Diversification is always good. You can diversify anything: for example, keep your money savings in different banks and in different currencies. The principle of eggs in different baskets works everywhere. Because it is risk reduction, which is also everywhere.
To begin with, 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 to transform a business to expand in one form or another.
Why diversify:
- for financial strength and overall stability;
- profit;
- competitiveness.
The strategy of enterprise diversification must be de alt with in advance, calculating your actions and possible options for external events many steps ahead.
Strategy is an intellectual concept, because high-flying management decisions are made here - with research, analysis,comparison, selection of optimal options. If diversification is included in the overall strategy of the enterprise, it should be highlighted in a special format, mode of execution and a special assessment of effectiveness. There is a risk of failure, but it can be taken care of during the next stage - action planning and process implementation.
Types of diversification strategy
Unrelated, or lateral, diversification: in addition to the core business, the formation of a new type of business that the company did not do before. It may even be a new industry. An example is the 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 popularity of the artist only plays into the hands
Linked Diversification Strategy: In this case, businesses are created that are directly or indirectly linked to existing businesses. For example, the famous French fashion houses, in addition to clothes, have long been releasing perfumes, cosmetics and many other accessories
Linked diversification is divided into vertical and horizontal types. They need to be told separately.
Lateral or unrelated diversification
This type of production diversification strategy is expedient if the market of its own existing products is weakening - it is in a recession stage. It is possible to “grab” a new field of activity with numerous and strong competitors. The idea of sideways diversification looks great on paper. But not in life: notwe must forget that a new type of business requires much more effort and money than the usual business. Yes, and the risks in such actions are incalculably greater.
There are two types of unrelated diversification:
- A centered diversification strategy is the production of new products or services, but within the framework of an existing business - in its own industry. The old business remains the main one in the company, the new branch runs in parallel and uses the technological and organizational capabilities of the parent business.
- Conglomerative diversification is a real product portfolio renewal in the form of a new production of new products that are no longer connected to the 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: there are fewer risks and costs, because the business is known in all 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 revise all types of diversification strategies in order to focus on the most optimal type for a particular business, and not on diversification, which is the most popular on the market.
Tied diversification: vertical type
This variant of corporate diversification strategies can be called business expansion “along the production chain”. This is the inclusion in your business of new processes or even enterprises,which are included in the general technological cycle of production of an existing product. This kind of product diversification strategy is effective if such changes will increase the profitability of the enterprise. Procurement, production and marketing of products - this is the overall chain along which you can "move" in order 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 the business.
- Partial integration - the most common option is when some of the components are produced in other companies.
- Quasi-integration is an interesting variant of diversification, in which companies are combined into production alliances without legal ownership.
It is possible to move both forward and backward along the production chain, which is reflected in another classification within vertical related diversification:
- Move "forward" - a direct diversification strategy is to gain control of the areas of the overall process between the enterprise that produces the product and the system for selling this product. Often this area is logistics - storage and delivery of goods to points of sale. Obtaining the right to control logistics and sales will provide an opportunity to improve the quality of customer service and the speed of delivery of goods to the finalconsumer.
- Movement "back" - reverse diversification is aimed at its own "raw material autonomy". These are strategic moves because they allow access to a source of supply or new technology. Its components will reduce costs, increase punctuality of production and, as a result, excellent business sustainability.
Tied diversification: horizontal type
This is the expansion of a business by combining competing businesses within the same industry. The most common variant of this corporate diversification strategy is geographic expansion with the emergence of branches of the enterprise in new regions. This may be the creation of branches in a new location, it may be the purchase of existing ones, or perhaps a takeover (this also happens).
A classic example of a horizontal diversification strategy is the market behavior of American brewers. First, they penetrated into the production and distribution of raw materials for beer (vertical diversification). Then they implemented a product diversification strategy - they expanded the product line, taking into account the preferences of different groups of their consumers. Brewers around the world have successfully embraced this "beer" market behavior.
In Russia, a vivid example of a diversification strategy is clearly visible in the actions of large Russian banks. It is implemented in two horizontal directions: these are branches in new geographical regions, and the expansion of the range of financial services.
Benefitsdiversification
There are many benefits, but the main ones can be grouped as follows:
- Efficient allocation of resources.
- Increase in adaptive abilities.
- Expanding sales opportunities.
- Optimal utilization of all enterprise capacities.
If the main goal of diversification is the possibility of an additional effect from 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. To follow, to think, to be able to draw conclusions and make decisions, to 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 even more so to implement it in one form or another?
Answer: not always, of course. First you need to try all possible ways to grow in your home business. If the company has a strong position in the market, and the market itself is developing at a good pace, then market diversification is not required at all.
A completely different question is the company's product or service line. The strategy of horizontal diversification of products 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 mindsentrepreneurs in difficult situations:
- Strong competition.
- Decrease in demand for products.
- Declining consumer purchasing power.
It is best not to wait for any phenomena that include the word "decrease" in their name. Strong and pronounced competition in the market is already absolute evidence 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 vertically and horizontally.
Changes in any company can only be implemented in four ways:
- In products or services, usually an extension of the product line.
- Expansion of product distribution channels.
- Expanding areas of activity - entering new "lateral" businesses.
- Change the position of the company itself in the industry.
M&A
Firstly, this is a worldwide trend. Having an undeservedly negative image in the eyes of the general public, mergers and acquisitions have serious advantages over the classic types of diversification:
- shelf company joins;
- no need to develop a market to replace the existing one;
- suppliers and intermediaries know the nuances of the business and interact well with each other;
- market participants are coordinating withother members;
- employees of affiliated companies know their job well – high professional competence of staff.
Thus, acquisitions and mergers lead to a decrease in the classic costs associated with the launch of a new production, advertising costs and time (which is also a major resource) for the legal side. They are a very effective form of diversification with minimal overhead.
Examples of diversification
The classic and most replicated example of a diversification strategy of all possible types and types is Richard Branson's group under the Virgin brand. The peculiarity and strongest point 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 - you can't list them all. It would be a mistake to think that Branson was doing just fine with diversification. His business has a history of major and high-profile failures in entering new markets. For example, he wanted to but could not beat Steve Jobs in cell phone manufacturing.
Richard Branson failed with the great and terrible Coca-Cola. He released a competitive drink accompanied by an extremely unusual advertising campaign, which was eventually not accepted by any retail chain. It is better to look for pages with stories about Richard Branson in numerous materials about Richard Branson, because these are great object lessons on “what and how not to do”.should be done 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 “for the love of art”, then IBM began diversifying its business not from a good life. In 2009, as sales of computers began to fall, the company took up two new services - software and service equipment. Quick and smart decisions helped her stay at the forefront of the IT industry.
Another example is Spain's agricultural diversification strategy. Until the middle of the 20th century, this country belonged to the agricultural provinces with the predominant cultivation of wheat and industrial crops. For 15 years, under the Spanish Miracle program, Spain has diversified grain farming into the industry of growing and powerful export of a wide variety of fruits and vegetables. Grain is now imported, it is no longer profitable to grow it.
Conclusion
A diversified business becomes resilient in a rapidly changing external environment. It makes it possible to receive income from different sources that are not related to each other. At the same time, the diversification strategy requires a very competent approach to assessing opportunities and risks. From a management point of view, a special focus should be on proper cost planning, taking into account the many details that can further complicate the integration process.
