Diversification strategy

Diversification strategy consist of all projects of regrouping assets at the disposal of the enterprise to activities fundamentally different from in the past. It requires managers to engage in products, trades, technologies and markets that are new to the company.

Requirement for diversification

Diversification strategy almost always requires new financial investment. This activity may be the result of changes that have taken place already on the market, or which is to be expected in the future. Such a strategy is particularly reasonable if the existing system does not create additional growth opportunities. Among the main objectives of this strategy, you can highlight the pursuit of cost savings, spreading the risk, increased financial security, better use of resources, improved economic performance or survival on the market.

Types of diversification strategy

With regard to the depth of the diversification strategies can be divided into two groups:

• Centered diversification strategies
• Conglomerate diversification strategies

Centered diversification is the expansion of the new markets that are closer to the environment of the company. It can refer to the differentiation of products, markets and technologies. There are following types of diversification:

• Vertical diversification strategy,
• Horizontal diversification strategy,
• Lateral diversification strategy,

Advantages and disadvantages

Advantages of diversification strategy include:

• Risk reduction: By diversifying into different products, markets, or industries, a company can reduce its overall risk as the performance of one area can offset any losses in another.
• Increased revenue potential: Diversification can also open up new revenue streams and growth opportunities for a company.
• Improved financial stability: Diversification can also provide a company with a more stable financial position, as it is less reliant on any one product, market, or industry.

Disadvantages of diversification strategy include:

• Higher costs: Diversification can be a costly endeavor, as a company may need to invest in new products, markets, or industries.
• Difficulty in managing a diverse set of operations: Diversification can also make it more difficult for a company to manage its operations effectively, as it now has a diverse set of products, markets, or industries to keep track of.
• Lack of focus: Diversification can also lead to a lack of focus as a company tries to manage its diverse operations, which can negatively impact performance in some areas.

Examples of Diversification strategy

• Horizontal Diversification: This is when a company expands its current product line by adding new products and services that are related to its current offerings. For example, if a company sells computers, it could expand its product line by adding tablets and other related devices.
• Vertical Diversification: This strategy involves expanding a business into a related industry. For example, a computer manufacturer might expand its operations by providing repair and maintenance services for computer products.
• Concentric Diversification: This type of diversification involves developing new products or services that are related to a company’s existing products or services. For example, a company that manufactures computers could develop a new line of software products.
• Conglomerate Diversification: This type of diversification involves expanding into completely unrelated industries. For example, a computer manufacturer could expand into the automotive industry by producing car parts.

Other approaches related to Diversification strategy

A diversification strategy can include a range of approaches, such as:

• Market Penetration: This strategy involves focusing on existing markets, with the aim of increasing market share by increasing the volume of sales.
• Product Development: This approach involves introducing new products to existing markets, often to generate more revenue.
• Market Development: This strategy involves introducing existing products to new markets, either domestic or international.
• Horizontal Integration: This approach involves merging with or acquiring a company in the same industry and at the same stage of the production process.
• Vertical Integration: This approach involves merging with or acquiring a company that is at a different stage of production from the original business.
• Joint Ventures: This strategy involves forming a partnership with another company to pursue a specific goal.

In summary, diversification can involve a range of approaches, from market penetration to vertical integration and joint ventures. Each approach has its own advantages and disadvantages, and should be carefully considered before being implemented.

Diversification strategy — recommended articles

Vertical diversification strategy — Conglomerate diversification — Lateral integration — Lateral diversification strategy — Diversification in business — Methods of restructuring — Brown field investment — Related diversification — Capital restructuring

References

• Rumelt, R. P. (1982). Diversification strategy and profitability. Strategic management journal, 3(4), 359-369.