/5th of the total export

earnings and contributes 4 % to the GDP thereby making it the largest

industrial sector of the economy. The sector aims to grow its revenue to US$

85bn, its export figures to US$ 50bn and employment to 12 million by the

year 2010 (Texmin 2005).

The Indian textiles industry that already has an overwhelming presence in

the economic life of the country, has been given a further boost with the

scrapping of quotas in global trade of textiles and clothing. In the post quota

period, the size of industry has expanded from US$ 37 billion in 2004-05 to

US$ 49 billion in 2006-07. During this period, while the domestic market

has grown from US$ 23 billion to US$ 30 billion, exports has increased

from around US$ 14 billion to US$ 19 billion.

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As a matter of fact, the apparel and textile is the largest foreign exchange

earning sector in the country. Being a direct employment provider to over 35

million people and and with continuing growth momentum, the role of this

sector in Indian economy is bound to increase.

Indian Exports of Apparel & Textile Facts & Figures

Exports increased from US$ 14 million (2004-05) to US$ 17 million

(2005-06) 21.77 % increase.

With continuing growth, the total exports has increased to US$

19.62 billion (2006-07).

Current share in world export of textiles 3.5 - 4 %.

Current share in world clothing export 3 %.

Major export market Europe (22% share in textiles & 43% share in

apparel).

Single largest buyer US ( 10% share in textiles and 32.65 share in

apparel).

Other major export markets include - UAE, Saudi Arabia, Canada,

Bangladesh, China, Turkey and Japan.

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Largest export segment Readymade Garments (45% share in textile

exports and 8.25 share in India's total exports).

Readymade garments sector has benefited significantly with the

termination of Multi-Fiber Arrangement (MFA in January 2005.

Exports of readymade garments are expected to touch US$ 14.5

billion with a cumulative annual growth rate of 18-20% (Apparel

export Promotion Council).

Product-wise Export Share

Commodities

2005-06

(Million US$)

Readymade Garments 6038.69

Cotton Textiles 3290.31

Man-made Textiles 1948.72

Wool & Woolen Textiles 66.57

Silk Textile 406.82

Total 11751.11

Add handicraft, Coir & Coir

Manufacturers and Jute

Total 13065.24

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SECTOR-WISE ANALYSIS

Readymade

garments

Accounts for around 45% of the countrys total textiles exports. The

amounted to US$ 7.75 billion (2005-06), recording an increase of 28.69

exports during

During the first quarter of 2006-07 the exports have amounted to US$ 2

recording an increase of 15.70% over the exports during the correspondin

2005-06.

Cotton textiles

including

handlooms

Cotton Textiles i.e. yarn, fabrics and made-ups (Mill made / Powerloom /

account for more than 2/3rd of our exports of all fibers/yarns/made-ups. The e

amounted to US$ 4.49 billion, recording a healthy increase of 26.78% over

2004-05.

During the first quarter of 2006-07 the cotton textiles including exports of

have amounted to US$ 1.25 billion, recording an increase of 25.70% over

during the corresponding period of 2005-06.

Man-made textiles

During 2005-06, man-made textile exports have amounted to US$ 2 bil

reflects a decline of 2.47% over the exports during the

During the first quarter of 2006-07, exports have amounted to US$ 0.52 bil

reflects an increase of 13.15% over the exports during the corresponding peri

06.

Silk textiles During 2005-06, the exports of silk textiles were amounted to US$ 0.69 billio

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an increase of 16.37% over the exports during

During the first quarter of 2006-07 the export figures were to US$ 0.165 bil

reflects an increase of 4.23% over the exports during the corresponding peri

06.

Woolen textiles

The woolen textile exports during 200405, were US$ 0.42 billion, recording

of 23.4% as compared to the corresponding period of

During the first quarter of 2006-07 the export of woolen textiles have amoun

0.114 billion that reflects an increase of 11.96% over the exports

corresponding period of 2005-2006.

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REMEDIAL MEASURES

The textile exporting community of the country is looking to reduce

dependency on the US market and is focusing towards the European market

for attaining further growth and to fight currency pressure. This is because of

the fact that even though the rupee strengthens itself to Rs. 39.54 against the

dollar, the Euro-rupee equation is comparatively at a higher exchange price

of Rs. 56.

While many exporters are in talks with European buyers to increase

revenues from the European market, keeping long-term interests in mind,

they are also hoping to ramp up domestic operations, improve production

and manufacturing efficiencies. For example, some companies are trying to

convince their existing clients in Europe to shift from paying in dollars to

Euros. Some companies are also pondering over market diversification with

more emphasis on Europe.

According to industry experts, these are only short-term benefits and will not

be beneficial to small and medium enterprises to cope up with the

appreciation of rupee.

