home » Style » Mind map for production diversification. Horizontal diversification of production

Mind map for production diversification. Horizontal diversification of production

Even the most successful business or enterprise cannot constantly develop and function according to only one criteria. Both large and small participants in the business sector cannot exist unchanged for a long period of time. The market, like external environment Overall, it is constantly changing and developing. Someone leaves, someone returns, new players appear, so even the most successful enterprise needs to change the centers of economic attention, distribute funds, look for new approaches to development, and so on.

This rule has been successfully confirmed for decades by thousands of domestic and foreign companies, as well as millions small enterprises. The concept of “diversification” has been dealing with this issue for a long time. However, most market participants neglect this concept, and today we have to find out why diversification is needed and what it is like. Let's look at what diversification is in simple words.

Diversification - what is it?

redistribution of attention centers in the market;
expansion of the range of goods or services produced;
search for new markets;
mastering new technologies and production methods for expansion;
receiving additional profit;
eliminating possible bankruptcy.

In simple words, diversification is a way of doing business economic activity, in which the bet for obtaining benefits is placed on several centers equal to each other. This also applies to sales markets. For example, when you have a certain capital, in order to benefit from it with minimal risks, you invest in shares of several successful companies at once.

Did you know? According to research by the Financial Times, last years The domestic raw material economy has become one of the top world leaders in terms of direct diversification of foreign investment.

in the foreign exchange market - when investing funds in different currencies or assets;
in real estate - investing in commercial properties of different types;
when opening a deposit - using several banks as objects at once;
when buying precious metals - investing simultaneously in platinum, gold, silver, etc.

At the same time, a properly diversified company is a new player in the market that is able to master new production technologies and increase profits in a fairly short period of time. After this, such an enterprise becomes dynamically developing, as a result of which it can experience more than one positive process of asset restructuring.

Benefits of Diversification

As mentioned above, when investing Money With one earning tool, the risks of bankruptcy are very high. When distributing funds between several objects or areas, the chance of losing capital is reduced to almost zero. Diversification is the best way out from a crisis situation for a company in an industry that is declining. It is a strategy that reduces dependence on many external sources, increases market competitiveness, improves financial efficiency and increases profits.

Did you know? Diversification emerged in the second half of the twentieth century in advanced economies. This process was preceded by the previous development of economic and industrial relations in the USA, Germany, Japan and other developed countries.

The main advantage of diversification is to obtain the maximum economic effect from all possible diversity. In other words, an enterprise that produces several types of products at once will be more profitable and competitive in the market than one that is popular.

multi-purpose use of all available resources;
building an effective sales network for goods and services;
comprehensive training and education of personnel.

Diversification (by type)

Diversification is a predominantly ramified concept; it can be used for almost any area of business and entrepreneurial activity. Let's take a closer look at several of its types.

Production

Diversification of production is a strategic reorientation of an enterprise's activities towards expanding the number of types of products and expanding sales markets. Its main idea is to provide the company with stability in the market if one of the production lines becomes unprofitable, at the expense of other production lines.

Often this process can result in a unique technology, process or product. Thus, the concepts of diversification and narrow specialization are opposite in meaning. An example of this type is a music factory, which, in order to stay afloat, is mastering the production of cabinet furniture.

Products

Product diversification is a process that is expressed in an enterprise increasing the number of goods and services due to the development of new technologies and production methods, or numerous modifications of one type of product. This type is a form of economic struggle with competitors for a place in the market.

An example would be a mineral water plant that is trying to enter the sugary drinks segment.

Prices

Price diversification is primarily a strategy aimed at maximizing coverage of the number of buyers with different levels income. It provides for the establishment of different pricing policies for products in relation to solvency potential clients. The ultimate goal of this process is to maintain production profitability and increase sales volumes.

income level of consumers: issued in the form of discounts on popular goods for less affluent buyers or through personal pricing;
quantity of goods or services consumed: for example, additional discounts are established for wholesale or large consumers;
product categories: thanks to the creation of more expensive goods among the assortment by creating artificial popularity around it among certain buyers.

