Diversification is always good. You can diversify anything you like: for example, store your cash savings in different banks and in different currencies. The principle of eggs in different baskets works everywhere. Because it is a reduction of risks, which are also everywhere.
First, let's go through the basic concepts and formulations. The most adequate of all existing seems to be the following:
Diversification is a focus on the most diverse development of activities.
A diversification strategy is a plan for transforming a business to expand it in one form or another.
Why diversification is needed:
- for financial stability and overall stability;
- arrived;
- competitiveness.
The diversification strategy of the enterprise must be dealt with in advance, considering its actions and possible options for external events many steps forward.
Strategy is an intellectual concept, because here high-level management decisions are made - with research, analysis, comparison, selection of optimal options. If diversification is included in the general strategy of an enterprise, it should be singled out in a special format, execution mode and special performance assessment. There is a risk of failure, but you can take care of it during the next stage - planning actions and implementing the process.
Types of Diversification Strategy
- Unrelated, or lateral, diversification: in addition to the main business, the formation of a new type of business, which the company did not do before. It may even be a new industry. An example is extremely frequent cases when famous artists invest and become owners of cafes and restaurants. This is a completely different field of activity in which the artist’s popularity plays into the hands.
- A related diversification strategy: in this case, types of businesses are created that are directly or indirectly related to an existing business. For example, the famous French fashion houses, in addition to clothing, have long been producing perfumes, cosmetics and many other accessories.
Associated diversification is divided into vertical and horizontal types. You need to tell about them separately.
Lateral or unrelated diversification
This type of production diversification strategy is advisable if the market for its existing products weakens - it is in a recession. You can “grab” a new field of activity with numerous and strong competitors. The idea of diversification "on the side" looks great on paper. But not in life: one must not forget that a new type of business requires much more effort and money than the usual thing. And the risks in such actions are innumerable more.
Unrelated diversification is of two types:
- A strategy of centered diversification is the production of new products or services, but within the framework of an existing business, in its own industry. The main thing in the company remains the old business, the new branch runs in parallel and uses the technological and organizational capabilities of the parent business.
- Conglomerative diversification is a real renewal of the product portfolio in the form of new production of new products that are no longer associated with an existing business.
It should be noted that the strategy of centered diversification is a favorite way of business restructuring for Russian entrepreneurs. This is understandable: fewer risks and costs, because the business is known in all its details. And importantly, the failure of the idea of diversification will not be so painful if it is carried out according to this type. But the best option would still be to first make an audit of all types of diversification strategies in order to focus on the most optimal form for a particular business, rather than on diversification, which is the most popular on the market.
Related diversification: vertical type
This version of corporate diversification strategies can be called an expansion of the business along the production chain. This is the inclusion in your business of new processes or even enterprises that are part of the overall technological cycle of production of an existing product. This type of product diversification strategy is effective if such changes increase the company's profitability. Supply, production and marketing of products - this is the general chain along which you can "move" to optimize and integrate the entire process. The vertical type of diversification is also divided into several options:
- Full integration of the production chain - all processes from the logistics of raw materials and other components to the sale of finished products at retail - this is an example of including the entire cycle in business.
- Partial integration - the most common option is when some of the components are manufactured in other companies.
- Quasi-integration is an interesting diversification option, in which companies are combined into production alliances without legal registration of property rights.
Along the production chain, one can move both forward and backward, which is reflected in yet another classification within the vertical related diversification:
- Moving "forward" - a direct strategy for diversification is to gain control of areas of the overall process between the enterprise that produces the product and the sales system of this product. Often on this site is logistics - storage and delivery of goods to points of sale. Obtaining the right to control logistics and sales will make it possible to improve the quality of customer service and the speed of delivery of goods to the final consumer.
- The “backward” movement - reverse diversification is aimed at its own “raw material autonomy”. These are strategically important steps because they allow you to access a source of supply or new technology. Their components will reduce costs, increase punctuality of production and, as a result, excellent business stability.
Related diversification: horizontal type
This is an expansion of the business by combining competing businesses within the same industry. The most common version of this corporate diversification strategy is geographic expansion with the emergence of branches in new regions. It can be the creation of branches in a new place, it can be a purchase of existing ones, or maybe a seizure (this also occurs).
A classic example of a horizontal diversification strategy is the market behavior of American brewing companies. First, they penetrated the processes of production and delivery of raw materials for beer (vertical diversification). Then they implemented a product diversification strategy - expanded the product line taking into account the preferences of different groups of their consumers. Brewers in all countries of the world have successfully captured such a "beer" market behavior.
