Diversification as a growth strategy may be considered for a variety of reasons. Diversification is primarily utilised to reduce riskin an industry slump. When a business or sector faces a recession, a conservative motive to diversify is to avoid substantial ramifications.
Full Answer
Once a company starts growing, the board of directors always think to diversify their business. Why? because it gives a lot of flexibility. Diversification is a growth strategy that involves entering into a new market or industry. We all have observed so many companies who continuously diversify the business.
Companies considering diversification need to answer another pair of questions: If we are missing one or more critical factors for success in the new market, can we purchase them, develop them, or make them unnecessary by changing the competitive rules of the industry? Can we do that at a reasonable cost?
The decision to diversify can prove to be a challenging decision for the entity as it can lead to extraordinary rewards with risks. Some very famous success stories of diversification are General Electric and Disney. However, the entry of Quaker oats into the fruit juice business, Snapple lead to a very costly failure. Why Do Companies Diversify?
This corporate strategy enables the entity to enter into a new market segment which it does not already operate in. The decision to diversify can prove to be a challenging decision for the entity as it can lead to extraordinary rewards with risks. Some very famous success stories of diversification are General Electric and Disney.
A company’s competitive advantage will be short-lived, and diversification will fail, if competitors in the new industry can imitate the company’s moves quickly and the company’s moves quickly and cheaply, purchase the necessary strategic assets in the open market, or find an effective substitute for them.
What makes diversification such an unpredictable, high-stakes game? First, companies usually face the decision in an atmosphere not conducive to thoughtful deliberation. For example, an attractive company comes into play, and a competitor is interested in buying it. Or the board of directors strongly urges expanding into new markets. Suddenly, senior managers must synthesize mountains of data—including internal-rate-of-return calculations, market forecasts, and competitive assessments—under intense time pressure. To complicate matters, diversification as a corporate strategy goes in and out of vogue on a regular basis. In other words, there is little conventional wisdom to guide managers as they consider a move that could greatly increase shareholder value or seriously damage it.
If managers have cleared the hurdles that the preceding questions raise, they then need to ask whether the strategic assets they intend to export are indeed transportable to the new industry. Too many companies mistakenly assume that they can break up clusters of competencies or skills that, in fact, work only because they are together, reinforcing one another in a particular competitive context. Such a misjudgment can doom a diversification move.
Ten years later, the companies had dropped out of the game. The reason: in addition to the oil companies’ capabilities, the mineral business required low-cost extraction capabilities and access to deposits, which the oil companies lacked.
Yet in reality, the success of McDonald’s in the fast-food business can be attributed to the synergy that exists between those competencies—which support and reinforce one another—and to the fit between the collection of those competencies and the competitive demands of the fast-food market. Indeed, I find it useful to think of interrelated competencies as organisms living in a symbiotic relationship within a particular environment. You cannot separate them and move them elsewhere and expect them to flourish as usual, just as you cannot take the engine out of an airplane and expect it to fly.
Consider the diversification history of Sharp Corporation. In the early 1950s, the company decided to leverage its existing strengths in the manufacturing and retailing of radios by moving first into televisions and then into microwave ovens. Sharp licensed the television technology from RCA and acquired the microwave oven technology by working with Litton, the U.S. innovator in that technology. Similarly, Sharp diversified into the electronic calculator business in the 1960s by buying the necessary technology from Rockwell.
A business is generally defined by using one of three frameworks: product, customer function, or core competencies. 2 Thus, depending on its approach, Sony could decide that it is in the business of electronics, entertainment, or “pocket-ability.”. When facing the decision to diversify, however, managers need to think not about what their company ...
4 Reasons Why Giant Companies Diversify Their Business: 1. Changing in the market: Generally, giant public or private limited companies always keep their eye on what is happening in the market. They tend to look at which industry is booming or which industry has the highest potential to grow.
Every business targets different people to grow the business. By diversifying the business, the company targets people who are different from the main business. If the company able to provide the best service or product, it helps to increase the brand value of a company. Let’s understand briefly….
