Conglomerate diversification

Conglomerate diversification (also: unrelated diversification) mainly involves offering new products or services to new customers. It is used as a strategy to grow on the market and gain new customers, which are no interested in current offerings. New products and services created during conglomerate diversification strategy, are usually totally different than products or services currently in the offering. Main goals of conglomerate diversification is to grow sales and profits in the same time maintaining current marketing activities. After incorporating the conglomerate diversification strategy, the company's offer is expanded to include products not related to the older ones. Sometimes it also involves stopping the production of previous. Changing offer brings many benefits. This diversification allows penetrating new markets and reaching new customers, which is the most important for the company.

Diversification strategy is based on action towards new products and new markets. Diversification is usually used in large companies. It causes big changes in the scope of:

• organizations
• financing structure
• management of the enterprise(Picone P. M., 2012).

It involves checking the company's strengths in the new fields, in order to acquire new competences, increase competitiveness and, above all, to ensure new markets.

The precursor in the field of company's strategy was H. I. Ansoff. He believed that the development of the company means the introduction of new, different from the current products and then, selling them on a completely new market. Conglomerate diversification is the highest degree of differentiation of the company, because it often uses new technologies. This type is one of the main directions of evolution of the enterprise in highly developed countries (Ansoff H. I. 1957).

Reasons for using the diversification strategy

The company's management decides to the choice of a diversification strategy for a number of reasons. However, it should be remembered that making such a decision should be preceded by the efficiency testing process, because any wrong decision can cause economic and organizational consequences. There is a few reasons why the company decides to choose diversicication strategy, for example:

• willingness to create better corporate image, so that customers want to use the services of the current supplier,
• uncertain and constantly changing environment,
• huge competition,
• lack of prospects for the development of the company,
• striving to reduce costs in the enterprise,
• reduce the probability of loss,
• maximizing profits
• desire to make a new, better product,
• etc.

Advantages of conglomerate diversification

Based on many sources, we can list the benefits of the diversification strategy. The effects of conglomerates results of:

• financial synergy - it consists in supporting individuals who have the greatest development chances,
• effective use of the work of the administration and specialists, especially in supervising and conducting work,
• savings and reduction of management costs (Coase, 1937; Williamson, 1975),
• ability to use information,
• etc.

Unfortunately, it also happens that the planned goals are not achieved. Conglomerate diversification can also cause major complications, for example:

• problems with the company's image, loss of reputation and good position,
• difficulties in management and organization,
• unexpected inefficiency.

Examples of Conglomerate diversification

• Apple Inc. is a good example of conglomerate diversification. It started as a computer company, but over the years has diversified into many other areas such as music, mobile phones, tablets, and software. Apple has also recently started offering a streaming music service - Apple Music - and a streaming video service - Apple TV+.
• Amazon is another example of conglomerate diversification. Amazon started out as an online retailer selling books, but it has since diversified into many other areas, including selling electronics, apparel, groceries, and streaming media.
• Wal-Mart is a good example of a company that has diversified into different sectors. It started as a discount retailer, but has since diversified into many other areas such as grocery stores, restaurants, and home improvement stores.

Limitations of Conglomerate diversification

• Conglomerate diversification strategy has its limitations. Firstly, it requires a large financial investment to acquire new companies or to create new products and services. Secondly, it involves risks, since there is no guarantee that new products and services will be successful on the market. Thirdly, it often takes a long time for the company to research and develop new products and services, and to establish new customer relationships. Finally, it can be difficult to manage the different business units and to ensure that they all work together towards achieving the same goals.

Other approaches related to Conglomerate diversification

• Expansion of the current product/service range: Expansion of the current product/service range can be an effective way to diversify a company's offer. This strategy involves creating products and services that are related to the original ones, but still different enough to attract new customers.
• Geographical expansion: A company can engage in geographical expansion to diversify its offer. This involves entering new regions and markets, which may be untapped and therefore untapped potential customers.
• Acquisitions and mergers: Acquisitions and mergers provide a company with an opportunity to diversify its offer by taking over another company that has a different product or service offering. This also allows the company to enter a new market quickly and effectively.
• New technology: Companies can also use new technologies to diversify their offer. This could involve using new software and hardware to create new products and services, or using existing technologies in new ways.

Conglomerate diversification is an effective strategy for a company to grow and gain new customers. It involves offering new products and services to new markets, and expanding the company's offer. Other approaches related to conglomerate diversification include expansion of the current product/service range, geographical expansion, acquisitions and mergers, and using new technology to create new products and services. All of these strategies allow a company to diversify their offer and reach new customers.

Conglomerate diversification — recommended articles

Horizontal diversification strategy — Lateral integration — Related diversification — Strategic Buyer — Tuck-In Acquisition — Vertical diversification strategy — Market Challenger — Diversification in business — Reintermediation

References

• Ansoff H. I. (1957) Strategies for diversification Harvard Business Review vol. 35, 113-123
• Imbs J., Wacziarg R. (2003) of Diversification The American Economic Review, Vol. 93, No. 1. 63-86
• Palich, L. E., Cardinal, L. B., & Miller, C. C. (2000). Curvilinearity in the diversification-performance linkage: an examination of over three decades of research. Strategic management journal, 21(2), 155-174.
• Picone, P. M. (2012). Conglomerate diversification strategy and corporate performance.

Author: Ewa Wójcik