The Strategy Of Diversification

A critical literature review was conducted on strategic diversification literature as well as on competitiveness of the home healthcare market. The library resources available at Aston University were adequate to complete the literature review. Internet was also used to explore further literature on competition in home healthcare business. A search was carried out using key words (strategic diversification & competition) on the university library database.

In the following literature review emphasis is given to the theory of diversification and its underlying scope for businesses. The literature review addresses the key-motivators for diversification and explores answers to the question that why is it so appealing for some businesses to deploy the strategy for diversification. Towards the end of the review evidence from some empirical studies is considered on performance results of the businesses that choose to diversify. A gap in the current knowledge has been identified as there is no information available on how, why, when, where and up to what extent a home healthcare company should engage into the strategy of diversification.

Literature Review

The strategy of diversification has been very popular in the world since the 1960s (Hoskisson and Hitt, 1990). Diversification is defined as a means of spreading the base of a business to achieve improved growth and/or reduce overall risk that may take the form of investments that address new products, services, customer segments, or geographic markets (Booz, Allen, and Hamilton, 1985). A similar view is given by Morris (1958) as he explains that the policy of diversification indicates allocating resources to alternative activities or opportunities. A different approach to define diversification as a ”strategic management issue in the development of a marketing plan” is given by Eastaugh (2005).

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In order to diversify, a firm must have the necessary resources such that diversification is economically feasible (Penrose, 1959). A similar opinion is given by Chatterjee & Wernerfelt (1988) by writing that tangible, intangible and financial assets therefore may facilitate diversification. Healthcare at Home ltd. has leveraged its resources being a market leader for almost 18 years, therefore the launch of this project effectively establishes the fact that Healthcare at Home ltd. is economically stable and it is the right time for the company to explore options for strategic diversification. According to Hoskisson and Hitt (1990) diversification cannot be expected by firms acting in perfectively competitive markets. Therefore, authors are trying to institute that firms who diversify operate in to an imperfectly competitive market. Current home healthcare market meets some criterions of an imperfect competition being an oligopolistic market as there are only three or four major operating companies.

Motivators for diversification differ from firm to firm. According to Rijamampianina, Abratt and February (2003) some of these motivators are increased stock value of the firm, increased growth rate of the firm, better funds management, revenue growth, improved stability of earning and increased efficiency and profitability. A similar view is given by Higgins and Schall (1975) and Lewellen (1971) stating, diversification can improve debt capacity, reduces the chances of bankruptcy by going into new markets. According to Teece (1982) and Williamson (1975) diversification improves asset deployment and profitability. Hence one can say that the main motivators behind why a firm decides to diversify are economies of scale and scope, market power, profit stability, improve financial performance and growth. These factors are very relevant to Healthcare at Home ltd. and this research project on the basis that the current NHS financial constraints, high service expectations from customers and the company’s own commitment to excel upon those expectations while differentiating itself from competitors is inevitably squeezing the profits. Going forward the company’s focus could be to find another ways of wealth generation via exploiting the remaining opportunities in home healthcare industry and hence findings of this research project could become a very useful source of information.

Researchers mainly describe three types of strategic diversification; concentric, horizontal and conglomerate (Wikipedia, 11th January, 2010). However, Rumelt (1974) classified the firm’s strategy of diversification into four types based on the proportion of every single business to its revenues. The four types are single business, dominant business, related business and unrelated business.

According to Puia (2009), if the new products and services draw heavily from the internal resources, knowledge and capabilities, the firm is practising related diversification; when there is a little overlap, the firm is considered to be practising unrelated diversification. Firms, in pursuit of related diversification perform best through internal development, because they leverage internal strengths and avoid transactions costs (Williamson, 1985) and market auctions (Barney, 1988). Firms engaged in unrelated diversification succeed best through acquisitions, because acquisition offers a corporation the opportunity to purchase the skills necessary to compete in unrelated product areas (Dundas and Richardson, 1982).

However, Chatterjee & Wernerfelt (1991) argue that the type of diversification one would expect to result from a resource depends on its specificity within a particular industry. For Healthcare at Home ltd. opting for related or unrelated diversification option can create a dilemma.

Benefits and cost of diversification is also a largely studied management research area, where different researchers argue in both directions. The corporate diversification literature however has failed to reach consensus about the relationship between firm diversification and performance (Hall, 1995).

Some studies, suggest service firms should not diversify (Normann 1984), whereas Nayyar (1993), claims that industry diversification based on the information asymmetry is positively associated with performance. Another empirical study carried out by, Pandya and Rao (1998), establishes that the group of diversified firms on average tend to perform better.

Researchers argue that there may be superior levels of performance from related diversification relative to the unrelated type; related diversification is the more common method of business growth (Ng, 2007) (Wernerfelt and Montgomery, 1988). One of the empirical studies carried out by, Mishara & Akbar (2007), on the transaction cost economies & resource-based view of firm establishes positive synergistic effects from relative diversification. A complementing view that the resource-based view seems to suggest that firms diversify into related industries and related diversification leads to superior rents is given by Montgomery and Wernerfelt – (b) (1988) and Rumlet (1974).

A different approach by Zook (2001) points out that 90 percent of companies’ efforts to diversify outside of their core business has failed over the past decade. A similar view suggests that if a firm was able to maintain or manage its competitive advantage while diversifying, it would result in successful diversification (Rijamampianina, Abratt and February, 2003). According to Porter (1996), companies erode their competitive advantage through poor diversification strategies. His research shows that diversification around the core business has a higher success rate than other approaches to diversification.

Reviewing current literature a gap in the current knowledge emerges as there are no empirical studies have been carried out around strategic diversification options and performance of a home healthcare company. Further there is no information available on how, why, when, where and up to what extent a home healthcare company should engage into the strategy of diversification. Dilemma of related or unrelated diversification as a strategic choice is also a missing link in the literature.