Business

Business diversification is the distribution of a company's capabilities among different sectors of the economy. The main point This process is to obtain greater profits and establish greater status for the company.

By its specificity, this concept lies in the fact that in addition to itself, the company invests in other enterprises or financial institutions, often not related to each other. This helps to more effectively develop and increase capital and minimize financial risks.

For example, a company producing automobile oils buys securities or enters the foreign exchange market. Often in business, diversification helps to overcome an economic crisis and preserve assets.

Capital

Capital diversification is the process of investing money in different industries and financial institutions, which in most cases are not related to each other. This is the most in a simple way preserve capital at minimal cost, since this type does not provide for the complete distribution of available funds.

For example, to reduce the risk of losses, part of the money is distributed among several banks, and part is invested in securities. This reduces the risks several times, since it is unlikely that all banks will go bankrupt at the same time and securities will lose their solvency.

Economics

Economic diversification is one of the most complex and global examples of cash flow distribution. In a general sense, it means investing capital at a general level in such a way that all branches of the state develop proportionately. This makes it possible to create a powerful economy that has strong immunity to any crisis.

For every country, diversifying its activities is a necessary step, as the smooth growth of all types of industries stimulates the development of linkages between industries, which in turn stimulates overall economic growth, entrepreneurship and income.

Investment portfolio

Investment portfolio diversification is an economic system for managing possible risks, in which funds are distributed between different earning instruments. Its essence lies in the fact that the total risk of the investment portfolio will be tens of times less than that of an individual package. Thanks to this, it is possible to achieve long-term and stable increase in cash flow. To do this, in addition to stocks and bonds, it is recommended to include precious metals, real estate, etc. in the portfolio. All this in the future ensures stability and growth of assets.

Important! When diversifying an investment portfolio, the main thing to pay attention to are the three most important characteristics of the process: return, correlation and risk.

A well-diversified portfolio is an investment instrument that consists of many securities in such a way that the share of each type is small relative to the overall importance. The risk of such a portfolio approaches general indicators occurrence of risk situations in the market, while the risk of each security is covered equally.

Risks

Risk diversification is such a distribution of investments within a portfolio in all possible ways and methods, in which the possibility of a complete loss of funds is reduced to zero.

In simple words, this means that when investing, an investor is insured against possible losses due to the redistribution of invested funds between more and less risky areas, respectively. At the same time, in theory, reducing risk should not affect the profit received.

Important! Use only uncorrelated assets when diversifying investments, this is The best way save capital, because while one asset does not provide profit, another doubles it!

Types of diversification

In generally accepted scientific sources, three types of this concept are distinguished, depending on the direction, methods of its use and the production zones involved. Below we give a short description of each.

Related is a diversification process in which the company’s product range increases due to new goods or services. At the same time, new products are not the main ones, but have serious technological connections with primary goods.

vertical;
horizontal.

Vertical diversification. This type of related diversification, in which a related product in expanded production is used either in the chain of production of main goods, or, conversely, in the production of an additional product, a purely basic product is used.

For example, huge metallurgical corporations, which own processing plants, produce pellets for their own purposes, and sell surplus production to competitors.

A type of related diversification in which the new kind products in expanded production are not used for the company's immediate purposes, but are manufactured using existing technologies.

For example, a communications equipment manufacturing company is mastering the technological process for manufacturing lighting fixtures. In this case, the new product is released either under the same brand or under a completely new name.

Unrelated

This is a type of redistribution of a company’s financial priorities, in which the development of a new direction of industry production occurs through the attraction of its own funds and capital. At the same time, the new production line is in no way connected with the old direction of the company.

The biggest advantage of such diversification of the enterprise is the development of flexibility in the market as the main quality of the company, and the development of new production methods makes it possible to avoid the risks associated with the possible unprofitability of other production lines. Using an example, it looks like this: new production is based on the technological base of the old line or creates all the conditions for the release of new products from scratch.

Combined

Combined diversification is one of the most common methods of developing an enterprise or company.

In its structure, this is a mixed type, which is put into action in several ways:

1. Filling the portfolio with assets that interact with various business areas of the company and belong to related and unrelated types. 2. Division of resources and administrative levers among individual areas that are developing based on the principles of related diversification.