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As per industry statistics, the European market cannot offer as much

volumes as the American market fetches. Secondly, there will always be a

resistance to the incremental prices, which exporters can enforce upon their

foreign clients. Hence, targeting the burgeoning domestic market, which has

significant growth potential should be the long-term strategy for the Indian

textile sector. Besides this, while some bigger companies have managed to

plug losses by hedging, it is time for the smaller companies too, to look at

this option, as the textile industry has had to grapple with issues such as job

cuts and profit losses this year.

OBJECTIVES

Why Diversification?

The two principal objectives of diversification are

improving core process execution, and/or

enhancing a business unit's structural position.

The fundamental role of diversification is for corporate managers to create

value for stockholders in ways stockholders cannot do better for

themselves1. The additional value is created through synergetic integration

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of a new business into the existing one thereby increasing its competitive

advantage.

FORMS AND MEANS OF DIVERSIFICATION

Diversification typically takes one of three forms:

Vertical integration along yourvalue chain

Horizontal diversification moving into new industry

Geographical diversification open up new markets

Means of achieving diversification include internal

development,acquisitions, strategic alliances, andjoint ventures. As each

route has its own set of issues, benefits, and limitations, various forms and

means of diversification can be mixed and matched to create a range of

options.

Description

This paper studies the nature and pattern of diversification in 252 private manufactur

the Indian corporate sector from 1995 to 2004. Using Rumelt's methodology of dive

found that Dominant Business (DB) is the most popular strategy among Indian

Unrelated Business (UB) is the least preferred one. Among the sub-categories, Domi

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(DC) and Related Constrained (RC) are the most favored strategies. Indian compan

pattern of diversification, the forward pattern being Single Business (SB) to DB an

Business (RB), and the backward pattern being UB to RB and RB to DB. Thus, Ind

not leave their core businesses even while diversifying which results in a comparativ

the diversification process.

Sustaining growth is a key challenge to business leaders in an enterprise. The busine

changing fast and to keep pace with the volatile business conditions and growin

business needs to pursue growth strategies. A growth strategy is one, which is marked

the level of objectives of a business, much higher than its past achievement level. T

indicator of a growth strategy is to raise the market share and or sales objectives sign

1980; Secchi and Boltazzi, 2005).

Every company passes through five stages in its life, namely, emergence, g

regeneration and decline (James, 1973). If a company wants to delay the last pha

growth strategies. Organizations that do not grow are pushed out of their business aren

and other new entrants. Many a time, the environment also offers favorable opportuni

government provides concessions and incentives for growth in industries in certain ar

government provides concessions to priority sector industries and those established in

These opportunities stimulate companies to grow and growth helps create economies o

scope, serves as a motivational force for managers,

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Keywords

Nature and Pattern of Diversification in the Indian Corporate Sector, Dominant B

leaders, growing competition, market share, growth strategies, joint ventures, licen

foreign markets, portfolio of products, administration, corporate sector, Indian co

policy,Industrial Classification, component businesses, DB strategy.

Motives to Diversify

In some instances, managers may be motivated to diversify their companies eve

incentives and a lack of resources should constrain any inclination toward diversific

motives for diversification include:

Reduction of managerial risk

Diversification may enable managers to reduce employment risk (the risks related to

jobs or a reduction in compensation) because by diversifying the company (by add

additional businesses) managers may be able to diversify their employment risk if pro

decline significantly as a result of the diversification.

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Desire for increased compensation

Diversification also may enable managers to increase their compensation because of p

between diversification, company size, and executive compensation.

This positive correlation may exist because diversification generally results in a

complexity and size of the overall company, and large companies are more difficul

consequence, managers of large companies generally are compensated more highly tha

small companies.

Managers may be motivated to increase overall company diversification even when

resources are absent. If this happens, internal and external governance mechanisms g

play to discourage diversification that is motivated solely by managerial self-interest. U

mechanisms are not perfect and may give incentives to managers to take strategic act

level of company diversification) that are counter-productive (resulting in lo

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performance). For example: Spin-off companies may not realize productivity gains.

are spun off may have unrecognized interdependent linkages with business units t

company.

Ultimately, the appropriate level of diversification should be determined by the market

company resources and capabilities. One signal that the company may be overd

operating diversified businesses reduces rather than improves the overall performance o

Therefore, diversification strategies can be used to enhance a company's strategic co

enable it to earn above-average returns. However, positive outcomes from diversifi

only when thecompany achieves the appropriate level of diversification, given its reso

and core competencies, and taking into account the external environmental opportunitie

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Reasons for Diversification

Companies may implement diversification strategies to enhance or increase the strateg

of the overall organization. If they are successful, the value of the company increa

created through either related or unrelated diversification if the strategies enable the

businesses to increase revenues and/ordecrease costs when implementing their respec

strategies.

