Diversification Strategy

Diversification is a company strategy wherein a company tries to increase profitability through increased sales volume from new products and new markets. In layman’s term, diversification means venturing out into new business, new products or new markets to increase profits. It is a form of growth strategy involving a significant increase in the performance objectives beyond past performance records. Diversification allows a company to venture out into new lines of business that are different from the present operations. Companies employ different diversification strategies to expand firms' operations by adding markets, products, services, or stages of production to the existing business.

Diversification in the form of growth strategy is viewed by many investors as “bigger the better”. Higher sales volume is seen as a measure of performance irrespective of the profit margins, increase in sales is always welcomed. People often assume that if the sales increase the profits will follow suit.

The concentric diversification is a strategy where a company adds a related product or market to achieve a strategic fit. This allows the company to achieve synergy making it possible for two or more parts of an organization to achieve greater total effectiveness or profitability than what would have been possible for a single entity. This strategy may be employed to attain financial synergy to let companies with stronger financial backing but limited growth opportunities work with a company that may not b financially strong but is having a greater market potentials. Another advantage of this strategy is that it opens ways to achieve management synergy, where management experience and expertise is applied to different situations.

A conglomerate diversification takes place when a company diversifies into businesses or markets that are not related to their present business or market operations. Under this situation synergy may be achieved by combining management expertise or financial resources, while the main objective of conglomerate diversification is to improve the profitability of the parent company and make little of no efforts in trying to achieve marketing or production synergy.

Diversification efforts may be either internal or external depending upon the objectives of the company. Internal diversification is a situation where a company ventures into a different but related business line. It involves increasing the company’s product or market base. The external diversification on the other hand is used to achieve similar results with a difference that the line of business is drastically different and not related to the parent company.

There are many reasons why a company may opt for a diversification strategy, main objective being that companies are looking to grow and increase profitability. It is imperative that they decide whether they want to diversify by starting a related or unrelated business line.