Definition And Main Types Of Business Diversification

Definition And Main Types Of Business Diversification

What is the diversification of a company?

The business diversification is one of the strategies used by companies when it comes to expanding its market horizon. In this sense, diversification is synonymous with expansion, growth, investment, and openness.

In general, companies that opt for diversification seek new market niches or commercial possibilities. This may be motivated by several reasons, ranging from corporate growth opportunities to the implementation of internal restructuring plans.

Whatever the reason, the truth is that diversification means focusing on those areas of commercial spectra that are beyond the reach of companies and that, after a previous study, represent a business opportunity.

A company can enter such commercial areas when it is committed to new products, when it gives a new focus to existing ones or, simply, when it is committed to attracting other groups of consumers.Definition And Main Types Of Business Diversification

What are the types of business diversification?

At first, companies have two options to implement a business diversification plan . The first, which is the most used by numerous companies in various sectors, is to make an investment of its own to try to reach that new commercial spectrum or capture a specific group of customers.

Investments can be reflected in the acquisition of new infrastructures, machinery or the purchase of inputs and raw materials.

The second option is more common among large business groups. It is about acquiring totally or partially another company that operates in a sector complementary or different from the one of the companies that make the purchase. This operation guarantees that the capital will diversify regardless of whether the brands merge or not.

For example, a television channel specializing in the news can be diversified if it acquires a programmer who is dedicated to the realization of cultural content. Not only will it have more possibilities to reach new segments of the audience, but it will also have invested its capital in other fronts.

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Related and unrelated diversification

This last example serves to illustrate the two main types of  business diversification that exist depending on the commercial activity:

a) Related:

As its name suggests, the related business diversification is one that seeks to combine two or more activities that have some type of relationship. However, it is not only about similar activities, as in the case of the television channel; it also implies that the activities have some kind of technological, commercial or productive compatibility. The essential thing in this type of operation is that the two actions give better results than those that would be given separately. In general, companies that resort to this type of diversification plan do so after having detected a business opportunity in their respective market.

b) Not related:

It is the opposite case to the related one. The new activities that companies are betting on are completely new to their philosophy and do not bear any relationship with the products or services that they have offered so far. It is the strategy of those brands that decide to invest in commercial spectra with which they have no familiarity. Unrelated diversification operations involve a higher level of risk, although those who carry them out have sufficient capital and resources to mitigate those risks. Numerous business groups in the world have been formed on the basis of this type of commercial diversification.

What are the diversification strategies?

Diversification is a process that depends on several factors. Each company has objectives that encourage you to undertake a plan of this type. These objectives are the distinguishing feature in each case. For example, a car company will not pursue the same purposes as a chain of bakeries.Definition And Main Types Of Business Diversification

Due to its many implications and effects, diversification cannot be decided overnight. It must be justified by a prior analysis of the situation and translated into a specific plan.

Among other things, the diversification plan must describe the manner in which such an operation will be applied. This element is known as the diversification strategy, which in general terms can be carried out in the following ways:

a) Horizontal:

In this diversification model, the company offers new products for sale and in markets that are related to the commercial spectrum in which the company operates. The formats change, but not the approach.

b) Vertical:

In these cases, the companies enter fully to the elaboration of products to which previously it acceded after operations in the market. That is to say, in a certain way he becomes his own client or supplier. It is not necessary that you go out in search of these products since they are already part of your production chain.

c) Concentric:

Concentric diversification consists in the production of new products, almost always within the same line of those that already existed. For example, a brand of mint soft drinks can expand its product range after launching the same drink with lemon, orange and peach flavors.

d) Conglomerate:

This category also involves the elaboration of new products, although with the difference that they do not have any relation with the traditional ones. The conglomerate diversification fits well within the unrelated model and is typical of large and large-scale business groups.Definition And Main Types Of Business Diversification

Benefits of business diversification

There are several advantages that diversification offers to companies, among which are:

  • Introduction in new markets. The business possibilities increase and also the probability of economic benefits.
  • Diversification of risk. Companies that focus their investments in a single sector have more risk of losses in crisis situations or before the threats of their commercial activity.
  • Use of resources. Sometimes, companies do not take full advantage of their productive resources. Diversification can be a good option in this regard.
  • The greater presence of brands. Diversify means entering commercial spectra to which until then it has not been accessed. When this happens, companies gain presence and, if the results are as expected, consolidate their positioning in the new market.

Keep Reading: Diversification As A Way To Combat Competition

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