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A STUDY ON PROBLEMS IN DIVERSIFICATION STRATEGIES IMPLEMENTED IN CHINA HOME APPLIANCE INDUSTRYbyLI TIANQINA thesissubmitted in partial fulfillment of the requirementsfor the Degree ofBACHELOR OF BUSINESS ADMINISTRATIONforJoint Bachelor of Business Administration (BBA) ProgrambetweenTianjin University of Technology (TUT), Tianjin City, P. R. ChinaandThompson Rivers University (TRU), Kamloops, B. C., CanadaJune 1st, 2009摘要近年来多元化的经营战略愈演愈烈，自20世纪末不论是从宏观经济角度还是从微观经济角度来探寻原因，我国家电业各大龙头企业正在经历缓慢的发展阶段，组织结构陈旧，产品结构过于单一等一系列弊端的出现促使各大厂家把迅速发展的眼光纷纷投向多元化经营。

市场的蓬勃发展使得家电企业纷纷从彩电、空调，扩张到手机通讯、冰洗、小家电。

但后续问题接踵而来，产品的固有形象不但没有强化，而且面临空心化和模糊的危险，加上旷日持久的价格战，公众很容易在家电企业的快速扩张中失去品牌认知的方向。

曾经红极一时的家电品牌在这场没有硝烟的战场上或销声匿迹或苟延残喘。

这篇论文深刻剖析了我国家电业多元化经营存在的问题，用案例分析、对比统计数据法得出解决之道，从而给仍处在盲目多元化阶段的同行以警示。

关键词：多元化战略家电业核心竞争力ABSTRACTDiversification has been the primary strategic measure for economic adjustments employed by large enterprises in China’s matured home appliance industry ever since for macro- and micro-economic reasons the enterprises started experiencing chronic and structural troubles in the last decade of 20th century. It seeks to increase profitability through greater sales volume obtained from new products and new markets. Through the boom in diversified production and strategies into home appliance industry, more and more domestic companies who have ever created famous brands failed to compete in this fierce battle.This thesis expounded the core conclusion of diversification conception based on the research of predicaments laid bare in the China electrical industrial development for years, which amplifies the comparison research through statistical approaches and takes the home appliance businesses of the country as a controlled industry-level sample. It will also be highlighted that blindly pursuing diversification beyond the firm’s limits will bring financial and organi zational trouble to the firm.Key Words: Diversification Strategy Home Appliance IndustryCore CompetencyBRIEF CONTENTSCHAPTER 1 INTRODUCTION TO DIVERSIFICATION IN THEHOME APPLIANCE MARKET (1)1.1 Theory Review (1)1.2 Analysis of What has Happened in Western Giant Companies (3)1.3 Situational Analysis on When a Firm Should Diversify (4)CHAPTER 2 SITUATIONAL ANALYSIS OF DIVERSIFICATIONSTRA TEGY IMPLEMENTA TION IN CHINESE HOMEAPPLIANCE ENTERPRISES (5)2.1 Status Quo of the Chinese Home Appliance Market (5)2.2 Venture Analysis of Diversification (7)2.3 The Dilemma Faced by Chinese Domestic Home Appliance Enterprises (8)CHAPTER 3 SOLUTION TO THE PROBLEMS OF DIVERSIFICATION (10)3.1 Best Practice from Successful Case Study (10)3.2 Ways to Avoid Diversification Venture (11)CHAPTER 4 CONCLUSION AND PROSPECT (13)4.1 Conclusion (13)4.2 Prospect (14)REFERENCES (16)ACKNOWLEDGEMENTS (17)CHAPTER 1 INTRODUCTION TO DIVERSIFICATION AND PRACTICES ON HOME APPLIANCE MARKET Diversification strat egies are used to expand firms’ operations by adding markets, products, services, or stages of production to the existing businesses. The purpose of diversification is to allow the company to enter lines of business that are different from current operations. When the new venture is strategically related to the existing lines of business, it is called concentric diversification. Conglomerate diversification occurs when there is no common thread of strategic fit or relationship between the new and old lines of business; the new and old businesses are unrelated.In chapter one, the author discusses research scope, research objective, content, methods used in this thesis and reviews current literature. At the same time, we take a look at the theories of enterprise diversification development, including diversification causes, diversification ventures, and diversification ways and means. And then comes the review of the current situation of our domestic home appliance industry, followed up by the venture analysis of diversification strategy based on the failure case study. As large-scale companies with different origins and evolutionary patterns, both Haier and Xiao Tian’E are appropriate grounds to test the long-term effectiveness of various elements and types of resources and capabilities that the enterprises utilize for diversification measures.To sum up with the bench-marking research in terms of the successful case study like Haier to develop the best practice with the purpose to give a hand for their counterparts still in trouble. The conclusion of diversification strategy anticipates a big blueprint of marketing strategy for the electrical industry in this adversarial marketing environment, as well as gives alert to those organizations heading for diversification blindly.1.1 Theory ReviewDiversification is a form of growth marketing strategy for a company. It seeks to increase profitability through greater sales volume obtained from new products and new markets. Diversification can occur either at the business unit level or at the corporate level. At the business unit level, it is most likely to expand into a new segment of an industry in which the business is already in. At the corporate level, it is generally entering a promising business outside of the scope of the existing business unit.Diversification is part of the four main marketing strategies defined by the Product-Market Growth Matrix.1.1.1Background of the Product-Market Growth Matrix:The Ansoff Product-Market Growth Matrix is a marketing tool created by Igor Ansoff. The matrix allows marketers to consider ways to grow the business via existing and/or new products, in existing and/or new markets –there are four possible product/market combinations. This matrix helps companies decide what course of action should be taken given current performance. The