Diversification is a form of corporate strategy to increase profitability of a company through greater sales volume obtained from new products and new markets. It occurs either at the business unit level or at the corporate level. It is a risk management technique that mixes a wide variety of investments within a portfolio. It attempts to smooth out unmethodical risk events in a group so that the positive performance of some investments will neutralize the negative performance of others.
Companies may diversify for strategic objectives, expected outcomes, valuable comparison between strategy and expansion. Some companies diversify by conquering new positions through mergers and acquisitions whiles others diversify when there are not much growth opportunities for the market they are in. There are many reasons for pursuing a diversification strategy, but most pertain to management’s desire for the organization to grow. Companies must decide whether they want to diversify by going into related or unrelated businesses.
They must then decide whether they want to expand by developing the new business or by buying an ongoing business. There are advantages to diversification, beyond simply expanding one’s product line. For example, a diversified company is potentially better insulated against a loss of revenue in one business tranche. Diversification strategies are used to expand firms’ operations by adding markets, products, services, or stages of production to the existing business. The purpose of diversification is to allow the company to enter new lines of business that are different from current operations.
When the new venture is strategically related to the existing lines of business, it is called concentric diversification. On the other hand, when the new and the old businesses are unrelated it is classified as Conglomerate diversification which occurs when there is no common thread of strategic fit or relationship between the new and old lines of business, meaning the new and old businesses are unrelated. Compare and contrast the two businesses—core business, their size, financials, global presence, use of e-business (marketing, sales, etc. ).
Johnson & Johnson Inc. – Successful Johnson & Johnson is an American multinational pharmaceutical company founded in 1886, manufacturing sterile surgical supplies. Its core business is the manufacturing of medical devices and consumer packaged goods. Its common stock is a component of the Dow Jones Industrial Average. The company is listed among the Fortune 500. The corporation has grown to have more than 250 operating companies in 60 countries employing approximately 116,000 people, producing medicines and medical devices, as well as consumer products like sanitary goods, baby shampoo and dental floss.
National Semiconductor Corporation – Unsuccessful National Semiconductor Company has an international reputation for semiconductors. The pioneering chip maker offers a variety of integrated circuits (ICs), especially analog and mixed-signal (blending analog and digital functions) chips. Its products focus on analog chips, which transform physical information – light, sound, pressure, even radio waves – into data that a computer can use. National Semi’s chips are used in wireless, networking, medical, solar, automotive, and industrial applications.
It gets more than 75% of sales from customers outside the US, largely to contract manufacturers that serve its OEM customers. In the 1970s, the company tried to make electronic consumer products in addition to the semi-conductors that went inside them. Compare and contrast their outcomes (one successful, one unsuccessful) Johnson & Johnson Johnson & Johnson is a diversified healthcare company that develops, manufactures and markets products in three primary lines of business: Pharmaceuticals (41% of sales), Medical Devices and Diagnostics (35%) and Consumer Products.
Since the 1900s, the company has pursued steady diversification. It added consumer products in the 1920s and created a separate division for surgical products in 1941 which became Ethicon Inc. It expanded into pharmaceuticals with the purchase of McNeil Laboratories Inc. , Cilag, and Janssen Pharmaceuticals, and into women’s sanitary products and toiletries in the 1970s and 1980s. In recent years, Johnson & Johnson has expanded into such diverse areas as biopharmaceuticals, orthopedic devices, and Internet publishing.
Recently, Johnson & Johnson has purchased Pfizer’s Consumer Healthcare department. The transition from Pfizer to Johnson and Johnson was completed December 18, 2006. National Semiconductor Corporation The company wasn’t suited for retail manufacturing, and was crushed by companies that were. By the time digital watches became popular in America; National had been driven from the marketplace, suffering losses that overshadowed its success in semiconductors. Analyze the three primary reasons for the different outcomes.
First, Johnson & Johnson diversified into items that are strategically related to the company’s existing lines of business. Johnson & Johnson is a diversified healthcare company that develops, manufactures and markets products in three primary lines of business: pharmaceuticals, medical devices and diagnostics and Consumer Products. On the other hand, National Semiconductor Corporation entered into the production of unrelated products which is not common thread of strategic fit or relationship between the new and old lines of business, meaning the new and old businesses are unrelated.
Second, Johnson & Johnson diversified through mergers and acquisitions of new companies. For instance, it expanded into pharmaceuticals with the purchase of McNeil Laboratories Inc. , Cilag, and Janssen Pharmaceuticals, and into women’s sanitary products and toiletries in the 1970s and 1980s. In recent years, Johnson & Johnson has expanded into such diverse areas as biopharmaceuticals, orthopedic devices, and Internet publishing. Recently, Johnson & Johnson has purchased Pfizer’s Consumer Healthcare department.
The transition from Pfizer to Johnson and Johnson was completed December 18, 2006. On the other hand, National Semiconductor Corporation entered into diversification to make electronic consumer products in addition to the semi-conductors that went inside them. They did not embark on growth strategy through acquisition and mergers. They had stiff opposition and were crushed by companies suited for retail manufacturing. Lastly, Johnson & Johnson diversification strategy is well matched to the strengths of its top management team members which are factored into the success of that strategy.
On the other hand, National Semiconductor Company top executives did not manage diversification effectively. Recommend two actions the unsuccessful one could have made to make their diversification venture successful First is that National Semiconductor should ensure a diversification strategy which is well matched to the strengths of its top management team members and factored into the success of that strategy. Different diversification strategies require different skills on the part of a company’s top managers, and that factors should be taken into consideration before firms are joined.
For instance, the success of a merger may not depend only on how integrated the joining firms become, but also on how well suited top executives are to manage that effort. Secondly National Semiconductor should diversify into related products where they can control the market. To conclude, I must say that if diversification strategy is done strategically to relate to the company’s existing line of business or diversified through mergers and acquisitions of new companies with the support of its top management team members, then its objective of growth and risk taking can be achieved.
University/College: University of Chicago
Type of paper: Thesis/Dissertation Chapter
Date: 21 September 2016
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