Often a combination is the merging together of several companies that are opposite in the economic sphere in order to continue to exist exclusively in the direction of overall development.

Diversification strategy is a marketing action that allows companies to discover new promising directions for businesses different from the current production line. The main essence of the strategy is the redistribution of the company's funds and capital between different types of areas of activity, which significantly reduces the risks of bankruptcy of the enterprise.

In today's highly competitive market conditions, strategy becomes a powerful tool for managing all kinds of risks. If the process is started correctly, the company can avoid bankruptcy or losses even during difficult periods of economic crisis.

Types of strategy

Among the existing strategies, three main types can be distinguished: conglomerative, centered, horizontal. Below we will look at them in more detail.

Conglomerate

A conglomerate diversification strategy is a process that is aimed at ensuring that a company begins producing goods and services that are not related to its main products and their markets.

This strategy is one of the most complex of all existing today. This is due to the fact that the construction of its proper functioning depends on many surrounding factors, including the qualifications of managers and ordinary personnel, the availability of the necessary funds and seasonal economic changes in the market.

The opposite of this strategy is the concentric diversification strategy, in which a new product is produced, which, from a technological and technical point of view, is identical to the existing ones at the enterprise in this moment. Its role is to attract additional customers by offering offers to consumers from different social environments.

Centered

The centralized diversification strategy involves the company searching for new production opportunities based on existing ones. technological processes and lines, as well as main products.

This strategy involves opening new production lines based solely on the best achievements of previous products or services. At the same time, this part of the business develops and operates separately from the main portfolio.

An example of such a strategy is the Hilton hotel chain. The company moved from premium hotels to the construction of more affordable hotels, which helped the company take a leading position in this circle.

Horizontal

The horizontal diversification strategy implies the growth of the company’s finances through the creation of a new product that requires new technologies that are not similar to previous ones. With this strategy, the company creates technologically unrelated products, for the implementation of which existing tools can be used (for example, in logistics or wholesale sales Oh).

This strategy involves the creation of products that should be consumed by the main product or become its accompanying part.

Choosing a diversification strategy

Developing a business diversification strategy may be the best way to solve financial problems company, and give the opportunity to manage all kinds of risks when commercial activities companies. However, the economic growth of an enterprise is possible only with proper diversification of the company, and this is the main tool for successful business. Therefore, next we will talk about how to choose the right strategy and do everything to ensure that the company exists only stably.

Business Analysis

This is the first place to start, since conglomerate and other types of diversification are impossible without this. The analysis must be detailed, and the head of the enterprise must clearly identify the main strengths and the technological and economic basis of its establishment and, on the basis of this, determine possible paths to business development.

What are the strengths of the production?
How stable does the company feel in the market?
How much free resources are in stock?

Finding directions

After a serious analysis of the business, at the next stage the management will have to determine for itself the right direction for diversifying the enterprise. This is a rather complex process, which is based on serious macroeconomic research. As a result, specific industries are identified in which the company will be able to realize itself most profitably in the shortest possible time. But the most common phenomenon is the expansion of production based on personal experience, preferences and capabilities of the owner. This path has its pros and cons, but the approach is quite effective if it is backed by a wealth of serious knowledge.

This stage is no different from assessing the risks and prospects when creating a business from scratch. An assessment of the competitiveness of the production line is carried out, an analysis of all existing competitors is carried out, it is also important to determine general trends and prospects for development in the market as a whole and opportunities for future diversification of pricing policy. All this together will help to finally choose future paths to development for the enterprise.

What are the long-term prospects for the market and economic situation?
How to sell new products correctly?
Does the firm really have all the resources it needs?
Is there a plan to finance the process?
Is there a clear work plan for the next 5 years?
Are there better alternatives for developing or overcoming the financial crisis?

Portfolio analysis

The next step after completing the analysis of the prospects for the development of a new line of commercial activity is to assess the feasibility of a new product within the framework of the existing financial portfolio. This is not very difficult to do; there are a lot of professional matrices in the specialized literature.