Once a company starts growing, the board of directors always think to diversify their business. Why? because it gives a lot of flexibility.
Reliance Industries Ltd, Mahindra Group and Tata Group have built the best businesses by continuously diversifying the business.
To expand the business, big businesses need to increase the number of products or services they provide.
In most of the cases, big companies always prefer to buy SME (Small and Medium Enterprise) rather than buying private equity.
Generally, giant public or private limited companies always keep their eye on what is happening in the market .
The following are the advantages of diversification: 1 As the economy changes, the spending patterns of the people change. Diversification into a number of industries or product line can help create a balance for the entity during these ups and downs. 2 There will always be unpleasant surprises within a single investment. Being diversified can help in balancing such surprises. 3 Diversification helps to maximize the use of potentially underutilized resources. 4 Certain industries may fall down for a specific time frame owing to economic factors. Diversification provides movement away from activities which may be declining.
Being diversified can help in balancing such surprises. Diversification helps to maximize the use of potentially underutilized resources. Certain industries may fall down for a specific time frame owing to economic factors. Diversification provides movement away from activities which may be declining.
However, a diversified entity will lose out due to having limited investment in the specific segment. Therefore, diversification limits the growth opportunities for an entity. Diversifying into a new market segment will demand new skill sets. Lack of expertise in the new field can prove to be a setback for the entity.
As the economy changes, the spending patterns of the people change. Diversification into a number of industries or product line can help create a balance for the entity during these ups and downs. There will always be unpleasant surprises within a single investment. Being diversified can help in balancing such surprises.
A mismanaged diversification or excessive ambition can lead to a company over expanding into too many new directions at the same time. In such a case, all old and new sectors of the entity will suffer due to insufficient resources and lack of attention.
Some very famous success stories of diversification are General Electric and Disney. However, the entry of Quaker oats into the fruit juice business, Snapple lead to a very costly failure.
In a concentric diversification strategy, the entity introduces new products with an aim to fully utilize the potential of the prevailing technologies and marketing system. For example, a bakery making bread starts producing biscuits.
One main reason as to why companies tend to diversify is the pursuit of “ growth ”. Companies usually, after having been enough time in a business, realise that their knowledge and expertise could be employed in other markets or other segments of the same market. Take for instance, when the British giant “ Virgin ” decided to enter the rail-service market, they knew they could use their expertise in the transportation market. Similarly, The motorcycle engines-maker “ Honda ” realised that its capability in manufacturing motorcycles engines could be employed else where. Subsequently, they decided to enter new segments and start producing engines for different kind of gas-engine vehicles.
This can help businesses to radically alter their output to such a degree that new products can be completely unrelated to an existing business. This “horizontal” diversification aims to sell new products to its existing customers. Whilst this can lead to a reliance on one audience, it can also help foster loyalty and create a strong customer-brand bond.
In order to access wider markets, partnerships can come in very handy. Concentric diversification requires existing skill sets within a business in order to diversify, yet partnering with another business can provide a route into a market in which a business currently doesn’t have the skills to succeed.
Diversify is about creating creating multiple income, for example Elon Musk in creating electrical cars, outerspace and even creating energy.
That is, relying on one market could threaten the cash flow of the business due to the fact that some markets and industries are subject to dramatic sales decline and recession periods. To avert this, managers tend to decide to enter different industries and diversify their portfolios.
In economics, the entrepreneur is considered as the most important factor of production, which assembles and mobilizes the other three factors of production i.e. land, labor and capital. In the long run, these entrepreneurs become a businessman.
Entrepreneur: An entrepreneur is a person who conceives a unique idea or concept to start an enterprise and brings it into reality. He is the person who bears risks and uncertainties of the business. The venture established by the entrepreneur is known as Startup Company, which is formed for the very first time regarding the idea, innovation or business process. They are the ones who lead the market always no matter how many competitors will come later, but their position will remain untouched.