To what extent is diversification the best strategy to achieve profitable growth?
Novartis, a large multinational pharmaceutical company, recently diversified by buying Alcon, in a £24.8bn deal. Alcon is a producer of eye care products such as contact lenses. Google has diversified by investing £124m in a wind power business. To what extent is diversification the best strategy to achieve profitable growth? Justify your answer with reference to Novartis, Google and/ or other organisations that you know. (40 marks)
Diversification - Practice under which a firm enters an industry or market different from its core business.
Growth – The process of improving some measure of an enterprise’s success. Business growth can be achieved either by boosting the top line or revenue of the business with greater product sales or service income, or by increasing the bottom line or profitability of the operation by minimizing costs.
Profitable growth can be achieved in many ways and strategic diversification has definitely played a large role in the growth of many large businesses today. However just like any strategy this all depends on many factors e.g. the type of industry the business is operating in or the risks involved into entering new markets.
Virgin is one example of a company that owes most of its very profitable growth base on mostly un- related diversification; and yes although this type of strategy is very risky, it has big rewards making Virgin $ 21.3 billion (2011) and a value of £5.01 billion in 2008. Starting from only a small record shop in London in 1971, Richard Branson (co-founder of virgin and business tycoon) spent no time growing his empire through strategic diversification from transport, internet broadband, TV and even bridal wear in Manchester. This shows that, although very un related at times, diversification has been the key element to Virgins overall very profitable growth. On the other hand by diversifying into new markets this has the tendency to fail due to other factors such as other competitors. Trying to
Diversification - Practice under which a firm enters an industry or market different from its core business.
Growth – The process of improving some measure of an enterprise’s success. Business growth can be achieved either by boosting the top line or revenue of the business with greater product sales or service income, or by increasing the bottom line or profitability of the operation by minimizing costs.
Profitable growth can be achieved in many ways and strategic diversification has definitely played a large role in the growth of many large businesses today. However just like any strategy this all depends on many factors e.g. the type of industry the business is operating in or the risks involved into entering new markets.
Virgin is one example of a company that owes most of its very profitable growth base on mostly un- related diversification; and yes although this type of strategy is very risky, it has big rewards making Virgin $ 21.3 billion (2011) and a value of £5.01 billion in 2008. Starting from only a small record shop in London in 1971, Richard Branson (co-founder of virgin and business tycoon) spent no time growing his empire through strategic diversification from transport, internet broadband, TV and even bridal wear in Manchester. This shows that, although very un related at times, diversification has been the key element to Virgins overall very profitable growth. On the other hand by diversifying into new markets this has the tendency to fail due to other factors such as other competitors. Trying to