CA Intermediate · Financial Management and Strategic Management · Strategic Choices
Rohini Pharma, a Hyderabad generic drug maker, is considering the following: it wants to buy a Bengaluru diagnostics-kit firm which has no link with its products, technology or customers, mainly because the target has surplus cash flows and promising profits. Which strategy is this and what is its key feature?
This is conglomerate diversification. The acquired firm has no link with Rohini's products, technology or customers, and the motive is financial gain from its cash flows and profits. Concentric diversification would require related technology or marketing synergy, which is missing here.
- AConcentric diversification, as it exploits technological synergy
- BConglomerate diversification, as it is driven by financial rather than operational synergyCorrect
- CForward integration, as it moves nearer to the customer
- DTurnaround strategy, as it restores profitability
Explanation
Conglomerate diversification involves adding businesses unrelated in product, technology and market, and the rationale is typically financial, such as cash flows and profit prospects. Concentric diversification needs related technology or marketing synergy, which is absent here. The deal is not a move along the value chain, so it is not forward integration.
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