matrix consists of four strategies (See Fig. 1.1).Fig. 1.1 Product-Market Growth MatrixSources: Ansoff, I., Strategies for Diversification, Harvard Business Review, V ol. 35 Issue 5, Sep-Oct 1957 Ansoff pointed out that a diversification strategy stands apart from the other three strategies. The first three strategies are usually pursued with the same technical, financial, and merchandising resources used for the original product line, whereas diversification usually requires a company to acquire new skills, new techniques and new facilities. Therefore, diversification is meant to be the riskiest of the four strategies to pursue for a firm.1.1.2 Diversification and Corporate StrategyA company is diversified when it is in two or more lines of business that operate in diverse market environments.Strategy-making in a diversified company is a bigger picture exercise than crafting a strategy for a single line-of-business; a diversified company needs a multi-industry, multi-business strategy and a strategic action plan must be developed for several different businesses competing in diverse industry environments.Companies and organizations are challenged with daily decisions that can provide unlimited opportunities internally and externally. Finance and growth maximization also play a large role in these decisions. Executives and managers must make decisions on how resources will be appropriated, how to increase profits, sales, and the companies overall business portfolio. Companies are able to determine what is working and not working by analyzing the company financial statements. At times the financial statements will tell a lot about an organization and their financial situation or background. When companies begin to lose out on profits or sales, they are at a point in time where they could be potentially bought out or go out of business. These companies face finance and growth maximization challenges, which influence their decisions. Constantlyunder pressure, executives and managers make decisions concerning how resources are to beappropriated, in an effort to understand how to increase profits, sales, and the overall portfolio of the business.The strategies of diversification can include internal development of new products or markets, acquisition of a firm, alliance with a complementary company, licensing of new technologies, and distributing or importing a products line manufactured by another firm. Generally, the final strategy involves a combination of these options. This combination is determined in function of available opportunities and consistency with the objectives and the resources of the company.1.2 An Analysis on What has Happened in Western Giant CompaniesVirgin moved from music producing to travel and mobile phones; Walt Disney moved from producing animated movies to theme parks and vacation properties; Canon diversified from a camera-making company into producing whole new range of office equipment.The whole world is more than willing to join the diversification battle in order to seize more market share and compete with other enterprises. Let’s take a close look at Philips.Philips (Netherlands) is the largest consumer electronics manufacturer in the world. One of Philips’ successful strategies is diversification of worldwide portfolio.Royal Philips Electronics of Netherlands began as a small light-bulb factory in Holland, and by the turn of the century, was one of the largest producers in Europe. One-product focus made Philips a leader in industrial research which stimulated product innovation. Consequently, product line was broadened significantly and the flow of exciting new products and ideas continued through the years. A limited domestic market soon forced Philips to grow internationally. The foundations for what was to become one of the world’s biggest electronics companies were laid.The company’s culture based on constant tech nical innovation led to numerous new products developed, (first color TV, first stereo TV, first TV with teletext). Philips’ legendary innovative capability brought up about 150 brands supported by the company worldwide. All these factors contributed to the dilution of Philips brand name and the lack of scale economies.However, though the change in industry life cycle, consumer electronics industry reached maturity and was already entering decline phase. Fierce competition led to cost efficiency being the most important factor for achieving competitive advantage. Cost efficiency could be achieved by low wages, scale economies, and low overheads. That is why Philips began outsourcing its manufacturing facilities and “slimming” its workforce. Despite the fact that Philips had extremely diversified product lines, with some products being on the different life cycle stages, hyper competition and shortened life cycle made it virtually impossible to capitalize on them.As we can see, key success factors change over time. The structure that brought Philips to the top became a burden finally. Therefore, we can conclude that firms that were successful in one phase of the industry’s development may have to acquire rather different resources and capabilities in order to be successful in the next phase.Industry evolution posed a huge challenge to managers: strategy and organizational structure should be adapted to keep pace with the rate of change in the external environment and the internal environment.1.3 Situational Analysis on When a Firm Should Diversify:Diversification efforts may be either internal or external. Internal diversification occurs when a firmenters a different, but usually related, line of business by developing the new line of business itself. Internal diversification frequently involves expanding a firm’s product