Question & Answer: What are the different levels of diversification firms can pursue by using different…..

There are three different levels of diversification, that firms may pursue by using different corporate-level strategies.

1) Low level diversification strategy: This includes single and dominant level business strategies. In such business strategies companies generate their maximum revenue from their core business areas. Companies that follow single- or dominant-business strategies have low levels of diversification. More than 95% of the revenues come from single business unit in single level business strategy, whereas, between 70% to 95% of the revenues come from single business unit in dominant level business strategies. The example of the company using such kind of strategies is Frito Lay

2) Moderate to high level diversification: This includes moderate to high level diversification strategies. This is the strategy where most of the companies use related diversification strategy for their business. All the businesses in these cases are linked to each other.

A diversified company is one that earns at least 30% of its revenues from sources outside of the dominant business and whose units are linked to each other by the sharing of resources, and by product, technological, and distribution linkages. Moderately Diversified companies also earn at least 30% of their revenues from the dominant business and all business units share product, technological, and distribution linkages. The example of the company that uses this kind of a strategy is GE

3) Very high level diversification: This is the scenario where companies use unrelated diversification strategy for their business purposes. Companies that generally use such strategy are known as conglomerates.

Unrelated diversified companies generate at least 30% of their total revenues from the dominant business but there are few linkages between key value-creating activities. Unrelated-diversified companies do not share resources. Conglomerates (companies following unrelated diversification strategies) dominate the private sector economy in several countries such as Latin America, South Korea and India while US has more highly diversified companies. The example of this kind of strategy is Samsung.

Advantages of diversifying their operations :

1) To increase the value of a company: This is one of the major reasons why a company may choose to diversify its operations. Diversifying its business will lead to the company creating an edge over rest of its competitors which lead to sustainability of the business.

2) To decrease the risk for a company: The main motive behind this is to reduce the competition and operational risks that an organization may encounter.

3) To neutralize another company’s strengths: This is very important as neutralizing competitor’s strengths will prove to be a major achievement for the business. This will highly contribute to the profitability and growth of the organization.