What Is Diversification?
Diversification is a growth strategy in which a company expands by producing a new product, launching a new product line, or entering an entirely new market.
For example, an automobile manufacturer may expand its brand by starting to manufacture tyres or adding a new truck product line.
Diversification ranges from hearing about the success of the world’s largest entertainment company, Disney, which owns ESPN, ABC, Disney theme parks, cruise lines, and Pixar, to hearing about the decline of National Semiconductor Corporation, which collapsed due to incompetent retail manufacturing in the market.
Need for Diversification?
“Don’t put all your eggs in one basket”
Every business will experience market saturation and a halt in customer growth at some point. Diversification allows for the exploration of new markets and the targeting of new customers. The following are some of the reasons why the company should diversify:
- To be on the safer side, diversification offers you a chance to explore more than just your core business. It seems beneficial to have a diversified channel to protect the company from a decline in a particular sector by distributing financial risks.
- Diversification helps you gain a maximum customer base and establish you as a top provider. Movie rental provider, Blockbuster suffered a downfall as it failed to switch to new DVDs by mail, and online streaming formats.
- Diversification pursues stability and predictability, in case of loss or market saturation. It makes certain that the company remains profitable.
- Diversification demands maximum use of resources that might be underutilized currently.
While diversification appears to be a simple way to maximise profits by investing in new areas and exploring different assets, it is simply a risky bet if not accompanied by proper research and strategy.
When it comes to business expansion, no slack is tolerated. Before making the decision to diversify, conduct thorough research and run all data-driven assessments.
Major strategies for diversification
Decisions should be based on facts, the best strategies, and competitive analysis. Diversification strategies are classified into the following categories:
Horizontal diversification-
Horizontal diversification occurs when a company launches a new product or merges with another company with the same market position and approach that does not deviate the company from its existing customers.
Take the case of DISNEY-PIXAR,
Pixar competed in the same animation space as Disney, but its animated films incorporated cutting-edge technology and an innovative vision. The acquisition of Pixar has added pre-eminent creations to a portfolio of Disney entertainment that is unrivalled. The merger is widely regarded as having evolved Disney, increased its market share, and increased profit.
Vertical diversification-
Vertical diversification leads to company growth by focusing more on its core industry’s business supply chain. It is regarded as a strategic move to add complementary products or services to the existing ones. The advantages provided include lower production costs, higher profits, and market expansion.
Walt Disney is the most successful company at vertical diversification. It owns the companies that create and produce film and television properties, which are then marketed and distributed globally by Disney, who broadcast on affiliated networks such as ABC and other channels and platforms. Home videos are produced by Disney-owned companies and frequently shipped to Disney retail stores, along with significant amounts of other consumer products such as toys, games, and so on, and sold directly to customers. Many of the items are available in Disney’s hotels, restaurants, and theme parks.
Concentric diversification-
When a company decides to launch a new product or expand a completely new product line, it attracts new customers and creates a new portfolio for the brand.
Marvel Comics was purchased by Disney in 2009 as an intellectual property acquisition because its characters and brands were a strategic fit for Disney’s family-oriented brands. As a result, its superheroes such as Spider-Man, Iron Man, Thor, Captain America, and others were distributed throughout other Disney businesses such as its theme parks, retail stores, and video game division.
Take, for example, Coca-acquisition Colas of a Nigerian-based fruit company, Chi Ltd, which has updated the company profile with a solid foundation in Africa.
Conglomerate diversification-
Diversification poses the greatest risks when a company introduces a new product that is unrelated to its current core business.
When it comes to companies with a diverse business portfolio, Disney has a remarkable track record of pursuing a mix of related and unrelated diversification. One of them is the real estate business of resort properties. Disney has made certain that customers experience the magic of Disney right on its property, rather than staying in a different hotel or going to a third-party environment to watch its movies and visit Disney parks.
Richard Branson’s storey is one of unrelated diversification. Virgin, which owns a record label for airlines, planned to release Virgin Cola to compete with Coca-Cola and Pepsi. However, the ad spent was far too expensive, and it was unable to overcome the market’s pre-existing powers, resulting in a massive loss.
The goal is always the company’s success and growth. A strategy tailored to your company’s needs can yield significant benefits; however, a hastily devised diversification strategy can lead to the company’s demise.