At this stage, it is important to understand whether the product will exceed the space allocated for it in the portfolio. Otherwise, it will be difficult to predict the future fate of the business.

Examples of diversification

While for our economy diversification is something new and unknown, for most foreign companies such a process is something ordinary that does not require emphasis special attention. In addition, without this it is impossible to imagine the successful functioning of a business for many years.

Here are a few examples of a successful process:

1. By the end of 2009, IBM began Hard times. The company's profits fell sharply. Business diversification helped IBM stay afloat. Despite the fact that sales of computers and electronics fell by 7%, net profit for the year increased by 18%. This happened due to the fact that the electronics giant expanded its presence in the market in the field of equipment service and development software. 2. The concept can be viewed on a more global scale through the diversification of the US economy. This process has been evident over the past 25 years. The state has reached an even distribution of assets between the most financially profitable industries. This helped the country maintain its position in the list of leading countries in terms of living standards and financial security for citizens, as well as achieve serious success in international markets. 3. In the domestic industry, we can give an example with the company FPG "Neftekhimprom", which, in addition to the production of raw materials for the industry in the production of car tires, also began producing the finished product - this helped the owners create a full cycle of manufacturing goods and become a noticeable competitor in the domestic tire market .

How does diversification in the state economy affect your pocket?
How to reduce the risk of your investments?

Whatever stage the business is at, diversification is the best way not only to preserve hard-earned assets, but also to increase capital. Thanks to many years of experience of international companies from all over the world, this process has reached us in the most effective form. But despite the high effect of redistributing the investment portfolio, the main thing is to remember the appropriateness of decisions and costs in relation to the resulting economic effect.

Diversification strategy is a marketing strategy that allows a company to identify and develop additional lines of business that are different from its current products and services. In an increasingly competitive environment, a production diversification strategy becomes an excellent tool for risk management; allows you to avoid excessive focusing of efforts on one area of the company's work.

When implemented correctly, a diversification strategy helps maintain a company's performance and profits during periods of economic downturn, stagnation, or sudden change principles of the industry. The strategy can bring clear benefits to the firm and improve business stability, but requires detailed evaluation internal resources companies, factors environment and in-depth knowledge of market trends. In the article we will talk about the possible types and classification of corporate diversification strategies and give examples successful strategies and look at the proper process for developing a business diversification strategy.

A diversification strategy is appropriate if:

opportunities for developing current business are narrowing;
new opportunities open up;
you can transfer existing capabilities to other industries;
production costs are reduced;
resources are present (including organizational ones).

The decision to diversify is made based on expectations and forecasts. When developing a diversification strategy, you must use the following three criteria:

attractiveness of the industry;
costs of entering the industry;
additional benefits (synergy effect).

Classification of diversification strategies

There are related and unrelated (conglomerate) diversification. In turn, related diversification can be vertical or horizontal. The main criterion for determining the type of diversification is the principle of merger. With a functional merger, enterprises related in the production process are combined. In an investment merger, the merger occurs without the production community of enterprises.

Vertical integration

Related vertical diversification, or vertical integration, is the process of acquiring or incorporating new production facilities into the enterprise that are part of the technological chain of production of the main product at stages before or after the production process.

An integration strategy is justified when an enterprise can increase its profitability by controlling strategically important links in the chain of logistics, production, and sales of products.

In this case, it is possible Various types vertical integration:

full integration of production activities;
partial integration, in this case some of the necessary components are purchased from other enterprises;
quasi-integration - the creation of strategic alliances of enterprises interested in integration without transfer of ownership rights.

Depending on the direction of integration and the position of the enterprise in the production chain, two forms of related diversification are distinguished:

forward integration or forward integration;
backward integration, or backward integration.

A backward integration strategy is used to protect a strategically important source of supply or gain access to new technology, important for basic activities.

With backward integration, the enterprise integrates functions that were previously performed by suppliers, i.e. acquires (establishes) control over sources of raw materials and production of components.