A vivid example of a diversification strategy in the actions of large Russian banks is clearly visible in Russia. It is implemented in two horizontal directions: these are branches in new geographical regions, and the expansion of the range of financial services.
The benefits of diversification
There are many advantages, but the main ones can be grouped as follows:
- Efficient allocation of resources.
- Improving adaptive abilities.
- Expanding marketing opportunities.
- Optimum loading of all enterprise capacities.
If the main goal of diversification is the possibility of an additional effect of diversity, then its main advantage is a pro-active style of action. Do not wait for the blows of fate in the form of crises or new strong players in the market who are ready to swallow at the slightest opportunity. Follow, think, be able to draw conclusions and make decisions, have the courage to take risks - this is an incomplete list of the competencies of a leader who is able to create and implement an effective market diversification strategy for his company.
Expediency of diversification
It is by no means an idle question - is it always necessary to think about diversification and, moreover, to realize it in one form or another?
Answer: not always, of course. First you need to try all possible ways of growth in your own business. If a company has a strong market position, and the market itself is developing at a good pace, then market diversification is not required at all.
A completely different issue is the product or service line of the company. A horizontal product diversification strategy will never hurt anyone. In this case, we are talking about attracting new consumer groups and increasing profits in the end.
Diversification strategies
Thoughts about possible diversification appear in the heads of entrepreneurs in difficult situations:
- Strong competition.
- Decrease in demand for products.
- Decreased purchasing power by consumers.
It is best not to wait for any phenomena whose name includes the word "decline". Strong and pronounced competition in the market is already an absolute indication to start developing a strategy for diversifying your business. Examples of highly competitive industries include air passenger transportation, sporting goods, and the sale of the Internet or mobile communications. All companies operating in these industries have new types of services in their business structures both in vertical and horizontal versions.
Changes in any company can be implemented in only four ways:
- In products or services, this is usually an extension of the product line.
- Expansion of sales channels.
- Expansion of areas of activity - access to new “lateral” businesses.
- Change the position of the company in the industry.
Mergers and Acquisitions
Firstly, this is a global trend. Having an undeservedly negative image in the eyes of the general public, mergers and acquisitions have serious advantages over the classical types of diversification:
- ready company joins;
- there is no need to develop a sales market to replace the existing one;
- suppliers and intermediaries know the nuances of the business and interact well with each other;
- market participants coordinate with other participants;
- the employees of the affiliated companies are well aware of their business - the high professional competence of the staff.
Thus, acquisitions and mergers lead to a reduction in the classic costs associated with the launch of a new production, advertising costs and time (which is also a serious resource) for registration of the legal side. They are a very effective form of diversification with minimal overhead.
Diversification Examples
The classic and most replicated example of a diversification strategy for all kinds and types is Richard Branson's Virgin brand. The peculiarity and the strongest side of this market umbrella is the huge number of cases of unrelated diversification. It combines air travel, banking, film production, the insurance business, and so on - there is nothing to list. It would be a mistake to think that with Branson with diversification everything went perfectly along the knurled track. The history of his business has large and high-profile failures with access to new markets. For example, he wanted, but could not get around Steve Jobs in the production of cell phones.
Richard Branson did not succeed with the great and terrible Coca-Cola. He released a competitive drink, accompanied by an extremely unusual advertising campaign, which as a result was not accepted by any retail network for retail sale. In numerous articles about Richard Branson, it is better to look for pages with stories about his failures, because these are excellent visual lessons "what and how not to do when entering new markets." Richard Branson himself learned these lessons perfectly.
The situation with IBM was fundamentally different. If Richard Branson is diversifying his business more “out of love of art,” then IBM began to diversify the business from a good life. In 2009, when computer sales began to fall, the company took up two new services - software and service equipment. Fast and smart solutions helped her stay on the crest of a wave in the IT industry.
Another example is Spain’s agricultural diversification strategy. Until the mid-20th century, this country belonged to agricultural provinces with the predominant cultivation of wheat and industrial crops. For 15 years, within the framework of the “Spanish Miracle” program, Spain has diversified its grain industry into the industry of growing and exporting a wide variety of fruits and vegetables. The grain is now imported, it is now unprofitable to grow it.
Conclusion
A diversified business is becoming sustainable in the face of rapidly changing external conditions. It makes it possible to generate income from various sources that are not related to each other. At the same time, a diversification strategy requires a very competent approach to assessing opportunities and risks. From the point of view of management, a particular focus should be on the correct planning of costs, taking into account the many details that may further complicate the integration process.