11/23/2015
Essay on Profitability of Unrelated Diversification Strategy.
– Gayatri Subramanian.
Most companies are moving towards internationalization, implementation of corporate
strategies for globalization is not the same as the strategies in the native markets.
Developing and underdeveloped countries possess institutional voids caused by lack of
intermediaries and regulatory systems. It is important to understand the customer
preferences in order to customize products. The willingness to pay increases with
reduction in costs. Costs are directly proportional to infrastructure available. At most
instances infrastructure is not globally uniform. Developed countries have a better
infrastructure and therefore strategies that work for developed countries may not work for
developing or underdeveloped countries.
Developing countries have a lot of opportunities. Investments could be highly profitable.
Multinational companies can exploit the low labor costs and increase production. Mass
production can result in lowering the cost of goods. Low cost strategies have worked well
for a numerous transnational companies. ‘While companies can’t use the same strategies in
all developing countries, they can generate synergies by treating different markets as part
of a system.’ (Khanna.T.et.al, 2005). Efficient diversification strategy is essential to build a
higher competitive advantage. It also helps to gain economies of scope and scale.
Illinois tool works sets a good example for unrelated diversification. ITW buys any the
firm in the auto, welding, construction and food industries. ITW restructures the firms that
it acquires and focuses on most profitable product line in order to increase its profit
margins. It works on the 80/20 strategy. It tries to make 80% of its profits from 20% of
