A Level Business Studies: Diversification as a growth strategy
- Diversification means expanding a business into different products or services, or even into different industries altogether. (see Ansoff Matrix)
- This is done in order to spread out risk and reduce reliance on a single product or market.
- There are two main types of diversification: related and unrelated.
- Related diversification means expanding into products or services that are related to the existing business. For example, a shoe company might start making bags and accessories.
- Unrelated diversification means expanding into products or services that are completely different from the existing business. For example, a shoe company might start making bicycles or smartphones.
- Diversification can be achieved through internal growth, where the company develops the new products or services themselves, or through external growth, where the company acquires another business that already has the products or services.
- Diversification can help a company grow by entering new markets, accessing new customers, and taking advantage of economies of scale.
- However, diversification can also be risky, as the company may not have the necessary expertise or resources to succeed in the new markets or industries.
- It can also be expensive to develop or acquire new products or services, and it can take time for the new products or services to become profitable
- Diversification can be a successful growth strategy if done correctly, but it requires careful planning and consideration of the risks and rewards.
- Innscor Africa, Zimbabwe’s retail giant is a prime example of a company that uses diversification. The company owns several brands and continues to expand
- They own Fizzi drinks, Gain Cash and Carry, National Foods, Probrands, Pearlenta and Active Cereal among other brands
Advantages of Diversification:
- Risk Reduction: Diversification can reduce a company’s risk by spreading its operations across multiple products, markets, or industries, reducing its reliance on any one area.
- Increased Revenue: Diversification can lead to increased revenue through the expansion of the company’s product or service offerings and access to new markets.
- Synergy: Diversification can create synergies where the combined company can achieve greater overall efficiency and effectiveness than the sum of its individual parts.
- Brand Recognition: Diversification can enhance a company’s brand recognition and reputation by expanding its offerings and reach.
- Competitive Advantage: Diversification can provide a competitive advantage by allowing the company to leverage its existing strengths in one area and apply them to new areas.
- Improved Financial Performance: Diversification can lead to improved financial performance, such as increased revenue and profitability, and a stronger balance sheet.
Disadvantages of Diversification:
- Lack of Focus: Diversification can result in a lack of focus and resources, as the company spreads itself too thin across multiple products, markets, or industries.
- Integration Challenges: Diversification can be complex and time-consuming to integrate, especially if the new products or services are significantly different from the company’s existing offerings.
- Strategic Misalignment: Diversification can result in strategic misalignment between the new and existing products or services, which can lead to conflicting goals and ineffective decision-making.
- Increased Costs: Diversification can result in increased costs, such as research and development, marketing, and production expenses, as the company expands into new areas.
- Cannibalization: Diversification can lead to cannibalization, where the new products or services compete with the company’s existing offerings and reduce overall sales and revenue.
- Failure Rates: Diversification can have high failure rates, as the company may lack the expertise, resources, or market knowledge to succeed in new areas.
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