Companies may also implement a diversification strategy to gain market powe

competitors. Companies may implement diversification strategies that are either value

devaluation of the company. They may attempt to diversify to neutralize a competitor

to reduce managers' employment risk (i.e., the risk of CEO being unemployed when a

company fails as compared to this risk when a single business fails but is only one p

company) or to increase managerial compensation because of the positive rela

diversification, company size, and compensation.

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Motives to enhance strategic competitiveness:

economies of scope (related diversification) through activity-sharing and the

transfer core competencies

market power motives (related diversification) by vertical integration or

blocking competitors through multipoint competitionfinancial economies motives (unrelated diversification) to improve efficiency

ofcapital allocationthrough an internal capital market or by restructuring the

portfolio of businesses

Motives that are value-neutral with respect to strategic competitiveness:

to avoid violations of antitrust regulations

to take advantage of tax incentives

to overcome low performance

to reduce the uncertainty offuture cash flows

to reduce overall company risk

to exploit tangible resources

to exploit intangible resources

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Failure to Diversify

What does it mean to diversify? It means to vary or spread risk. When onehired a broker or investment advisor and pays him an annual fee to managean account, a consumer should expect that his investments are diversified.Why is that so important? Its important because you want to spread yourrisk. Risk of what? Risk that the investments will lose value. What do I

mean by this?

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Lets assume that you give a broker $500,000 and you tell him that this is

your nest egg to retire on in 10 years. You tell the broker that you cannot

afford to lose the money because after you receive your social security

check, this money is all you have in the world. If the broker invested all of

your money is high risk stocks and securities, you could certainly stand to

gain a lot of money.

But what could also happen? Right ! You could LOSE a lot of money. How

would you feel if your $500,000 investment dropped down to $250,000

during that 10 year period? Im sure not well. The point is, an account

should be diversified (or placed into many different investments).

Investing in a high risk security is not necessarily negligent so long as its a

very small part of this hypothetical persons strategy. High risk investments

should usually be balanced with low risk investments. This is so that your

particular account wont plummet if the market drops in a major way.

Diversification can happens in many ways. Examples include:

A good mix of stocks and bonds

Diversification of funds within a mutual fund

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Diversification of funds within a variable annuity

Diversification of stocks withing a certain sector

Failing to diversify can result of major losses of your account. If you prefer

to have all of your eggs in one basket and feel that this is a good strategy for

you, then you would not have a diversification claim. However, if you desire

to preserve your capital and obtain small income, then you should ensure

that your account is diversified.

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Diversification via Acquisition: Creating Value

During the past 25 years an increasing proportion of U.S. companies have

seen wisdom in pursuing a strategy of diversification. Between 1950 and

1970, for example, single-business companies comprising theFortune 500

declined from 30% to 8% of the total. Acquisition has become a standard

approach to diversification.

In recent years the productivity of capital of many multibusiness companies

has lagged behind the economy. Nevertheless, diversification through

acquisition remains popular; between 1970 and 1975, acquired assets of

large manufacturing and mining companies averaged slightly more than

11 % of total new investment in those companies, and most of that activity

was diversifying acquisition.1 In the past few years the pace of activity has

been slower than in the hectic 19671969 period, but the combination of

high corporate liquidity, depressed stock prices, and slow economic growth

has meant that for many companies acquisitions are among the most

attractive investment alternatives. Since mid-1977, hardly a week has gone

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by without at least one major acquisition being announced by a diversifying

corporation.

In light of this continuing interest and the apparent economic risks in

following such a strategy, we present a review of the theory of corporate

diversification. We begin by discussing seven common misconceptions

about diversification through acquisition. We then turn to the basic question

facing companies wanting to adopt the strategy: How can a company create

value for its shareholders through diversification?

Our consideration of value creation leads to an examination of the potential

benefits of the alternatives availablerelated-business diversification and

unrelated-business diversification. Businesses are related if they (a) serve

similar markets and use similar distribution systems, (b) employ similar

production technologies, or (c) exploit similar science-based research.2

Common Misconceptions

There are seven common misconceptions about diversification through

acquisition that we can usefully highlight in the context of recent history.

They relate to the economic rationale of this strategy and to the management

of a successful diversification program.

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1. Acquisitive diversifiers generate larger returns (through increased

earnings and capital appreciation) for their shareholders than

nondiversifiers do. This notion gained a certain currency during the 1960s,

in part because of the enormous emphasis that securities analysts and

corporate executives placed on growth in earnings per share (EPS).

Acquisitive diversifiers that did not collapse at once from ingesting too

many businesses often sustained high levels of EPS growth.

However, once it became apparent that a large proportion of this growth was

an accounting mirage and that capital productivity was a better indicator of

managements performance and a businesss economic strength, the market

value of many acquisitive companies plunged.

