Diversification is a strategy used by many businesses to reduce risk, protect from competition and increase profits. It involves introducing new products or services which are related to the existing ones.
Moreover, it is frightening to invest your own money into a risky business concept that could easily fail when it launches.
This helps to protect the company from market volatility, as well as providing a competitive advantage and additional sources of income.
What is a Diversification Strategy?
Diversification strategy is a way for companies to spread out their investments across different products, services, or markets in order to reduce their risk and increase their profits. It is a strategy used by businesses to reduce the potential for losses that can occur when only investing in one product or market.
Diversification is one of four different growth strategies that are commonly used. It involves expanding a business by introducing new products or services, entering new markets, or acquiring other companies.
One of these growth strategies is probably a better fit than the others. They are:
- Product Development
- Market Development
To enter the market at a very low sale price in order to eliminate your competitors is called penetration.
Developing and trying out new products within your current market is product development.
Entering new markets that are not related to your current industry is market development. But, let’s discuss diversification.
Types of Diversification
There are three main types of diversification strategies:
Concentric diversification is creating new products and services that are similar to your current offerings. For example, an orange juice company comes out with a new smooth orange juice drink to complement its existing product, the orange juice with bits.
Horizontal Diversification is when a company begins to offer new products that are still related to their original product lines. For example, if a company originally sold plant pots, they might branch out and start selling seeds for different herbs and flowers.
Diversification of a conglomerate refers to the development of new products that have no relation to your original items. For example, your t-shirt company has now decided to start stocking apple products.
Conglomerate diversification is a riskier strategy than concentric diversification and horizontal diversification.
This is because more expenditure is required for product development and advertising. Additionally, because the goal is to enter a new industry, this strategy has a greater chance of failing.
Identifying Your Strategic Assets to Create a Competitive Advantage
Identifying your strategic assets is key to creating a competitive advantage. Strategic assets are the resources and capabilities that you have which are scarce, difficult to replicate and provide you with a competitive edge.
To identify your strategic assets, you must first assess the skills and resources of your business, as well as the competitive landscape. Analyzing the competition can help you to identify any gaps that you have or any areas where you have a unique advantage.
Once you have identified these assets, you can begin to develop a strategy to leverage them for competitive advantage. This could include differentiating yourself from competitors in terms of price, quality, innovation or customer service.
By focusing on your unique capabilities and resources, you can create a competitive advantage and increase profitability for your business in the long run.
Mitigating Risk with Diversification Strategies
Diversification is a common strategy used by companies to mitigate risk in times of market volatility or downturn. This strategy involves investing in multiple channels of product in order to spread the risk and avoid the significant losses that could be incurred if relying on one product alone.
By spreading the risk, a company is able to ensure that any one product’s loss in sales won’t have a significant impact on the overall business.
In order to make sure this strategy is successful, There is a general risk factor that helps predict how successful the introduction of a new product might be. This has three main points to address:
1. Analyzing the Porter’s Attractiveness Test to Assess Risk: companies must assess the market risk they are exposed to.
2. Reducing Cost of Entry to Maximize Profits: calculate the cost of entry.
3.Utilising the Better-Off Test for Synergy and Competitive: See if the new products have a synergy or competitive advantage.
By taking these precautionary steps, companies can ensure that their diversification strategy is effective at mitigating risk.
Merging with the Competition to Increase Profits
Merging with the competition is a popular tactic used by companies in order to increase their profits and gain a competitive edge. By merging, companies can gain access to the other company’s resources, customers, and products which can give them an advantage in the market.
Merging with the competition also allows companies to reduce costs by combining operations, increase their customer base and variety of products, and reduce the risk of unsystematic risk.
Furthermore, by merging, companies can also raise their prices and increase their profits as they have fewer customer options. All these factors make merging with the competition a viable option for companies looking to diversify and increase their profits.
Using Concentric Diversification to Increase Profits
Using concentric diversification to increase profits is a popular and proven strategy for businesses to employ. Concentric diversification involves adding new products and services to the existing line of goods and services, which are related to the main product or service.
This type of diversification is relatively low risk because the products being added are related to the existing product line and are likely to be accepted by customers.
For example, a coffee shop may choose to add sandwiches and pastries to their existing menu, allowing them to upsell customers at the till point and increase their profits. Similarly, gyms may choose to add a sauna or physio room to their premises which can be rented out for an additional stream of income.
Overall, using concentric diversification can be a low risk and profitable strategy for businesses to employ. It allows them to increase their profits by adding related products and services to their existing line, while also taking advantage of existing customer bases.
Examples of Successful Diversification
There are many examples of successful diversification. Apple is a great example of a company that has diversified its operations and products, from computers and tablets to streaming services and wearable technology.
Starbucks has also diversified its operations to include manufacturing, retail and consumer packaged goods.
Amazon is another example of successfully diversifying, from being an online retailer to a cloud computing service provider.
Wal-Mart is an example of a company that has successfully diversified its operations by offering a range of products and services, such as groceries, pharmacy, banking, financial services and even travel-related services. Finally, McDonald’s has also diversified its operations by expanding into a variety of other food products such as salads, smoothies and wraps. All of these companies have successfully diversified their operations and seen increased profits as a result.