Diversification Business Strategy

Diversification is a strategy by which a company expands its operations, introduces new products and upgrades old ones, and enters new markets. The main purpose of diversification is to reduce business risks and create new sources of income.

At the same time, business diversification can be a necessary step to survive in a competitive market.

Diversification. When to start?

When your business is losing stability, financial indicators are falling and competitors are not resting. If, during the normal course of business, the external environment is likely to change, it is time to think seriously about change.

In order to correctly assess the company's position, internal diagnostics and diagnostics of the market as a whole are carried out. On the basis of the data collected and the SWOT analysis, a diversification strategy is developed and integrated into the overall business strategy.

Horizontal (or product) diversification

This is the easiest diversification strategy to implement. A company that decides to diversify its business processes: expands its product range, targets a new type of customer, develops new products, enters new markets. It conducts market research, studies the needs of existing and potential customers, and then decides which new products or services will be profitable and likely to succeed. A company takes a lot of risk by operating in a small and closed market. Horizontal diversification requires you to constantly expand your customer base, broaden your product range and offer different products to reduce your dependence on a single source of income.

If your business is built around one product or service, there is a high risk of losing customers. You need to add new product lines to attract different groups of customers and broaden your target audience.

Apple is a great example of a brand that has used horizontal diversification to grow. Starting with personal computers, the company has expanded into phones, music players and other products.

Geographical diversification

A geographic diversification strategy aims to open up new businesses, new industries and new markets. This type of diversification is available to companies of all sizes. It can be undertaken at a local, national, continental or global level. The challenge for the business is to enter new markets and adapt all the processes of the business to unfamiliar legislation and mentality. Expanding into new markets reduces the company's risks, it does not fix all the work to one region or country.

Vertical diversification

This refers to the diversification of all processes. It is a strategy whereby a company expands its operations into different stages of the production chain or vertical market segments. Instead of focusing on one stage of production or one industry, the company expands its presence across the entire production chain. This allows it to control quality and the distribution process, and reduces its dependence on suppliers. In vertical diversification, a company expands its customer base by offering new services or products.

Consumer-focused diversification

Consumer-focused diversification is a strategy for growing a business by taking consumer trends into account. Researching and collecting data on the new target market is key to understanding the new target audience.

Risks

Diversification allows you to reduce risk. Developing new products or entering new markets requires additional investment. How and when will they pay off? It is important to remember that even a strictly calculated plan may not take into account all the nuances of the business. It is often impossible to avoid losses. This should be taken into account at the diversification planning stage. Broadening the product range and adding new products can lead to sales cannibalisation - a reduction in the sales or market share of an old product due to the introduction of a new one.

The business environment is constantly changing and diversification allows you to adapt better to these changes. Arabesco sideral unipessoal lda advises the top management of client companies on how to diversify their business. Our experts carry out a preliminary analysis of the business and identify the main risks that may affect its stability. These may include: economic instability, shifts in consumer demand, changes in legislation and competition.