This can be at the expense of the competitive position. This is also the reason why some investment companies buy up companies that diversify a lot and then sell them in separate parts. That had many different department stores in its portfolio. As a result, their risk was spread and they were able to serve different target groups and segments. However, the investment companies KKR and Alpinvest felt that these companies were worth more separately than under the wings of one holding company.
Vendex KBB was purchased and split. You can also apply diversification in stock trading. Don't bet that one company or one particular sector is going to do well, but spread your shares across different sectors and maybe even different countries.
Conglomerates
Another way to spread your equity risks is hedging. Business development consultants. Business coaching. Show more. It is also termed as business development. It can be done by adding new products to the range or by altering the existing products. Diversification strategy enables the business to get the opportunity to grow through increased sales by entering the new markets or existing customers.
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First of all businesses need to set the objectives for the product diversification. You can do it in two ways i. This approach is used to protect the business. For instance, demand for your products is dropped and there is tough competition in the market. This is seriously alarming particularly for the businesses that build their business on a single product.
Survival of the business is seriously threatened with declining revenues. This is an alternative approach to defensive strategy. You see a strong opportunity in the market but you are not willing to take advantage of it via existing products.
- What is Product Diversification?;
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Product diversification strategy is a time consuming and expensive activity. It can also kick start growth again, especially if you know how to take advantage of momentum in the market. The most straightforward way to diversify is to expand the product range you already offer.
This is known as horizontal diversification. Usually, the new products are closely related to the current core business, for example:. With horizontal diversification, a business can reduce some of its risk exposure while exploiting certain synergies. Using the example of the shoe manufacturer, the additional cost of producing children's shoes should be manageable since the tools, equipment and technical skills to manufacture shoes are already in place. Current customers with children and new customers would be your target market.
Think about all the steps that are involved in getting a product to market. With vertical diversification, a company that's already operating in one of these areas expands to another. It does this by assuming control over an additional production or distribution step. Vertical diversification, also known as vertical integration, can be forward or backward:.
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Forward vertical diversification happens when a business moves forward in the supply chain, i. For example, our shoe manufacturer could start its own network of shops, allowing the business to control sales to the end consumer. Backward vertical diversification happens when the business moves backwards in the supply chain and becomes its own supplier. For example, the shoe manufacturer could acquire a tannery, thus reducing its reliance on leather suppliers.
Product diversification definition — AccountingTools
By diversifying vertically, a business can leverage its existing competencies. It can also reduce costs and remain true to its value chain — the activities a company performs to bring a product or service to the market. Perhaps the best-known example of a successful vertical diversification strategy is Apple. Apple manufactures its own custom chips, screen technologies and touch ID fingerprinting for iPhones and iPads.
This is an example of backward vertical integration. At the same time, Apple has achieved forward vertical diversification by opening a chain of retail stores that exclusively sell Apple products. When a company expands into a new industry it does not currently operate in, it is pursuing a strategy of lateral diversification. For example, an airplane engine manufacturer could develop a range of vacuum cleaners for the consumer market.
Or, our shoe manufacturer could open a driving school. There is no connection between the new market and the core business. An example of this is the Virgin brand. What started out as a brick and mortar record retailer diversified into travel and leisure, entertainment, financial services and now space travel.
What is a diversification strategy, its types, and why is it important?
This kind of extreme diversification worked because of the vision and extraordinary risk tolerance of its founder, Richard Branson. All businesses strive for growth. But the roads they take to get there vary and the vehicles they use can take many different forms. Developed by mathematician and business manager, Harry Igor Ansoff, the Ansoff matrix provides a framework for formulating growth strategies. According to its creator, when the goal is to generate growth, two levels of decision-making surface. Should your business penetrate new markets or should it stay in its existing markets?
And, would you like to extend your product portfolio or not? Market penetration is the strategy of increasing sales of current products to current markets.