Many widely diversified companies have had low capital productivity in

recent years. Exhibit I shows the performance of a sample originally selected

by the Federal Trade Commission in 1969 as representative of companies

pursuing strategies of diversification and not classifiable in standard

industrial categories. While the average return on equity of the sample was

20% higher than the average of theFortune 500 in 1967, it was

18% below theFortune average in 1975. Even the surge in profits in 1976

and 1977 and the impact of nonoperating, accounting profits in several

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corporations failed to bring the sample average up to theFortune average.

What is even more telling than the return on equity figures is that the

samples return on assets was 20% or more below theFortune500 average

throughout the ten-year period.

Incentives for Diversification

However, not all companies diversify to increase the value of the overall

company. Some attempts at diversification are implemented to prevent the

value ofthe company from decreasing.

Low Performance

When companies are able to earn above-average or superior returns in a

single business, they have little incentive to diversify. However, low

performance may provide an incentive for diversification, as a low-

performing company may become more risk seeking in an effort to improve

overall companyperformance. On the other hand, it has been shown that

lower returns are related to greater (not lower) levels of diversification.

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In response to low returns (or poor performance), companies often choose to

seek greater levels of diversification. At some point, however, poor

performance slows the pace of diversification, often resulting in

restructuring divestitures of businesses to lower the level of company

diversification.

AsFigure 5.5 illustrates, companies exhibiting low performance in their

dominant businesses often implement related-

constrained diversification strategies which, to some point, result in

increased performance. In search of even higher performance, related-

diversified companies may continue to diversify, but elect to acquire

unrelated businesses. Because the company's core competencies do not

create value in unrelated businesses, company performance decreases.

Uncertain Future Cash Flows

Companiesalso may implement diversification strategies when their

products reach maturity (in the product life cycle) or are threatened by

external factors that the company cannot overcome.

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Thus, companies may view diversification as a survival strategy. For

example tobacco companies like ITC are diversifying because of future

demand uncertainty that resulted from attacks on smoking and the ban on

events sponsorships.

Uncertainty can also be derived from supply sources as well as demand

conditions.

Company Risk Reduction

As you will recall from the discussion earlier in this chapter, companies that

diversify in pursuit of economies of scope take advantage of linkages

between primary value-creating activities to realize synergy from sharing.

Synergy exists when the value created by business units working together

exceeds the value the units create when working independently. However,

these linkages--and the interrelatedness or interdependencies that result--

produce joint profitability between business units and the flexibility of the

company to respond may be adversely affected, increasing the risk of failure.

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To eliminate this risk, companies may do one of two things: (1) operate in

more certain environments to reduce the level of technological change and

choose not to pursue potentially profitable, yet unproven product lines or (2)

constrain or reduce the level of activity-sharing, thus foregoing the potential

benefits of synergy

However, these decisions could lead to further diversification to diversify

into industries where more certainty exists or to additional, but unrelated

diversification

Business-Level Strategies

There are four generic strategies that are used to help organizations establish

a competitive advantage over industry rivals. Firms may also choose to

compete across a broad market or a focused market. We also briefly discuss

a fifth business level strategy called an integrated strategy.

1. Cost Leadership Organizations compete for a wide customer based on

price. Price is based on internal efficiency in order to have a margin that will

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sustain above average returns and cost to the customer so that customers will

purchase your product/service. Works well when product/service is

standardized, can have generic goods that are acceptable to many customers,

and can offer the lowest price. Continuous efforts to lower costs relative to

competitors is necessary in order to successfully be a cost leader. This can

include:

Building state of art efficient facilities (may make it costly for

competition to imitate)

Maintain tight control over production and overhead costs

Minimize cost of sales, R&D, and service.

Porter's 5 Forces Model

Earlier we discussed Porter's Model. A cost leadership strategy may help to

remain profitable even with: rivalry, new entrants, suppliers' power,

substitute products, and buyers' power.

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Rivalry Competitors are likely to avoid a price war, since the low

cost firm will continue to earn profits after competitors compete away

their profits (Airlines).

Customers Powerful customers that force firms to produce

goods/service at lower profits may exit the market rather than earn

below average profits leaving the low cost organization in a monopoly

positions. Buyers then loose much of their buying power.

Suppliers Cost leaders are able to absorb greater price increases

before it must raise price to customers.

Entrants Low cost leaders create barriers to market entry through its

continuous focus on efficiency and reducing costs.

Substitutes Low cost leaders are more likely to lower costs to entice

customers to stay with their product, invest to develop substitutes,

purchase patents.

How to Obtain a Cost Advantage?

