"Every diversification decision is an entry decision" - Discuss this statement in terms of its implications for the success of new business diversification.

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“Every diversification decision is an entry decision.”  Discuss this statement in terms of its implications for the success of new business diversification.  Your answer should address issues of competitive advantage, industry analysis and industry evolution.

What is the motivation for diversification?  What is the process to set up the diversification venture?  What are the determinant factors that make diversification successful?  And what are the rules to manage diversification?  

Many firm in mature stage find themselves have little room to grow, difficult to capture more market share and to earn more profit.  The future of the established firms could be threatened by industry disruption as innovative start-ups entering the market.  Those more capable incumbents would constantly adapt to the new rules of competition through both innovation and imitation.  There are several reasons that would motivate firms to consider diversification.  First, the volatile business could cause firms’ earnings uncertain, or the changing business climate could cause firms less profitable than before.  EMI Ltd. is a good example, emerged as the Electric and Musical Industries, and then redirected itself towards the development of sophisticated electronic devices during the war.  After the war was over, EMI was struggling to make profits because its business was largely aligned with the defense-related products.  So the CT scanning came into birth, after EMI’s vision on the great opportunity this breakthrough medical technology would bring.  Second, the greater financial reward would trigger firms to take on new ventures, especially these firms who foresee the growth limitation of their existing core business.  Like Microsoft, it started with the OS business, and then it expanded its business into software applications, Internet Browser, database system and many, many more.  Third, a favorable repositioning for the current business and a potential future overall business growth could be another force to motivate firms to consider diversification.  Head Ski, after an initial success by selling premium priced Skis, expanded the product lines including poles and skiwear.

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Whether to diversify the business or not is not an easy decision to make.  It is just like to enter a new industry, the ultimate market size, the predicted growth rate and the future industry structure have to be evaluated and analyzed carefully and thoroughly.  Since diversification occurs when a firm develop a new independent unit very different from its core strategy and activities, there are a number of challenges need to be addressed between the new and old business, like how to allocate the resource, whether to utilize the exiting capabilities or develop new ones, or how to approach ...

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