Corporate Diversification Strategies

Fill in your details below or click an icon to log in: Marketing Philosophies and Ethics Lamont, and Scott W. You are commenting using your WordPress. When it comes to a diversified portfolio, more investment types may not equal better.

Diversification as an international business strategy and some thoughts about risk. Posted by Grant Hall on July 22, May 1, Being a painter in Vietnam is risky business.

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When choosing diversification strategies, look at your current customer base to determine if you can sell them different items or if you can add new customers by selling them a similar product at a different price or under a different name.

Review your current suppliers, sales reps and distribution partners to determine if you can use them to sell different products, reducing your start-up costs. Calculate the ongoing operating costs and stress on your administration of a diversification strategy and determine if you can support two different businesses or product lines.

Consider the impact of one product line competing with the other if you will sell similar items. Sam Ashe-Edmunds has been writing and lecturing for decades. He has worked in the corporate and nonprofit arenas as a C-Suite executive, serving on several nonprofit boards.

He is an internationally traveled sport science writer and lecturer. Edmunds has a bachelor's degree in journalism. Skip to main content. Diversification Diversification means branching out into new business opportunities, not just expanding your existing business. Reasons for Diversification Before you begin planning a diversification strategy, write the reasons you are considering doing so. Unrelated Strategies As you consider diversifying, decide if you want to stay in a related business or go into a completely different market.

Brand Diversification In some cases, you can diversify by selling the same product, or a similar one, under a different name. Considerations When choosing diversification strategies, look at your current customer base to determine if you can sell them different items or if you can add new customers by selling them a similar product at a different price or under a different name.

References 2 Journal of Comprehensive Research: Corporate Strategy -- Diversification. About the Author Sam Ashe-Edmunds has been writing and lecturing for decades. Accessed 14 September Growth may also increase the power and prestige of the firm's executives.

Conglomerate growth may be effective if the new area has growth opportunities greater than those available in the existing line of business. Probably the biggest disadvantage of a conglomerate diversification strategy is the increase in administrative problems associated with operating unrelated businesses.

Managers from different divisions may have different backgrounds and may be unable to work together effectively. Competition between strategic business units for resources may entail shifting resources away from one division to another.

Such a move may create rivalry and administrative problems between the units. Caution must also be exercised in entering businesses with seemingly promising opportunities, especially if the management team lacks experience or skill in the new line of business. Without some knowledge of the new industry, a firm may be unable to accurately evaluate the industry's potential.

Even if the new business is initially successful, problems will eventually occur. Executives from the conglomerate will have to become involved in the operations of the new enterprise at some point. Without adequate experience or skills Management Synergy the new business may become a poor performer. Without some form of strategic fit, the combined performance of the individual units will probably not exceed the performance of the units operating independently.

In fact, combined performance may deteriorate because of controls placed on the individual units by the parent conglomerate. Decision-making may become slower due to longer review periods and complicated reporting systems. Diversification efforts may be either internal or external. Internal diversification occurs when a firm enters a different, but usually related, line of business by developing the new line of business itself.

Internal diversification frequently involves expanding a firm's product or market base. External diversification may achieve the same result; however, the company enters a new area of business by purchasing another company or business unit. Mergers and acquisitions are common forms of external diversification.

One form of internal diversification is to market existing products in new markets. A firm may elect to broaden its geographic base to include new customers, either within its home country or in international markets. A business could also pursue an internal diversification strategy by finding new users for its current product. Finally, firms may attempt to change markets by increasing or decreasing the price of products to make them appeal to consumers of different income levels.

Another form of internal diversification is to market new products in existing markets. Generally this strategy involves using existing channels of distribution to market new products. Retailers often change product lines to include new items that appear to have good market potential.

Packaged-food firms have added salt-free or low-calorie options to existing product lines. It is also possible to have conglomerate growth through internal diversification. This strategy would entail marketing new and unrelated products to new markets. This strategy is the least used among the internal diversification strategies, as it is the most risky.

It requires the company to enter a new market where it is not established. The firm is also developing and introducing a new product.

Research and development costs, as well as advertising costs, will likely be higher than if existing products were marketed. In effect, the investment and the probability of failure are much greater when both the product and market are new.

External diversification occurs when a firm looks outside of its current operations and buys access to new products or markets. Mergers are one common form of external diversification. Mergers occur when two or more firms combine operations to form one corporation, perhaps with a new name. These firms are usually of similar size. One goal of a merger is to achieve management synergy by creating a stronger management team. This can be achieved in a merger by combining the management teams from the merged firms.

Acquisitions, a second form of external growth, occur when the purchased corporation loses its identity. The acquiring company absorbs it. The acquired company and its assets may be absorbed into an existing business unit or remain intact as an independent subsidiary within the parent company. Acquisitions usually occur when a larger firm purchases a smaller company.

Acquisitions are called friendly if the firm being purchased is receptive to the acquisition. Mergers are usually "friendly. Diversification strategies can also be classified by the direction of the diversification.

Vertical integration occurs when firms undertake operations at different stages of production. Involvement in the different stages of production can be developed inside the company internal diversification or by acquiring another firm external diversification. Horizontal integration or diversification involves the firm moving into operations at the same stage of production. Vertical integration is usually related to existing operations and would be considered concentric diversification.

Horizontal integration can be either a concentric or a conglomerate form of diversification. The steps that a product goes through in being transformed from raw materials to a finished product in the possession of the customer constitute the various stages of production.

When a firm diversifies closer to the sources of raw materials in the stages of production, it is following a backward vertical integration strategy.

Avon's primary line of business has been the selling of cosmetics door-to-door. Avon pursued a backward form of vertical integration by entering into the production of some of its cosmetics. Forward diversification occurs when firms move closer to the consumer in terms of the production stages. Backward integration allows the diversifying firm to exercise more control over the quality of the supplies being purchased.

Backward integration also may be undertaken to provide a more dependable source of needed raw materials. Forward integration allows a manufacturing company to assure itself of an outlet for its products. Forward integration also allows a firm more control over how its products are sold and serviced.

Furthermore, a company may be better able to differentiate its products from those of its competitors by forward integration.

By opening its own retail outlets, a firm is often better able to control and train the personnel selling and servicing its equipment. Since servicing is an important part of many products, having an excellent service department may provide an integrated firm a competitive advantage over firms that are strictly manufacturers. Some firms employ vertical integration strategies to eliminate the "profits of the middleman. However, middlemen receive their income by being competent at providing a service.

Unless a firm is equally efficient in providing that service, the firm will have a smaller profit margin than the middleman.

If a firm is too inefficient, customers may refuse to work with the firm, resulting in lost sales. Vertical integration strategies have one major disadvantage.

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Before you begin planning a diversification strategy, write the reasons you are considering doing so. You might have excess capital you can’t put into your existing business with a reasonable. A firm may elect to broaden its geographic base to include new customers, either within its home country or in international markets. A business could also pursue an internal diversification strategy by finding new users for its current product. For example, Arm & Hammer marketed its baking soda as a refrigerator deodorizer. There are many. Apr 24,  · The Path to Diversification If the scope and breadth of company types and diversification strategies above are any indication, this is a journey that can vary dramatically from business to business.