Diversification in business

Diversification in business is the strategy of making the organization's efforts focused on extending its zone of action. This usually involves the extension of product range, but can also mean finding new suppliers, customers, implementation different from the conventional methods of production, etc.

Types of business diversification

• Concentric diversification - consists of minor alterations to existing products offered (with minor changes in manufacturing technology), enabling companies to offer customers who previously were not interested in products or services of to the company. They may be, for example, variants of the products (tools, musical instruments, everyday objects) for left-handed or disabled people.
• Horizontal diversification - is an action oriented towards existing customers and is it includes offering them a new product. Launching a new product in the application of this strategy may rely on the creation of new markets. An example is the manufacturer of introducing new flavour of drink.
• Conglomerate diversification - company extend its offer with products not related to the previous products, they are directed to an entirely new customers. Sometimes this strategy is related to the discontinuation of production of older products.

See also:

• BCG growth-share matrix
• Lateral diversification strategy

Examples of Diversification in business

• Developing new products: Companies often diversify by introducing new products into the market. This could involve creating a new product that fits into an existing product line, or an entirely new product offering. For example, Apple Inc. started out as a computer company and has since diversified into smartphones, tablets, and watches.
• Acquiring new businesses: Companies may also diversify by acquiring other businesses. This can involve buying out a competitor or acquiring a company that offers a different product or service. For example, Amazon acquired Whole Foods, an organic grocery store, in 2017.
• Entering new markets: Companies can also diversify by entering new markets. This could involve expanding operations to a new geographical area or targeting a different demographic. For example, Nike has expanded its presence in China by opening a chain of stores in the country.
• Introducing new services: Companies can also diversify by introducing new services. This could involve offering a new type of service or a different way of offering existing services. For example, Amazon has diversified by offering cloud computing services to businesses.

Advantages of Diversification in business

Diversification in business can bring many advantages for an organization. Below are some of the main ones:

• Increased Profits: Diversifying your business can help to increase profits. You can expand your customer base by offering new products or services and increase your market share, allowing you to achieve higher profits.
• Increased Efficiency: By diversifying, you can reduce the risk of relying on a single customer, supplier or product line. You can also reduce the costs associated with production and marketing by focusing on areas of strength and using fewer resources.
• Improved Quality: By diversifying, you can focus on creating better quality products and services. This can help to increase customer loyalty and satisfaction, leading to increased sales.
• Increased Resilience: Diversifying can help to reduce the risk of business failure by spreading the risks associated with any one product or service. This can help to ensure that your business remains profitable and resilient in times of economic downturn.
• Improved Innovation: By diversifying, you can explore new ideas and products, increasing the chances of creating something new and successful. This can help your business to stay ahead of the competition.

Limitations of Diversification in business

Diversification in business can be a great strategy to expand a business’s zone of action, however, it also has its limitations. These include:

• Resource Constraints: Diversifying requires resources, such as money, manpower, and time, which can be in short supply for smaller businesses.
• Management Inexperience: Diversifying a business may require different management skills from those required to manage existing operations. This can be a challenge for businesses with inexperienced management.
• Increased Risk: Diversifying can lead to increased risk for the business. This is because businesses are venturing into new areas and may not be familiar with the potential pitfalls.
• Market Changes: The market can change quickly, and a business that has diversified may not be able to keep up with the changes. This can lead to the failure of the business’s new venture.
• Competition: With more businesses entering the market, competition can become fierce and make it difficult for businesses to remain competitive.
• Difficulty Measuring Success: It can be difficult to measure the success of a diversification strategy, as there are often multiple factors that contribute to success.

Other approaches related to Diversification in business

One approach of diversification in business is diversifying the offerings of a company. This can mean introducing different products and services, expanding into new markets, finding new suppliers and customers, or even pursuing different production methods.

• Joint Ventures - Joint Ventures are strategic alliances between two or more companies to combine resources, knowledge, and capabilities in order to gain a competitive edge and achieve shared objectives.
• Mergers and Acquisitions - Mergers and acquisitions involve combining two or more businesses to create one larger entity. This can provide a company with access to new markets, technologies, and resources, as well as cost savings and economies of scale.
• Licensing - Licensing is when a company grants another entity the right to use its intellectual property for a fee or royalty. This allows a company to expand its reach without having to invest in additional resources.
• Franchising - Franchising allows companies to expand quickly by allowing them to sell their products and services through franchised outlets. This can provide a company with access to new markets, resources, and capital.

In summary, diversification in business can take many forms, including joint ventures, mergers and acquisitions, licensing, and franchising. Each of these strategies can provide a company with access to new markets, resources, and capabilities.

Diversification in business — recommended articles

Horizontal diversification strategy — Tuck-In Acquisition — Lateral diversification strategy — Vertical diversification strategy — Lateral integration — Conglomerate diversification — Incremental innovation — Strategic Buyer — Types of innovation

References

• Markowitz, H. M. (1968). Portfolio selection: efficient diversification of investments (Vol. 16). Yale university press.
• Rumelt, R. P. (1982). Diversification strategy and profitability. Strategic management journal, 3(4), 359-369.
• Ansoff, H. I. (1957). Strategies for diversification. Harvard business review, 35(5), 113-124.
• Imbs, J., & Wacziarg, R. (2003). Stages of diversification. American Economic Review, 63-86.