Determine and Control Cost

Reconfigure the Value Chain as Needed

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Risks

Technology

Imitation

Tunnel Vision

Value Chain A framework that firms can use to identify and evaluate the

ways in which their resources and capabilities can add value. The value of

the analysis lays in being able to break the organization's operations or

activities into primary (such as operations, marketing & sales, and service)

and support ( staff activities including human resources management &

procurement) activities. Analyzing the firm's value-chain helps to assess

your organizations to what you perceive your competitors value-chain,

uncover ways to cut costs, and find ways add value to customer transactions

that will provide a competitive advantage.

2. Differentiation - Value is provided to customers through unique features

and characteristics of an organization's products rather than by the lowest

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price. This is done through high quality, features, high customer service,

rapid product innovation, advanced technological features, image

management, etc. (Some companies that follow this strategy: Rolex, Intel,

Ralph Lauren)

Create Value by:

Lowering Buyers' Costs Higher quality means less breakdowns,

quicker response to problems.

Raising Buyers' Performance Buyer may improve performance,

have higher level of enjoyment.

Sustainability Creating barriers by perceptions of uniqueness and

reputation, creating high switching costs through differentiation and

uniqueness.

Risks of Using a Differentiation Strategy

Uniqueness

Imitation

Loss of Value

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Porter's Five Forces Model Effective differentiators can remain

profitable even when the five forces appear unattractive.

Rivalry Brand loyalty means that customers will be less sensitive to

price increases, as long as the firm can satisfy the needs of its

customers (audiofiles).

Suppliers Because differentiators charge a premium price they can

more afford to absorb higher costs and customers are willing to pay

extra too.

Entrants Loyalty provides a difficult barrier to overcome.

Substitutes (trans. 4-26) Once again brand loyalty helps combat

substitute products.

3. Focused Low Cost- Organizations not only compete on price, but also

select a small segment of the market to provide goods and services to. For

example a company that sells only to the U.S. government.

4. Focused Differentiation - Organizations not only compete based on

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differientation, but also select a small segment of the market to provide

goods and services.

Focused Strategies - Strategies that seek to serve the needs of a particular

customer segment (e.g., federal gov't).

Companies that use focused strategies may be able serve the smaller

segment (e.g. business travelers) better than competitors who have a wider

base of customers. This is especially true when special needs make it

difficult for industry-wide competitors to serve the needs of this group of

customers. By serving a segment that was previously poorly segmented an

organization has unique capability to serve niche.

Risks of Using Focused Strategies:

Maybe out focused by competitors (even smaller segment)

Segment may become of interest to broad market firm(s)

5. Using an Integrated Low-Cost/Differentiation Strategy

This new strategy may become more popular as global competition

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increases. Firms that use this strategy may see improvement in their ability

to:

Adaptability to environmental changes.

Learn new skills and technologies

More effectively leverage core competencies across business units and

products lines which should enable the firm to produce produces with

differentiated features at lower costs.

Thus the customer realizes value based both on product features and a low

price. Southwest airlines is one example of a company that does uses this

strategy.

However, organizations that choose this strategy must be careful not to:

becoming stuck in the middle i.e., not being able to manage successfully the

five competitive forces and not achieve strategic competitiveness. Must be

capable of consistently reducing costs while adding differentiated features.

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Core Competence

A core competence is the result of a specific set of skills or production

techniques that deliver value to the customer. Such competences enable an

organization to access a wide variety of markets. Executives should estimate

the future challenges and opportunities of the business in order to stay on top

of the game in varying situationsIn 1990 with their article titled "The Core

Competence of the Corporation", Prahalad and Hamel illustrated that core

competencies lead to the development of core products which further can be

used to build many products for end users. Core competencies are developed

through the process of continuous improvements over the period of time. To

succeed in an emerging global market it is more important and required to

build core competencies rather than vertical integration.NEC utilized its

portfolio of core competencies to dominate the semiconductor,

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telecommunications and consumer electronics market. It is important to

identify core competencies because it is difficult to retain those

competencies in a price war and cost cutting environment. The author used

the example of how to integrate core competences using strategic

architecture in view of changing market requirements and evolving

technologies. Management must realize that stakeholders to core

competences are an asset which can be utilized to integrate and build the

competencies.[ Competence building is an outcome of strategic architecture

which must be enforced by top management in order to exploit its full

capacity

In Competing for the Future, the authors Prahalad and Hamel show how

executives can develop the industry foresight necessary to adapt to industry

changes, discover ways of controlling resources that will enable the

company to attain goals despite any constraints. Executives should develop a

point of view on which core competencies can be built for the future to

revitalize the process of new business creation. The key to future industry

leadership is to develop an independent point of view about tomorrow's

opportunities and build capabilities that exploit them.[ In order to be

competitive an organization needs tangible resources but intangible

resources like core competences are difficult and challenging to achieve. It is

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even critical to manage and enhance the competences with reference to

industry changes and their future. For example, Microsoft has expertise in

many IT based innovations where for a variety of reasons it is difficult for

competitors to replicate Microsoft's core competences.