Direct integration consists of acquiring or strengthening control over the structures located between the enterprise and the end consumer, namely the system of distribution and sale of goods. This type of strategy is used when a company cannot find intermediaries with a high-quality level of customer service or seeks to know its customers better.

Horizontal integration

Related horizontal diversification, or horizontal integration, is the combination of enterprises operating and competing in the same field of activity.

The main goal of horizontal integration is to strengthen the firm's position in the industry by absorbing certain competitors or establishing control over them.

Horizontal integration allows you to achieve economies of scale, expand the range of goods and services, and thus gain an additional competitive advantage. Often the main reason for horizontal diversification is the geographical expansion of markets. In this case, companies that produce similar products but operate in different regional markets merge.

Strategies

The need to develop a diversification strategy arises for an enterprise in the presence of strong competitors, falling demand for current products and declining profits. This strategy gives the company the necessary flexibility and ability to adapt to constantly changing market conditions.

The diversification strategy is based on the idea of changing four components of the enterprise’s activities:

products,
sales channels,
spheres of functioning,
the company's position in the industry.

Before developing a strategy, a potential innovation is analyzed according to three criteria:

costs associated with the implementation of a new project;
existing barriers/boundaries to implementation;
size of potential demand.

It is also possible to take into account additional effects, which will arise only with the implementation of a diversification strategy.

If there are several options, a strategy with the following criteria is selected:

relatively low costs for implementing the strategy;
average or short term return on investment;
steadily growing demand for products new to the enterprise.

The strategy also largely depends on the type of diversification - unrelated diversification is often more costly and difficult to implement, while the related type is simpler and associated with fewer risks.

Diversification of business and company

Diversification the whole company possible through mergers and acquisitions, which is a global trend.

Mergers and acquisitions have a number of advantages over the development of production diversification:

ready-made production is purchased,
the sales market is developed,
a network of suppliers and intermediaries has been established,
there is interaction with other market participants.

The process of mergers and acquisitions helps reduce costs associated with organizing new production or adapting the current one to the needs of new products, advertising costs and concluding new supply contracts. Moreover, along with finished production, the enterprise receives a qualified workforce.

Diversification of production

Diversification in the production sector is the synchronous development of unrelated, disparate types of production, a significant expansion of the current assortment and range of the entire range of products within an enterprise or concern with a reorientation of current sales markets.
The development of a diversification strategy is based on the need to increase production efficiency in order to obtain economic benefits and prevent bankruptcy, and the company itself becomes a diversified complex of divisions.

Risk diversification

Refers to the selective allocation of investments, taking into account the existence of different classes of financial instruments. Thus, in order to diversify risks, it is customary to include in the “portfolio” financial instruments one type (shares of several companies) and different financial instruments (for example, shares and bonds).

Economic diversification

Economic diversification means nothing more than the simultaneous comprehensive multi-sectoral development of production and services, completely unrelated to each other. This process is largely facilitated by state policy aimed at organizing modern structure national economic complex.

Conglomerate diversification

Conglomerate diversification of products (works, services) is a process in which the existing range is replenished with products (works, services) that have no relation to the existing range, as well as to the technologies used for this.

Diversification of goods, as well as diversification of services, implies an increase in the quantitative range through the release of a new product (work, services) aimed at new markets.

Examples of diversification

A classic example of diversification is the automotive industry.
In particular, it is known that the global automobile market currently consists of a very limited number of participants. In fact, this industry has formed, and a characteristic feature of the automobile market is high-level structural competition in prices and quality of products.

There is certainly a never-ending debate surrounding the issue of industry leadership. Meanwhile, among the undoubted leaders is the Japanese manufacturer, whose cars meet the highest quality at relatively low prices. The most important characteristic The automotive industry is considered to have a low level of profit margin, which, given high competition and the existence of certain barriers, makes this industry unattractive for a potential investor.

As an ANTI-example, we can cite the situation that developed with the anti-AIDS drug. Undoubtedly, humanity's need for such a drug is extremely high, and the cost of the drug and the rate of profit from its sales would amount to a cosmic amount.

