Diversification strategy

Diversification strategy
See also
Vertical diversification strategy Incremental innovation Financial perspective Bancassurance Crisis management Horizontal diversification strategy Aggressiveness strategy Investment project Holding

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.

References

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