In a race to achieve cost cutting, quality and productivity most of the

executives do not spend their time to develop a corporate view of the future

because this exercise demands high intellectual energy and commitment.

The difficult questions may challenge their own ability to view the future

opportunities but an attempt to find their answers will lead towards

organizational benefits.

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Economic diversification

Reimagining the future

Two articles on attempts to move into high-tech; first, New York City

THAT city will, in the course of time, become the granary of the world, the

emporium of commerce, the seat of manufactures, the focus of great monied

operations, predicted DeWitt Clinton, governor of New York in 1824. He

was speaking about the effects of the Erie Canal, which connected the Great

Lakes to the Hudson River. Originally derided as Clinton's folly, the canal

helped to open up the west, allowing New York to benefit enormously from

an explosion of trade. Within 15 years of the opening, New York was the

busiest port in America, moving more than Boston, Baltimore and New

Orleans combined. The plan to open an applied sciences university campus

in New York City, reckons Seth Pinsky, who heads New York's Economic

Development Corporation, is an Erie Canal moment.

The city's embrace of high-tech has already begun. Tech clusters have

emerged in Manhattan's Flatiron District and Brooklyn's Dumbo, home to

firms like STELLAService and Etsy. Venture-capital firms and angel

investors have been looking at New York more seriously than they once did.

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Henry Blodget, of Business Insider, notes the financing ecosystem has also

gotten very well developed, from late-stage private equity right down to

angel investing. Some $1.2 billion was invested by venture-capital firms in

New York in 2010. The Big Apple even overtook Massachusetts in venture-

capital funding for internet and tech start-ups, making it second only to

Silicon Valley. And in the third quarter of last year, it surpassed it in venture

capital in all categories. Between 2005 and 2010 employment in New York's

high-tech sector grew by nearly 30%. Google alone has about 1,200

engineers in the city.

In this section

On to New Hampshire

Less of a drag

Unintended issues

Holder v states

Reimagining the future

Rolling the dice

Rick Santorums ride

Reprints

http://www.economist.com/node/21542419http://www.economist.com/node/21542445http://www.economist.com/node/21542430http://www.economist.com/node/21542429http://www.economist.com/node/21542451http://www.economist.com/node/21542427http://www.economist.com/rightshttp://www.economist.com/node/21542419http://www.economist.com/node/21542445http://www.economist.com/node/21542430http://www.economist.com/node/21542429http://www.economist.com/node/21542451http://www.economist.com/node/21542427http://www.economist.com/rights

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Related topics

Business

New York City

Private equity

Venture capital

Industries

Much of this growth has been organic, but there has been some help from

City Hall. Since 2002 the city has set up more than 40 projects to help the

biotech sector and helped create a network of incubators supporting start-ups

in that area. It also established a $22m municipal entrepreneurial fund, the

first of its kind outside Silicon Valley. A year ago Michael Bloomberg, a

tech entrepreneur before he became New York's mayor, called on

universities to pitch plans to develop and operate a new tech campus in New

York in exchange for access to city-owned land and up to $100m in public

money.

New York received seven proposals from 17 top institutions, including

Stanford University which did so much to create Silicon Valley. Almost

6,000 companies, including Google, Hewlett-Packard and LinkedIn, trace

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their beginnings to Stanford. But Stanford withdrew from the competition

last month, days before the mayor announced the winning proposal, which

came from Cornell, an Ivy League university, and its partner Technion, an

Israeli technology institute. The latter is considered to be one of the driving

forces in Israel's tech industry. It helped turn Israel from a country of

orchards to one of semiconductors. Some 4,000 start-up companies are

located around its campus.

The two bodies have plans to build a $2 billion 2m square feet (610,000

square metres) campus on Roosevelt Island, one subway stop from mid-

town. Cornell and Technion hope to have a temporary facility up and

running as soon as this autumn and complete their permanent home by 2017.

The bid had huge support from Cornell alumni, including a $350m gift from

Charles Feeney, who made his fortune through the Duty Free Shopping

Group. That is one of the largest donations in the history of American higher

education.

According to the city's analysis, over the next 30 years the campus will

generate more than $7.5 billion in economic activity, with 600 companies

spinning out of the new school directly; these are projected to create 30,000

jobs. Some 20,000 construction jobs will also be created, not to mention

about $1.4 billion in extra tax revenue. And it should help quench the never-

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ending demand for qualified engineers. The mayor has not ruled out naming

additional winners. And some of the losing plans will go forward regardless.

So New York could soon have several applied sciences campuses. Look out,

Silicon Valley.