At the same time, the scientific potential accumulated to date does not allow us to invent a universal remedy against AIDS, and therefore “deploy” profitable production does not seem possible. In other words, pragmatic investors will not yet be willing to show interest in the ultra-high rate of return from the sale of a future drug.

Modern features of diversification took shape in conditions of extremely complex development under the influence of global macro- and microeconomic criteria. The global evolution of ideas, starting from manipulation of an assortment of goods to the manipulation of a set of countries, can be placed in a unique formula, the elements of which are: a product set, a set within an entire industry, a set of industries and spheres of influence, a set of countries.

Accordingly, each subsequent stage on the path to achieving the goal of diversification will be distinguished by a change in priorities in the further development of the business.

Conclusion

Business diversification allows you to endure temporary difficulties relatively painlessly - interruptions in sales, a short-term decline in demand or product prices - and in the event of a long-term crisis, alternative branches of the enterprise’s activities can come to the fore and become the basis for repurposing the company according to a new strategy.

At the same time, diversification, especially in the case of production, usually requires additional investments - in new equipment, technologies, personnel. Correct solution should be based on a comparison of such costs with the price of risk.

A well-diversified investment portfolio will not help you avoid short-term losses, but one thing is clear: with a portfolio with a wide range, i.e., broken down into different asset classes, you can expect approximately the same or slightly higher returns, while reducing general level risk. This should be the starting point of every new investor.

It is believed that the strategy of horizontal diversification is the most difficult path enterprise development. This scheme provides for the introduction into production of previously unused technology, which makes it possible to create completely new products. At the same time, the sale of goods will be carried out through an already formed sales network, so the company does not need to search for suppliers and consumers. To organize the production of a product, a company must attract investment and ensure maximum profit after selling the product.

There are two main strategies for horizontal diversification: introducing new products into an old market or penetrating a new market. The first strategy is conventionally called innovative, and the second - diversification itself. When a company's product debuts in an old market, a horizontal diversification strategy is appropriate in three cases: the company intends to introduce a genuine innovation, wants to demonstrate, or wants to launch a product already produced by competitors. Pseudo-innovation is old products that have undergone an update. Making products manufactured by competitors is a substrategy of the “me too” principle, when the company seeks to equalize its chances with other players and balance the market.

Related horizontal diversification, or horizontal integration, is the combination of enterprises operating and competing in the same field of activity.

The main goal of horizontal integration is to strengthen the firm's position in the industry by absorbing certain competitors or establishing control over them.

In Russia, horizontal associations are typical for banking sector. Here they are aimed at expanding the range of banking services and geographical expansion of activities.

Unrelated diversification. This type of diversification covers areas of activity that do not have a direct connection with the main activities of the enterprise.

Diversification is justified if the opportunities for growth of the enterprise within the production chain are limited, the position of competitors is very strong, and the market for basic products is in decline. With unrelated diversification, there may be no common markets, resources, technologies, and the effect is achieved through the exchange or division of assets from areas of activity.

As mentioned above, a horizontal diversification strategy will require good and proven distribution channels. The company's logistics system must be streamlined and operate continuously. Otherwise, the search for new clients and consumers may divert all the initial income from product sales.

Unlike the technique of quickly increasing income, horizontal diversification takes time to realize the first profits. Often companies, before mastering new technologies, sign contracts with large partners. For example, a chemical production plant can sign an agreement with foreign factories that want to purchase high-quality tires for cars. This way, the plant will have to master rubber manufacturing techniques, but will not have to look for channels for selling these products. Thus, a new niche will be occupied in both domestic and foreign markets.

The main risk of any business strategy is investment. With horizontal diversification, the company risks losing a large part of its existing income or credit funds received for the development, implementation of technology and sale of goods. It is important to remember that only consumer interest in new products will determine maximum profit and recoup all investments.

If a company understands the importance and necessity of implementing a horizontal diversification strategy and is confident that its new product will be of interest to partners and consumers, it is worth mastering new technologies. They will ultimately allow not only to receive additional income and gain a foothold in a new area of business, but also to become a kind of impetus for the further growth of the company - the opening of new branches, structural divisions and offices.

