Strategies of Unrelated

Diversification

NAME FT NUMBER
Rahul Anand FT183072
Raghav Sharma FT182069
Nithyapriya Veeraraghavan FT181052
Tushar Mittal FT184104
Mohit Khandelwal FT181045
Sandeep Gupta FT181075
Abhishek Awasthi FT182004
Dhruv Sharma FT181034
Shruti Mishra FT183089
Krishna Prabhat Emani FT184037
UNRELATED DIVERSIFICATION
Unrelated Diversification is a form of diversification when the business adds
new or unrelated product lines and penetrates new markets. For example, if
the shoe producer enters the business of clothing manufacturing. In this case
there is no direct connection with the companys existing business.

CONGLOMERATES
A conglomerate is a corporation that is made up of a number of different,
seemingly unrelated businesses. In a conglomerate, one company owns
a controlling stake in a number of smaller companies, which conduct
business separately. Each of a conglomerate's subsidiary businesses runs
independently of the other business divisions, but the subsidiaries'
management reports to senior management at the parent company.
DIVERSIFICATION DISCOUNT
Businesses that diversify into unrelated businesses have been shown to
trade at a discount when compared to the breakup value of their
individual businesses.

ADDITIONAL REASONS FOR SKEPTISM ABOUT THE ROLE OF

CONGLOMERATES:
1. Existence of very few mechanisms for coordination between the
businesses
2. Difficulty within large complex organizations to restrain the empire-
building tendencies of managers which often leads to Failures of
performance and governance at many conglomerates.
These conclusions and findings are not the ONLY view about conglomerates
due to:
1. The existence of the diversification discount
2. Generalizability of these findings across time perids, across countries,
across firms in the same market and point in time
VALUE ADDING ROLE OF CONGLOMERATES
There are two issues that make it necessary to conduct a thorough
investigation into the value addition of conglomerates:
1. The Functioning of Markets and the Role of Institutional Context
2. Corporate Strategy of the Firm

CAN CONGLOMERATES ADD VALUE?

Context How well do What types of market

markets function? intermediaries exist?
How well do they function?

Does the firm have an Organizational processes

Strategy effective strategy to
add value to the Allignment with choice of
individual businesses? businesses and ownership
structure
UNDERSTANDING CORPORATE STRATEGY
IN AN UNRELATED DIVERSIFICATION
For Unrelated diversification, organizational processes within the firm, and
whether they are set up in a way that can effectively deliver value to the
diverse range of businesses inside the company is central to understanding a
firms corporate strategy.
These views can be misleading at times due to the following:
1. Ignoring the role of context
2. Ignoring the role of strategy
3. Focusing on the business mix rather than on organizational processes
4. Ignoring alignment between strategic choices (organizational design,
business mix, ownership structure)
CANONICAL EXAMPLES:
1. Conglomerates in the US, circa 1940-1975
2. Private Equity Firms
3. Business Groups
4. Present-day Conglomerates
DIMENSIONS OF ALLIGNMENT
1. Alignment of organizational processes with the choice of businesses
2. Alignment of initiatives with each other
3. Alignment with ownership structure

These dimensions of alignment between strategic choices can be useful in

informing the design and configuration of organizational processes within
conglomerates in a way that allows these firms to add value.