CONCLUSIONS AND RECOMMENDATIONS

The consultation recognized that crop diversification is one of the best

options to increase farm income leading to food, nutrition and ecological

security as well as poverty alleviation in the region. Therefore, greater

attention should be paid to crop diversification by the governments of the

region. Crop diversification could be approached in two complementary and

interactive ways; a) horizontal diversification through expanding the crop

base by substituting or adding more crops into the cropping systems as

commonly practiced by many countries of the region; and b) through vertical

diversification in which downstream activities are undertaken to add value,

indicating the stage of industrialization of the crops and their economic

returns. Vertical diversification is complementary to horizontal

diversification, and the opportunities should be exploited for product

diversification and value addition to achieve highest economic returns.

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Efforts have been made by different countries to identify high specialty

crops, new crops, off-season varieties and production systems, and novel

varieties of crops with comparative advantage, mainly fruits, vegetables and

ornamentals, to open up new opportunities for farmers. It was noted that the

promotion of multipurpose species would also be useful for diversification

of agro-processing on small scale at local/national level for productivity

enhancement and expanded employment opportunities.

Rice is the most important crop in Asia. However, in marginal areas, rice-

based cropping systems have relatively low returns. Improving the current

cropping systems to enhance their sustainability to the extent possible, and

shifting marginal areas out of rice into other more profitable crops is seen as

a solution. Alternatively, flexible cropping systems for upland farmers that

feature production of more income elastic goods like horticultural products

are a means of diversifying their income sources.

Concerns have been expressed regarding the policies of some countries to

reduce the extent of land under major perennial crops and rice; and

subsequent repercussions of these will have a long-term bearing. It was

noted that such crop replacements unless carefully analyzed might have

adverse effects on the food and industrial product supply in the region.

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The need for improved seed and other planting material seed industries to

supply quality seed and other planting materials which is so vital for crop

diversification. Steps should be taken to maintain effective national and sub-

regional seed security in the region through regional collaboration.

The high post-harvest losses of crop produce particularly in horticultural

crops which annually account for 20-40 percent in most countries, if

prevented, could increase yield by similar amounts. It was recommended

that efforts should be made to minimize such losses. The development of

links with the food industry for product diversification and value addition to

meet the demands of the changing society was recommended.

Serious concern was expressed of the soil fertility depletion, due to

continued intensive cropping over long periods of time, which needs to be

corrected. The use of organic manures as replenishments through direct

application or crop rotations and insertion of green manure crops and other

food legumes in the cropping systems was recommended.

Due to the impending labour shortages for agriculture, the need for

mechanization of field and post-harvest operations was noted. Need for

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mechanization of agricultural operations and assessment of the machinery

use by the agricultural sector of countries of the region was emphasized. In

view of limited land, water and labour supply, the need for adoption of

emerging agricultural technologies such as protected agriculture, organic

farming, Integrated Plant Nutrient System (IPNS) and Integrated Pest

Management (IPM) was emphasized. Efficient input supply systems through

micro-irrigation and fertigation should be encouraged.

The role of the private sector in the development of modern agro-

enterprises to infuse capital and technology into diversified cropping

systems for effective commercialization for long term sustainability was

advocated.

The importance of diversification to value-added export oriented crops was

emphasized. In that context, the need to study marketing opportunities and

product standards required by importing countries, as well as price

fluctuations, competitiveness etc., prior to embarking on diversification, was

highlighted. Furthermore, the availability of market information was

considered essential for identifying promising external markets. In general,

there is no point in diversifying into a crop for which market potential is

limited.

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Individual countries have developed policies, strategies and implementing

mechanisms for crop diversification. These include infrastructure

development (transport, communication and markets), pricing policies,

subsidies, insurance schemes, tax, tariff etc., in order to minimize risks and

safeguard the interests of agricultural entrepreneurs. As the strategies

adopted by different countries are innovative and diverse, sharing of such

information will benefit the other countries to stabilize and sustain their crop

diversification initiatives.

The governments role in recognizing farmers participation in the total

process of crop diversification, provision of information on new crop

varieties, technologies to be used, potential yields, marketing avenues and

incomes to be realized was essential for the development of successful crop

diversification programmes. The need for skill development and capacity

building and documentation of required information through the production

of field manuals, extension leaflets etc., for use by the entrepreneurs was

also considered essential.

Significant changes are taking place in domestic and international demand

for crop products due to improvement in income, better standard of living,

and changing life styles and preference patterns such as improved

horticultural and livestock products. Trade liberalization and development of

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transport and communication infrastructure have opened more avenues for

trade and have improved access to new and distant markets. This has created

new opportunities for crop diversification in various countries.