Diversification strategy

A diversification strategy is the development of new product markets, the release of new goods, and the provision of new types of services. A diversification strategy usually involves not only introducing diversity into product groups or service groups, but also expanding the enterprise’s activities to new areas of economic activity that do not overlap with those already developed by the enterprise.

In other words, a diversification strategy is a system of measures that an enterprise uses to eliminate the dependence of the economic efficiency of a business on one product group or one strategic direction of activity. A diversification strategy is designed to develop new types of products at the same time as entering new product markets.

Products may be new exclusively for a given enterprise, or new for all enterprises operating in a given field of production. The diversification strategy is designed to ensure the stability and profitability of the enterprise in future periods. Businesses diversify to minimize investment risk. However, diversification itself is associated with certain risks and costs, and therefore requires careful preliminary analysis.

Classification of diversification strategies

The main essence of the diversification strategy is to divide the assets and capital of one company between in various directions activities to reduce the risk of loss of future income. Diversification can take various shapes: in modern practice, there are 4 main types of product diversification strategies: horizontal, vertical, concentric and conglomerative. Let's look at each type of strategy in more detail.

Horizontal diversification

A horizontal diversification strategy involves acquiring or developing new products that can be sold to the company's current customers or clients. In this strategy, the company relies on the existing sales level and production technology. An example of horizontal diversification is the addition of a new type of cheese to a dairy company's sales line. Risks in a horizontal diversification strategy are reduced by increasing product diversity. In the event that one type of product loses its relevance, the company will still have an assortment that allows it to receive a stable income.

Vertical diversification

The vertical diversification strategy involves the company moving “up or down” along the production chain. In other words, the company enters the stages preceding its production cycle or moves forward to the stages subsequent to its production cycle. The vertical diversification strategy reduces the company's dependence on the decisions of third parties, prevents third parties from receiving excess profits and brings everything important processes within one company.

An example of vertical integration is when a company stops selling its products through separate retailers and opens its own retail and wholesale store. Or a company acquires a supplier of resources and raw materials to produce its goods. Or the company opens a subsidiary business selling paints and building materials to its main home remodeling business, providing the best prices and materials procurement process.

Concentric diversification

Strategy concentric diversification also called a related diversification strategy. This strategy means expanding the product portfolio with products (or lines of business) that make more efficient or full use of the company's existing technologies and resources. In other words, following a strategy of concentric diversification, a company creates complementary products or introduces complementary services that help facilitate and improve the consumption of the main product. This type of diversification is often used by smaller companies, and the new products created tend to be closely related to the company's core business.

For example, a manufacturer of children's products may acquire other small toy manufacturers around the country to increase distribution of its products and gain access to new markets. Another example would be the introduction of a small bakery's product range in addition to ready-made baked goods, semi-finished products and dough for preparing products at home. The advantages of a related diversification strategy are gaining access to ready-made solutions and experience, reducing competition in the segment (when purchasing competing products), and increasing the efficiency of using available resources.

Conglomerate diversification

The conglomerate diversification strategy is also called the unrelated diversification strategy and involves running two completely independent lines of business that do not improve each other's performance. Following a conglomerate diversification strategy, the company develops completely new business lines and gains access to completely new consumers. In fact, this is an investment of the company's current profits in new growing and highly profitable industries. Sometimes this type of future diversification allows a company to gain access to new technologies that can improve the current product.

A company resorts to a conglomerate diversification strategy when it can effectively apply its knowledge and experience in new markets; when it has technologies that allow it to gain competitive advantages in new markets; when new markets and industries have significantly high potential.

An example of such a strategy is a situation where a shoe manufacturer enters a new (for itself) clothing market (using its knowledge and experience in consumer preferences and behavior).

The main benefits of an unrelated diversification strategy are that the company can find and develop more profitable businesses in the future and reduce the impact of seasonal downturns in sales of the core business. The disadvantages (or risks) of such a diversification strategy is the need to allocate significant resources to the development of a new line of business and investments, which may not pay off if management is poor.