or market base. External diversification may achieve the same result; however, the company enters a new area of business by purchasing another company or business unit. Mergers and acquisitions are common forms of external diversification.When the home appliance manufacturer began to diversify its business, discuss what considerations relating to the marketing mix would it have investigated or thought about in the initial stages of their planning activities.There are situations when a firm should diversify: It has opportunities to expand into industries whose technologies and products complement its present business; It can leverage existing competencies and capabilities by expanding into businesses where these resource strengths are key success factors; It can reduce costs by diversifying into closely related businesses; It has a powerful brand name it can transfer to products of other businesses to increase sales and profits of these businesses.Based on the considerations mentioned above, the management team can effectively decide when to diversify, so that this ongoing diversification is not blind or imprudent.CHAPTER 2 SITUATIONAL ANALYSIS ON DIVERSIFICATIONSTRATEGY IMPLEMENTATION OF CHINESE HOMEAPPLIANCE ENTERPRISESTelevision has been an excellent medium for entertainment and information ever since the invention of the electron scanning tube in 1923 by Vladimir Kosma Zworykin, who is considered the father of the modern television. With the conversion to digital format 1080i in 1998, there has been a boom in the production of different types and technologies for Televisions. A new generation of televisions has been developed, including liquid crystal display (LCD), rear projection, and high definition that provides amazing visual characteristics and can be integrated into a home theater system.2.1 Status Quo of the Chinese Home Appliance MarketAs the output of different technologies worldwide increased year by year(as shown in Fig. 2.1), more and more companies entered in order to seize exciting market shares, which lead to technology behind these televisions decreases in costs. And in the China domestic market, the TV set industry was commonly acknowledged as a highly matured industry. Through the ongoing boom of TV set market, we are more likely to hear that the “all -loss” due to the fierce price battle. Besides the different types and technologies for televisions, the price of each TV set seems more important to customers.Figure 2.1 Q1 2001-Q4 2003, the output of different technologies worldwideSource: Stanford Resources Co., Mar.2003Fig. 2.1 illustrates that, during the last twelve quarter in 2001 to 2003, the output ofdifferent 05,00010,00015,00020,00025,00030,00035,00040,00045,000Q 101Q 201Q 301Q 401Q 102Q 202Q 302Q 402Q 103Q 203Q 303Q 403单位：千台U n i t : T h o u s a n d s e t stechnologies worldwide increased year by year.Table 2.1: Year 2001-2007, the Worldwide TV Set MarketAs shown in Table 2.1, the quantity of television output increased by years, while the increasing rate of price was dropping down; we can easily tell that the increase rate of average price is less than the sales amount. On the other words, the TV set industry was almost reached maturity, and the companies which need growth and development should find new markets and fresh blood to avoid the danger of the industry declining, so that they can not miss the opportunity to leverage resources and capabilities to other activities or just rest on laurels and not continually learning.To sum up, there are three motives for diversification:1. Growth. The desire to escape stagnant or declining industries is a powerful motive for diversification (e.g. tobacco, oil, newspapers).2. Risk Spreading. Diversification reduces variance of profit flows, but diversification lowers unsystematic risk not systematic risk.3. Profits. For diversification to create shareholder value, then bring together different businesses under common ownership & must somehow increase their profitability.2.1.1 Competitive Advantage Gained by Diversification StrategyDiversification is a form of growth strategy. Growth strategies involve a significant increase in performance objectives (usually sales or market share) beyond past levels of performance. Many organizations pursue one or more types of growth strategies. One of the primary reasons is the view held by many investors and executives that “bigger is better.” Growth in sales is often used as a measure of performance. Even if profits remain stable or decline, an increase in sales satisfies many people. The assumption is often made that if sales increase, profits will eventually follow.Growth may also improve the effectiveness of the organization. Larger companies have a number of advantages over smaller firms operating in more limited markets.1. Large size or large market share can lead to economies of scale. Marketing or production synergies may result from more efficient use of sales calls, reduced travel time, reduced changeover time, and longer production runs.2. Learning and experience curve effects may produce lower costs as the firm gains experience in producing and distributing its product or service. Experience and large size may also lead toimproved layout, gains in labor efficiency, redesign of products or production processes.3. Lower average un it costs may result from a firm’s ability to spread administrative expenses and other overhead costs over a larger unit volume. The more capital intensive a business is, the more important its ability to spread costs across a large volume becomes.4. Improved linkages with other stages of production can also result from large size. Links with distribution channels may lower costs by better location of warehouses, more