Diversity is a word with many (diverse) meanings. In the world of business, diversification is a means of managing risk while growing your business.
The principle can be applied everywhere, from your hiring decisions to your development of new products to your acquisitions: put all your eggs in a single basket, and you risk losing everything when the basket splits.
Spread those eggs across many baskets, on the other hand, and you can recover from this kind of disaster.
Why You Might Implement A Diversification Strategy?
There might be various reasons behind the implementation of a diversification strategy. Here are some-
- A company might consider a diversification strategy as the greatest way to advance competitive advantage. Once you are expanding your products or services, you are offering something new that your competitors can not.
- A successful diversification strategy will significantly improve the growth of the business and allow the company to make more profits.
- You might also implement a diversification strategy to brighten up the brand image of your company.
- Industrial changes can be another crucial reason for implementing a diversification strategy. You might want to take advantage of new innovative technology by introducing new products to your customers.
What Types Of Diversification Are There?
Let’s look at diversification as it applies to products. It can be divided into four different types.
This kind of diversification involves adding products which are similar to those you’re already producing. So, if you’re growing apples, you might move on to growing pears as well.
This way, you can build out gradually. This is an excellent strategy to bring new technology to the customers and offer something interesting and new to them.
Horizontal diversification means taking entirely new products and selling them to your existing customers. Our hypothetical apple grower might move on to selling books or merchandise related to apples.
Even though the introduced products or services are completely new, they will be in some way related to the original products. For instance, if a gaming company opens its virtual reality business, that would be horizontal diversification.
In the vertical diversification method, a company aims to embrace different parts of the production process within a single corporate structure by expanding the structure of the company.
Generally, the supply chain of the company moves up or down. An example of vertical diversification or vertical integration is when a car manufacturing company expands its business into the aluminum industry to offer raw materials for the ongoing product line.
This is the riskiest strategy of the three, as it involves pursuing an entirely unrelated product or acquiring another company. For instance, the Walt Disney Company expanded its business by obtaining other popular media firms, such as Pixar, 20th Century Fox, Marvel, and Lucasfilm. Research into the new market is the key to success in this strategy.
The Benefits Of Diversification
Let’s outline more specifically why diversification might be a worthwhile strategy.
Firstly, with a broader base of products to sell, you’re able to appeal to a broader range of customers – which means you’ll drive sales. People who like apples, people who like pears, and people who like both will all be attracted to your company.
You’ll also be able to weather economic storms. If you’re a supermarket or greengrocer selling a variety of different fruits, then you’ll be able to cope when the supply of one of those fruits begins to stall because of a poor harvest.
For example, during the recent pandemic, private jet and business plane companies faced a slump in demand. As such, they pursued a diversified strategy, offering cargo services to keep their planes in the sky.
Of course, there are also downsides to diversifying: you might be expanding into a market where you lack the advantage of expertise. What’s more, you might risk damaging your brand – which is why KFC and Chick-fil-A don’t sell hamburgers. There’s a reason that restaurant menus don’t continually add products indefinitely: too much variety and you’ll lose the benefits that come with specialization. So, there’s a balance to be struck.
How To Implement Diversification
A successful strategy of diversification rests on market research. You’ll need to look at where you’re uniquely positioned to offer a new product or service, and judge whether the demand for that service is enough to justify the effort.
Restaurants might offer takeaway services, while physical stores might offer online services. Be mindful of any regulations you might need to abide by, and whether you have the marketing strategy in place to make your proposed diversification work.