Diversification is a strategy aimed at reducing risks by adding assets, services, products, banks to the assets of the organization. This concept is also used in narrower meanings.
In economic activity, diversification is the expansion of the activity of large organizations or industries outside the core business. In a broader sense, this is a strategy aimed at multidisciplinary production. This form of organization is very important in modern market conditions and has a significant impact on the division of labor and competition.
Diversification of production - these are the changes carried out by the company in order to increase efficiency, obtain economic benefits and prevent bankruptcy. In industry, its most common forms are conglomerate and concentric.
The first is usually achieved through the acquisition of highly profitable organizations and firms in various industries. A concentric - due to the fact that the company is developing new technologies for the manufacture of products that relate to the profile in other industries. This is based on in-house development and application of technologies acquired in other areas. Although these 2 directions complement each other, the quantity of products produced increases only with concentric diversification, while the conglomerate is responsible for the redistribution of available capital.
There are also horizontal and vertical types of diversification of production. The latter concerns the stages of assembly and processing of one product. Horizontal diversification is the expansion of the range of products in order to attract more customers. The best option for the enterprise is a combination of these two types.
Diversification is a moving category. The more activities there are directions, the higher its level. It represents an adjustment of the main goals of the company, and possibly a change in the organization’s strategy. The first is the diversification of a narrow spectrum, and the second a wide one, which is not connected with the main production.
The stimulation of this category is due to the desire of business entities to strengthen their market position in a competitive environment, and also to respond in time to changes in market conditions.
The search for new areas of production diversification is relevant today. It is necessary to adapt to new conditions in the economy, which encourages firms to search for the most profitable areas of application of the potential created at the enterprise.
The reasons forcing business entities to release new products and conquer new market segments with them are:
1) ensuring a stable financial condition along with the release of more profitable products;
2) penetration in industries in which a high rate of profit is observed;
3) reduction of risks affecting profit making.
But it should be remembered that diversification is not a means of reducing risks. On the contrary, it can increase them if the entrepreneur, for example, invests in those areas where his knowledge is not supported by anything.