Discuss the Main Reasons for an Organization to Choose Diversification as a Strategic Direction

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Discuss the main reasons for an organization to choose diversification as a strategic direction.

When defining strategic directions, an organisation needs to analyze the context in which future operations will take place. The decision of entering a new market or to develop new products and services in an existing market needs to be though through focusing on increasing market share and increasing power over suppliers and buyers. Diversification, sometimes described as Horizontal intergration, involves different value networks and the aim is to create synergies to connect these different value networks together in order to create complementarities. What are the reasons for an organisation to choose diversification as a strategic direction?

There are 4 main drivers and 2 high contributors to diversification. The first one concerns economies of scale. By developing the scope of activities, an organisation increases its efficiency considerably. The second is spreading the corporate management competences for each part of the portfolio to benefit from the core. This generates an increase in learning and adapting to change. For instance, Virgin has consistently managed to spread the corporate management competences whilst implementing a strong corporate culture. The third one consists in making the most of the organization’s capabilities by constantly adapting to changes. This implies exploiting internal processes at its maximum. Finally, these all contribute to an increase in market power. When diversifying, an organisation is also spreading the risk by entering new markets or products and services as well as responding to market decline. These drivers create value by creating synergy, gained by complementarities between each part, which creates more outcomes by working together. However, the organization has to perceive relationships with existing businesses and to perceive complementarities in the concept. Moreover, prior to making the choice to...
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