efficient advertising, and shipping efficiencies. The size of the organization relative to its customers or suppliers influences its bargaining power and its ability to influence price and services provided.5. Sharing of information between units of a large firm allows knowledge gained in one business unit to be applied to problems being experienced in another unit. Especially for companies relying heavily on technology, the reduction of R&D costs and the time needed to develop new technology may give larger firms an advantage over smaller, more specialized firms. The more similar the activities are among units, the easier the transfer of information becomes.6. Taking advantage of geographic differences is possible for large firms. Especially for multinational firms, differences in wage rates, taxes, energy costs, shipping and freight charges, and trade restrictions influence the costs of business. A large firm can sometimes lower its cost of business by placing multiple plants in locations providing the lowest cost. Smaller firms with only one location must operate within the strengths and weaknesses of its single location.2.2 Venture Analysis of DiversificationAccording to Calori and Harvatopoulos (1988), there are two dimensions of rationale for diversification. The first one relates to the nature of the strategic objective: diversification may be defensive or offensive.Defensive reasons may be spreading the risk of market contraction, or being forced to diversify when current product or current market orientation seems to provide no further opportunities for growth. Offensive reasons may be conquering new positions, taking opportunities that promise greater profitability than expansion opportunities, or using retained cash that exceeds total expansion needs.The second dimension involves the expected outcomes of diversification: management may expect great economic value (growth, profitability) or first and foremost great coherence and complementarities with their current activities (exploitation of know-how, more efficient use of available resources and capacities). In addition, companies may also explore diversification just to get a valuable comparison between this strategy and expansion.2.2.1 Risks Existing in Diversification StrategyGoing into an unknown market with an unfamiliar product offering means a lack of experience in the new skills and techniques required. Therefore, the company puts itself in great uncertainty. Moreover, diversification might necessitate significant expanding of human and financial resources, which may detract focus, commitment and sustained investments in the core industries. Basically, a firm should choose this option only when the current product or current market orientation does not offer further opportunities for growth. Because it1. Places big demand on corporate management. The more diverse the business, the harder to it is(1) to oversee each subsidiary & spot problems,(2) to judge caliber of strategic plans of subsidiaries.2. Can not focus resources and capabilities on competing successfully in one area and focus on what the company knows and does best.2.2.2 Careful Investigation:Diversification as the riskiest of the four strategies presented in the Ansoff matrix and requires the most careful investigation:Porter’s Three Essential Tests1. The attractiveness test: the industry that has been chosen has to be either attractive or capable of being made attractive.2. The cost-of-entry test: the cost of entry must not capitalize all future profits.3. The better-off test: the new unit must either gain competitive advantage from its link with the corporation or vice versa.These three essential tests implied that whether a company implements diversification strategy or not depends on if it is profitable or not, or if it has potential to be profitable.2.3 The Dilemma Faced by Chinese Home Appliance EnterprisesThrough the boom in the diversified production and strategies of the home appliance industry in China, more and more domestic companies who have created famous brands failed to compete in this fierce battle. Blindly pursuing diversification beyond the firm’s limits just brings financial and organizational trouble to the firm.MeiLing, one of the top-5 refrigerator manufactures in China, imported Italian advanced roller washing machine’s technology and equipment in the same phase with Haier, but still gave no output and lay down in the factories; as for the newly invested air-conditioner branches, it is also like an empty old house slept until someone else wake it up.ChunLan, is more like versatile, air-conditioner, the TV set, washing machine, refrigerator, motorcycle, automobile are almost in one market segment. It’s very har d to tell how long this situation will last, so does the World Top-500 dream.Compared with the 2005 annul report of home appliance industry, it might be more concrete to see that ChunLan and TCL group had their first loss incurred since they issued shares, TCL and KeLong Electronic suffered great losses with 320 million and 487 million respectively. Even QingDao Haier fell down 35.27% on its gross margin. As well as the quarterly report of the first year 2006 showed that there are still more home appliance business that had losses, like ChangHong, KeLong Electronic, AoKeMa, MeiLing, etc.People may wonder how this happened, as we invested so much money and energy on the “promising” new market with the new product.2.3.1 ProblemsThe problems underlying show that home appliance enterprises which are successful as single-businesses start to enter other related or unrelated industry for developing newly increasing stage, however, after the entrance they still face the same situation as the old ones. They hope