Corporate strategy: diversification

Published on May 30, 2022   8 min

Other Talks in the Series: Key Concepts: Introduction to Strategy

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Hello and welcome to this series of introductory talks on business strategy. My name is Robert Grant. I'm a professor of strategic management at Bocconi University in Milan, Italy. I'm also the author of "Contemporary Strategy Analysis", a leading strategic management textbook used in business programs throughout the world.
In this talk on corporate strategy, I'd like to address the final dimension of corporate scope, diversification. A firm's expansion from one area of business into another area of business. Early in the 20th century, even large businesses were specialized into a single area of business. Steel, railroads, banking. Many large companies are now diversified across several industrial sectors. Consider Amazon. It began as an online bookseller. Now its online store offers almost any conceivable consumer product. It also supplies Cloud computing, consumer electronics and mobile devices and streamed audio and video entertainment. In discussing diversification with you, my goals are, first, for you to recognize the different motives for business diversification. Second, be familiar with the conditions under which diversification can enhance profitability in shareholder value. Third, to understand the types and sources of synergy from diversification. Finally, to distinguish between different types of relatedness amongst the firm's businesses. I should begin by considering the reasons why firms diversify. Then I'll consider the conditions under which diversification generates profit and shareholder value. Finally, I'll examine the sources of synergy in diversification and the types of relatedness amongst a firm's different businesses. However, let me start by telling you about a bicycle ride I had last week. Not far from home, I got a puncture, the question arose should I fix it myself or take it to the bicycle shop and let them do it? The shop charges are about 30 bucks an hour, a lot less than I can earn in my consulting and teaching activities. Moreover, who would do the job quicker? No contest. They were professionals, so I took the bike to the shop, paid them $50, and didn't even get my hands dirty.