The term "diversification" is commonly used by businessmen and business people when they talk about expanding the scope of a company. The reasons and goals for this can be very different for different companies. The very word "diversification" comes from the Latin diversus - different and facere - to do, literally: to do different things. Thus, diversification in the modern sense is a type of strategy, according to which the company expands the range of goods or services, organizes new areas of activity focused on new markets.
Diversification reasons
They can be based on:
- the desire not only to survive in a difficult economic environment, but also to strengthen its influence and position in a tough competition;
- the formation of excess finances that exceed the level required to maintain competitive advantages;
- attempts to reduce entrepreneurial risks by distributing them between different areas of activity;
- the possibility of getting more nailed than with a simple increase in production volumes.
For example, a footwear company, in the process of diversification, begins to additionally produce bags, because there are too many competitors - “footwear” - formed in this region.
However, the reasons for diversification can be the need to respond to the volatility of the market situation, and the logical expansion of normally functioning production, and the need to load new jobs for people who have been laid off at the main enterprise, etc.
The goals of diversification are similar to the reasons. This is the same desire to survive, strengthen your position among competitors, reduce possible risks, increase profits, etc.
Types of diversification
Related diversification. The definition speaks for itself. In order to expand the scope of its activities, the company is developing areas with which it is directly or indirectly connected. That is, it uses already applied technologies, returnable raw materials from its own production, established distribution (sales) channels, existing production capacities, etc. In other words, with associated diversification, the company adopts the advantages that it has achieved in its usual, traditional sphere.
For example, the same footwear company used to discard production waste or hand it over to another organization. In the process of diversification, waste began to go to the production of handbags, wallets, glasses cases, etc. The assortment has expanded, jobs have increased, and profits have increased.
Unbound diversification is the opposite of bound diversification. The company partially "steps into uncharted lands", i.e. develops completely new areas of business space. Employees master new technologies in new areas of production (services), study other market needs. This type of diversification is aimed, first of all, at minimizing risks (if there is a fear of collapse of the existing business) and obtaining additional profit (if there is confidence or at least hope that new goods or services are in demand among the population).
As a result of justified and successfully passed unrelated diversification, highly specialized companies are turning into large diversified conglomerates, the constituent links of which are not functionally interconnected.
A striking example of unrelated diversification is the YUKOS oil company, which is actively creating firms that are engaged in computer technologies, the promotion of local networks and Internet provision of its divisions and third-party clients, programming, etc.