to break out of the encirclement, but actually besieged by new products’ failures again.Diversification decisions involve the following two issues:1. How attractive is the sector to be entered?2. Can the firm achieve a competitive advantage?The fundamental questions underlying diversification is whether it enhances or weakens its competitive advantage, and many China home appliance industries actually weaken their competitive advantage on some extent, so that we called this kind of diversification blind and irritable. If the company which entering the diversified area but no core technology go on the market, there will be less profit and few break-though in essence.CHAPTER 3 SOLUTION TO THE PROBLEM OFDIVERSIFICATIONThe strategies of diversification include internal development of new products or markets, acquisition of a firm, alliance with a complementary company, licensing of new technologies, and distributing or importing product lines from another firm. Generally, the strategy involves a combination of these options, which is determined in function of available opportunities and consistency with the objectives and the resources owned by the company. Due to the high risks mentioned above, many attempts to diversify by companies led to failure. However, there are a few good examples of successful diversification.3.1 Best Practice from Successful Case StudyLet’s take China’s Haier as an example, which has evolved from operating a single refrigerator factory in Qingdao, China, to becoming the dominant supplier of white goods in China, including refrigerators, freezers, and washing machines, through a succession of eighteen acquisitions. More recently, Haier continue diversification on PC, mobile phone such these out of home appliance industry, and all of these are very successful.Screening out targets t hat Haier’s management feels it cannot successfully turn around is an important part of the company’s consolidation strategy. Zhang Ruimin Haier’s CEO, describes this pr ocess as “hunting the stunned fish, no t the dead ones”. On the flip side of the health coin, there can be a persuasive argument for buying strong companies on the basis that it is better to have available “best-of-breed” companies as part of your portfolio rather than letting them become part of a competitor.Fig. 3.1 Diversification among the US Fortune 500, 1949-1974Source: Chisnall, Peter, Strategic Business Marketing, 1995Xiao Tian’E which used to be Top One on washing machine market, but later operated refrigerator, air-conditioner, washing-bowl machine, drying cleaner etc., failed to compete on process in the market again. Different from Xiao Tian’E, Haier outsourced part of its manufacturingbut continued diversified investment on the capital market to spread the potential cash flow risks. Apparently, Haier is doing the diversified investment rather than diversified operation in order to integrate the industrial capital and financial capital.As shown in Fig. 3.1, the worldwide diversification trend proved that diversification was booming, but as time went by, during the 1980s and 1990s the trend reversed as large companies refocused upon their core businesses.3.2 Ways to Avoid Diversification Venture1. Refocus on the core business.One direction which is possible is concentrating more on electronic know-how in non-consumer business. The electronics especially the home appliance industry is undergoing rapid changes. In order to develop strategies, the key characteristics of the electronics industry must be considered. These characteristics include:(1). the integration of products and system functions(2). multi-functionality(3). multi-technology(4). escalating research and development efforts(5). the need for standardization with regard to product specificationsSince these five characteristics were fulfilled in a specific brand, it’s important to protect their core business from being destroyed by other new to market products.2. Operational Relatedness. The diversification synergize from sharing resources across businesses (common distribution facilities, brands, joint R&D)3. Strategic Relatedness. The diversification synergize at the corporate level deriving from the ability to apply common management capabilities to different businesses.To be more concrete that diversification applied into the home appliance market, there still solutions in terms of top home appliance manufacturers.4.Increase the pace of innovation in the face of stepped up competition.Adapting to changes in markets and consumer preferences alone is not enough to ensure future success. Competitive advantage is available only to leader companies who act as initiators of change, not preservers of the past.Shortened product life cycle challenges the entire home appliance industry now, so nobody can rest on their laurels. Therefore, companies must increase the pace of innovation in order to maximize the profits from new products, while dedicating less energy to existing products that are quickly becoming commodities. To remain leaders companies have to invest in maintaining world-class innovation and leverage intellectual property, and drive productivity through operational excellence. Profitability might be increased through re-allocation of capital towards opportunities offering more consistent and higher returns, leverage the brand and the core competencies to grow in selected categories and markets.5. Create a more flexible organizational structure.Companies have to break down the organizational structure from one focused on product development and manufacturing to a more flexible model that also emphasizes sales, marketing and cooperative competition allowing for shared development of new technologies. It needs to integrate。