Utilizing new markets, goods, services, or production stages allows businesses to grow their operations. The goal of diversification is to enable the corporation to enter business sectors that are distinct from its current operations. Concentric diversification management occurs when a new endeavor is strategically connected to the existing business lines.
Strategies for Offense and Defense Diversification Management
To increase its market share in the chemical wood cleaner industry, Company A might release a new formula. This is using a newly developed product to grow in its current market. The innovative method to remove garden weeds may be licensed by that same business. This is entering a new market with a new product that isn’t its own invention but is closely linked to ones that already exist. Finally, the business might start selling furnished serviced apartments. This is an illustration of entering a new market with recently acquired or manufactured products. Defensive Diversification Management refers to growing in one’s current market, whereas offensive diversification refers to growing in new areas. In general, defensive diversification acknowledges that there is competition in every market. By releasing new items, the corporation is attempting to increase its market share and defend its current stake. With related or unrelated items, offensive diversification aims to gain market share in a new market.
The Role Of Diversification In Growth Strategies
One type of growth strategy is diversification. Growth plans entail significantly raising performance goals above existing performance levels. Numerous businesses employ one or more different growth strategies. One of the main causes is the widespread belief among executives and investors that “larger is better.” Sales growth is frequently used as a performance indicator. A rise in sales is welcomed by many even if profits are constant or declining. It is frequently believed that if sales rise, profitability would inevitably follow. Growth may also increase the organization’s effectiveness. Over smaller businesses that operate in more constrained marketplaces, larger organizations enjoy a number of benefits.
1. Economies of scale can result from great size or a significant market share. More effective utilization of sales calls, shorter travel distances, quicker changeovers, and longer production runs can all lead to marketing or production synergy.
2. As the property ownership develops expertise in producing and delivering its product or service, learning and experience curve effects may result in decreased costs. Large size and experience may also result in better layout, increases in labor productivity, redesign of products or production methods, or larger and more capable staff divisions.
3. The ability of a company to spread administrative expenditures and other overhead costs over a larger unit volume may lead to lower average unit costs. The ability of a corporation to distribute costs across a big volume becomes increasingly significant the more capital-intensive the business is.
4. Largeness can also lead to better links with other production phases. Large orders can help companies build stronger relationships with their suppliers, which could lead to lower costs, faster deliveries, or the creation of items that smaller businesses couldn’t afford.
5. The ability of a company to spread administrative expenditures and other overhead costs over a larger unit volume may lead to lower average unit costs. The ability of a corporation to distribute costs across a big volume becomes increasingly significant the more capital-intensive the business is.
6. Largeness can also lead to better links with other production phases. Large orders can help companies build stronger relationships with their suppliers, which could lead to lower costs, faster deliveries, or the creation of items that smaller businesses couldn’t afford.
6 Different Types of Diversification Management Tactics
There are six well-known categories of diversification tactics:
Your business must horizontally diversify if it wants to expand market share in its current market, a new market segment, or both. This is accomplished by enhancing your current offering with fresh goods and services.
Vertical integration, another name for this growth strategy, is when a company expands its product line by incorporating new or existing products into its present supply chain.
Concentric diversification, a form of horizontal diversification, is adding new goods or services that are closely related to your current offerings to your product or service line.
Additionally, a conglomerate diversification strategy is a type of horizontal diversification that entails the introduction of brand-new goods or services that have nothing to do with the current product line of your company. This opens up a brand-new market and attracts clients who may not have previously been interested in your company.
When a company diversifies defensively, it means that they do so because their market segment has grown saturated, their current products have aged and are declining, or they are losing market share to other enterprises.
On the other hand, offensive diversification refers to a company’s aggressive efforts to increase earnings and market share through broadening its product or service line in order to penetrate new markets and win over more clients.
Diversification management advantageous for a business for a number of reasons, not the least of which is to increase profitability. For instance:
- Risks are reduced through diversification in the case of a downturn in the industry.
- More options and variety for products and services are made possible by diversification. If done properly, diversification significantly improves brand image and business profitability.
- Diversification management can be a form of protection. A business can defend itself from other businesses by diversifying its products or services.
- Diversification management enables the business to utilize excess cash flows in the case of a cash cow in a slowly expanding market.
The Importance of Diversification Management
Although diversification may not be right for every firm, it is a business strategy that is undoubtedly worth taking into account for any organization wanting to expand. Some of the most prosperous businesses in the world, like Apple, Google, Starbucks, and others, have used diversification. The following are the primary causes to think about diversification:
- Through the use of their current assets, reputation, and clientele, firms can use diversification to considerably boost their revenue.
- By investing in multiple products or markets, you can reduce your company’s risks by diversifying your operations.
- As society, the economy, and consumption change, diversification enables you to continue making money even through industry ups and downs.
- Your company’s current resources, which can be underutilized, might be maximized through diversification management.