International diversification

An international diversification strategy can take one of the two forms described above: linked or unlinked. But we talk about it separately because of its high importance for the company. International diversification is one of the main strategic ways to diversify a company's activities. They switch to it when diversification at the national level is completely completed. This process requires high management competencies and a properly structured management structure.

The company must develop marketing strategy not only for each business, but also for each country, taking into account national and regional characteristics of the market and product consumption patterns. Using the right international diversification strategy, a company can obtain significant economies of scale in production, access to rare and valuable resources, make maximum use of its resources and reduce the risks of stagnation and decline in sales.

Diversification is a phenomenon that characterizes the degree of diversity of types of products, types of activities, etc. at the enterprise. The wider the product line or the more unrelated production facilities, the greater the degree of diversification of the company.

Diversification - what is it?

Diversification (Latin diversus - different and facere - to do) is the process of allocating resources (material, monetary, etc.) in order to expand the range of products and increase market share (sales market). The purpose of this phenomenon is to maximize profits and increase the sustainability of the enterprise.

Diversification associated with a change in the company's activities is called diversification of production. The main difference between diversification and differentiation is the possibility of developing several directions independent of each other at once.

Types of Diversification

As part of production diversification, there are unbound and bound type, which, in turn, is divided into vertical and horizontal diversification.

Unrelated type of diversification also called lateral– it involves the creation of a new sphere, which is not directly related to the existing specifics of activity. For example, renting out one of the warehouses while using the remaining premises in the main activity.

A related type of diversification involves the creation of a new area of activity that depends on areas that are already operating. For example, the creation of a network of gas stations by an enterprise that processes oil.

Vertical diversification occurs when a company decides to expand production by “stepping” forward or backward along the production chain. For example, a company that produces bolts and washers begins to produce assembly units.

Horizontal diversification occurs when a company decides to expand its product range based on typicality production cycle. For example, manufacturers of face cream are starting to produce eye cream. More often than not, a new product is released under the same brand.

The benefits of diversification include:

expansion of sales markets;
beneficial redistribution of free resources;
reducing the risk of bankruptcy;
increase flexibility and adaptability;
fully utilize the existing capacity of the enterprise.

Diversification Strategies

The diversification strategy is based on the idea of changing four components of the enterprise’s activities:

products,
sales channels,
spheres of functioning,
the company's position in the industry.

Before developing a strategy, a potential innovation is analyzed according to three criteria:

costs associated with the implementation of a new project;
existing barriers/boundaries to implementation;
size of potential demand.

It is also possible to take into account additional effects, which will arise only with the implementation of a diversification strategy. If there are several options, a strategy with the following criteria is selected:

relatively low costs for implementing the strategy;
medium or short payback period;
steadily growing demand for products new to the enterprise.

Diversification of business and company

Diversification of an entire company is possible through mergers and acquisitions, which is a global trend.

Mergers and acquisitions have a number of advantages over the development of production diversification:

ready-made production is purchased,
the sales market is developed,
a network of suppliers and intermediaries has been established,
there is interaction with other market participants.

The main risk of a company's diversification is the undervaluation of its own production and the overvaluation of acquired production.

Mergers and acquisitions contribute to increasing the market share of the enterprise, increasing production capacity and more effective diversification at lower costs.

Examples of company diversification

The most striking example of a hyper-successful unrelated diversification of a company in modern market is a British company of VirginGroup. It seems difficult to calculate the exact number of directions in which the company is developing.

The company gained its fame by mastering the field of sound recording and creating a store selling music records, cassettes and discs. Currently, the most well-known areas of activity are:

air travel by Virgin Atlantic Airlines;
Virgin Vision film production;
Virgin Money banking services.

An effective example of related vertical diversification is the Czech company Studentagency. Starting with bus transportation in the cities of the Czech Republic, they gradually entered the markets of Austria, Slovakia and Germany, targeting tourists and travelers. Now the company is also engaged in providing hotel booking services and organizing excursions.

A famous example of related horizontal diversification is BIC, which became large and successful through the production of pens. The technology used by the enterprise made it possible to produce pens at a low cost in large quantities. Subsequently, the features of the production cycle were used to produce disposable razors and lighters, which also began to generate stable income.

Views