Diversification is a growth strategy where a company expands by manufacturing a new product, or starting a new product line, or entering a completely new market. Diversification stretches from listening about the success of the biggest entertainment company Disney owning ESPN, ABC, Disney theme parks, cruise lines, and Pixar to stories of the decline of National Semiconductor Corporation which got collapsed due to poor retail manufacturing incompetent to the market. For example, an automobile company might extend its brand by starting the manufacturing of tires or by adding a new product line of trucks.
Need for Diversification?
Every company and startups at some point faces market saturation and customer increment stalls. Diversification opens the possibility of exploring new markets and targeting new customers. The reasons to diversify the company are-
1.To be on the safer side, diversification offers you a chance to explore more than just your core business. It seems beneficial to have a diversified channel to protect the company from a decline in a particular sector by distributing financial risks.
2.Diversification helps you gain a maximum customer base and establish you as a top provider. Movie rental provider, Blockbuster suffered a downfall as it failed to switch to new DVDs by mail, and online streaming formats.
3.Diversification pursues stability and predictability, in case of loss or market saturation. It makes certain that the company remains profitable.
4.Diversification demands maximum use of resources that might be underutilized currently.
Major strategies for diversification:
1.Horizontal diversification-
Horizontal diversification is when a company starts a new product or merges with a company having the same position and approach towards the market, that doesn’t deviate the company from existing customers. example: DISNEY_PIXAR.
2.Vertical diversification-
Vertical diversification leads to company growth by focusing more on its business supply chain of core industry. It is considered as a strategic move to add products or services complementary to the existing one. The benefits provided are low production cost, higher profits, and the expansion of the market. example: Walt Disney.
3.Concentric diversification-
When a company chooses to add a new product or grow a completely new product line that also appeals to new customers and builds a new portfolio for the brand. Example: Coca-Cola.
4.Conglomerate diversification-
This diversification poses maximum threats as a company extends a new product that is unrelated to its current core business.
Questions to be raised before diversification:
1.What is the biggest strength of the company over other competitors in the same market?
2.What additional resources/skills are required to excel in the market?
3.Is there a chance for the Business to stand out?
4.Will diversification require breaking of current strategies?
Points of caution:
Diversification is a growth option with equal risks, if you fail at diversifying it may cost you more than revenue.
1.Thinning your core business by redirecting a lot of the funds to an unsuccessful plan.
2.Customer dissatisfaction and losing your current market.
3.Over diversified companies sometimes suffer instability in all sectors due to fewer resources.
4.Innovation and quality can sometimes be compromised for diversified companies as it is passive to market changes.
Diversification can enhance the company’s position as one of the strongest players in the market. Finally, make sure you don’t overdo it. All investments have some risk, also holding many investments doesn’t allow any of them to have much of an impact. It is a tempting fate to diversify, the key lies in finding the right balance between potential risks and maximum returns.
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