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What is a Diversification Strategy?

 
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Diversification is a strategy that takes a company into new markets with new products or services. Companies may choose a diversification strategy for different reasons.

Firstly, companies might wish to create and exploit economies of scope, in which the company tries to utilize its exciting resources and capabilities in other markets. This can oftentimes be the case if companies have under-utilized resources or capabilities that cannot be easily disposed or closed. Using a diversification strategy, companies may therefore be able to utilize all its capabilities or resources, and able to attract new business from market segments not catered to earlier.

Secondly, managerial skills found within the company may be successfully used in other markets, where the dominant logic and managerial procedures of management can be successfully transferred to other markets.

Thirdly, companies pursuing a diversification strategy may be able to cross-subsidize one product with the surplus of another. This way, companies with a very diverse portfolio of products catering to different markets may potentially grow in power, and be able to withstand a prolonged period of price competition etc. When having subsidized one product for a substantial period of time, the company might possibly be able to win a monopoly, making it the only supplier in the respective market.

Fourthly, companies may also want to use a diversification strategy to spread financial risk over different markets and products, so that the entire success of the company is not reliant on one market or product only.

There may however be other reasons for companies to use a diversification strategy than the four listed above, and companies may very well benefit from a diversification strategy for other reasons.

However, it is important for companies to realize the possible danger of diversifying its scope of operations to much. Companies might risk neglecting its core capabilities and become too diversified, where too many different products supplied to different markets might have negative effects on products and services, where e.g. product quality or uniqueness might suffer due to the shift in focus on different products and markets.

The diversification strategy can be split into two different types:

  1. Related diversification
  2. Unrelated diversification

Please click the links above to read more.

 
 
 
 
 
Date Created: 2010-12-11
Posted by: Admin
 
 
 

Related resources:

What is Michael Porter's 5 forces?
Internationalization of Multinational Corporations
Global strategies for MNCs: Christopher A. Bartlett & Sumantra Ghoshal
What is the Balanced Scorecard?
What is the BCG Matrix?
What is a SWOT analysis?
What is Michael Porter's Diamond Model?
Reference(s)
 
Exploring Coorporate Strategy
Johnson, Gerry. Scholes, Kevin Richard Whittington: (2006); Prentice Hall
Keywords:
Online MBA, Online MBA Courses, Diverification strategy, economies of scope, related diversification, unrelated diversification, resources, capabilities, diversification, markets, products

 


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