The role of FAO as facilitator in the development efforts of crop

diversification undertaken by different countries, through holding of

seminars and workshops, skills development programmes, information

sharing, facilitating germplasm exchanges etc., was recognized. The need for

the development of an information database on crop diversification for use

by policy makers, farmers, consumers, and other stakeholders was an

essential requisite for crop diversification. It was recommended that efforts

should be made to compile this database. To facilitate all the above-

mentioned activities the establishment of a Network on Crop Diversification

for the Region was recommended.

Recognizing crop diversification as an element of poverty alleviation,

income generation, equity and natural resource conservation, and to enhance

this, a well designed mechanism has to be developed through the

participation of international organizations and local governments to

strengthen the initiative undertaken by this region.

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Competitive Strategy Why Diversify? PepsiCo Case Study

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Why Diversify?

Why consider diversifying your business? What is diversification? Why do

businesses do it? Are there different types of diversification and have any

been really successful? This article will give answers to these questions and

much more!

Firstly what is Diversification? It is a corporate strategyto increase market

penetration and thereby increasing sales and gaining market share.

http://ramkkasturi.hubpages.com/hub/Corporate-Strategy-Disruption-For-Differentiation-In-The-Markethttp://ramkkasturi.hubpages.com/hub/Corporate-Strategy-Disruption-For-Differentiation-In-The-Market

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Many organisations consider diversification for a range of reasons. Some

valid reasons are:

Not having all of your eggs in one basket

If the industry becomes unattractive

Diminishing market opportunities & stagnating sales

When you spot an industry whose technologies & products complement

the present business

When you can leverage existing competencies & capabilities by

expanding into businesses whose same resource strengths are key

success factors & valuablecompetitive assets

Opens new avenues for reducing costs

Transference of a brand name to drive sales & profits

Competitive pressures

Diminishing growth prospects in the present business

Expand into industries whose technologies & products complement

present business (Dell printers)

http://harkonnen.hubpages.com/hub/StrategicManagementConceptsforProfessionalshttp://hubpages.com/topics/business-and-employment/small-businesses-and-entrepreneurs/niche-markets/981http://sspensley.hubpages.com/hub/MyLessonshttp://harkonnen.hubpages.com/hub/StrategicManagementConceptsforProfessionalshttp://hubpages.com/topics/business-and-employment/small-businesses-and-entrepreneurs/niche-markets/981http://sspensley.hubpages.com/hub/MyLessons

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Leverage existing competencies & capabilities by expanding into

businesses where these resource strengths are key success factors

Reduce costs by diversifying into closely related businesses economies

of scope & shared value chain

Powerful brand name can be transferred to products of other businesses

There are two types of diversification:

Related diversification

possess competitively valuable cross-business value chain matchups

horizontal integration

Unrelated diversification

have dissimilar value chains, containing no competitively useful cross-

business relationships can share support activities HR etc

There is also the concept of strategic fit. Without a strategic fit is highly

unlikely that a diversification will work:

strategic fit exists whenever one or more activities comprising the value

chains of different businesses are sufficiently similar as to present

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opportunities for transferring, combining, exploiting & business

collaboration

PepsiCo Case Study

A few years ago PepsiCo diversified. This is an interesting case study of

what can be achieved with a related diversification that has a strategic fit and

some future opportunities forPepsiCo.

PepsiCo has used the related diversification corporate strategy as their basic

approach to new businesses and acquisitions with a focus on beverages and

consumer foods. Wherever possible PepsiCo has found related activities

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within the value chain between the various beverage and snack food brands

to reduce costs and increase profits. Some of the elements of the value chain

that are shared include:

Marketing

Processing

Research and development

This has enabled PepsiCo to find a good strategic fit in most of the

businesses they have acquired. In turn this has lead to a good resource fit

with all businesses generating free cash flow and a minimum margin of 15%

+ across all units.

A key advantage for PepsiCo is that customers across the globe have similar

tastes and this has assisted the company in implementing global strategies

and being able to execute marketing and distribution similarly in all regions.

An opportunity exists for PepsiCo in the good-for-you and better-for-you

markets that they are just starting to implement across their products. This

change in consumer tastes worldwide provides an opportunity for PepsiCo to

acquire a health food company similarly to Sanitarium in Australia.

Sanitarium would fit into the PepsiCo model of being a consumer foods

company with a focus on ready to eat breakfast cereals and well as being a

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horizontal integration into the value chain as a related diversification. The

added advantage is that Sanitatium would give PepsiCo more credibility in

the GFU/BFU market and enable the company to take leadership on this

issue.

If you are considering diversification, hopefully these points will start you

on the right direction!

Diversifications

Amazon Price: $9.45

List Price: $15.95

Diversifications

Amazon Price: $2.99

Diversifications

Amazon Price: $27.14

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7/27/2019 M.COM S.M

60/60

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