Horizontal diversification strategies correspond to the following business characteristics. The essence of a horizontal diversification strategy

The key issue of diversification is the definition of its optimal boundaries and the list of activities that can be included in the company's business. What will the company look like in a few years? How attractive is the field of activity now and in the future? What do I need to do?

Diversification allows:

• reduce economic risks, “stay afloat” in the event of a deterioration in economic indicators by type of activity, since possible failures in one area are compensated by success in others;
• to flexibly redistribute resources from areas with low prospects to where the latter are high. To do this, it is important to be able to liquidate the shares of companies that are at their peak in time and skillfully invest them in growing promising companies;
• it is profitable to invest free funds in other industries if the possibility of growth and profit has been exhausted;
• expand existing markets and acquire new ones, thereby achieving economies of scale;
• increase the efficiency of using the accumulated potential, ensure full utilization of production capacities, create new jobs;
• adapt to market conditions, more actively resist rivals (including by buying up their enterprises), reduce dependence on partners;
• expand through the acquisition of new resources and technologies the possibility of optimizing the range of products, financial flows, etc.

At the same time, diversification gives rise to the problem of internal coordination of departments, increases the uncertainty of the future, and leads to a decrease in the role of the former core production.

In general, diversification allows the company to solve the socio-economic tasks of three levels of priority:

1. Ensuring survival through obtaining a guaranteed level of profit.
2. Achievement of economic stability and financial stability.
3. Gaining a dominant position in the market and solving social problems.

Analysis

The management of a diversified firm always faces three fundamental questions:

• How attractive is the relevant field of activity now and in the future?
• What will our company look like in a few years?
• What do I need to do?

The answer to them is given by a strategic analysis of diversification, consisting of several successive stages.

1. First of all, the study and assessment of the current situation of the company and its actions of a strategic nature is carried out, in particular:
   • the achieved degree of diversification (the ratio of total sales and sales of this division);
   • diversification features (related, unrelated, combined);
   • the nature of business transactions (domestic, multinational, global);
   • the focus of active actions (to create and develop new key units or strengthen the positions of existing ones);
   • steps to expand the portfolio and capture new industries, on the one hand, and get rid of unpromising divisions, on the other;
   • using diversification to enhance competitive advantage;
   • the ratio of investments in different divisions.
2. Matrix analysis of a diversified portfolio is done on the basis of any pair of indicators, for example, industry growth rates, market share, competitiveness, long-term attractiveness, etc.
3. Assessing the attractiveness of an industry in itself and relative to other industries. Based on the assessment of the attractiveness of all areas, they are ranked, because the main activities of the company should develop in industries with good growth prospects.
4. Comparison of the strength of business units based on analysis and evaluation:
   • the relative market share owned by the corporation (the higher it is, the stronger the competitive position);
   • ability to compete on price and quality;
   • opportunities to develop new products;
   • the degree to which the experience and skills of the staff match the key success factors;
   • profitability compared to competitors;
   • knowledge of the needs of customers and the market as a whole;
   • production possibilities;
   • marketing activities;
   • reputation, brand awareness;
   • management level.

   Each division's assessments help make decisions about their fate.

5. Comparison of the prospects of business units based on indicators of growth in production and profits, share in the company's total income, return on investment, cash flow.
6. Strategic fit analysis (how well each division fits into the company's strategic perspective). It is about whether the unit is consistent with other activities in which the company diversifies (can be introduced), and whether its strategy is well woven into the overall strategy (complements it favorably).
   

   Units that do not comply with this requirement are subject to reduction or liquidation, especially when it comes to related diversification.

7. Ranking of units according to investment priority in order to determine where to direct financial resources. This facilitates the setting of basic strategic objectives for each of them (aggressive expansion, protection of existing positions and additional investment, revision and change of position, reduction, liquidation).
   

   When ranking divisions, it is necessary to consider whether and how the resources and experience of the corporation can be used to strengthen their positions, especially if they are unsatisfactory.

8. Development of a corporate diversification strategy, which is based on the analysis and evaluation of both the portfolio as a whole and individual types of activities.

In general, the analysis allows answering the following questions:

• how many divisions operate in attractive industries;
• how many of them are in the final stages of the life cycle (maturity and decline);
• Does the company have enough funding sources?
• whether its main activities provide guaranteed profitability and the necessary cash flow;
• whether the business portfolio is subject to seasonal risks and fluctuations and whether its structure allows the company to secure a strong position in the future;
• does the firm have activities that it does not need;
• what is its competitive position in general.

Strategy options

There are the following options for diversification strategies, both related and not related to the main activities of the company.

• First of all, this is a strategy for entering new industries, which can manifest itself in different forms:

1. Absorption of an existing company (the most popular way), i.e., acquiring it without its consent (this differs from a merger).
   It can be:
   • horizontal,
   • vertical,
   • conglomerate.
   Acquisition provides rapid penetration, helps to immediately get connections with the supplier, the necessary technical support, information base, a well-known trademark, stronger competitive positions, and reduce the cost of entering the industry.
   

   The result is the rapid achievement of the optimal volume of production, the elimination of competition, the increase in the influence of the company in the market.

2. Creation of a firm "from scratch" under the control of the parent company ("diversification from scratch").
   

   To do this, one has to make large investments, overcome entry barriers, look for suppliers, form distribution channels, etc.

   This path is expedient if it requires less costs than buying an existing company, there is time and experience for its implementation, so that it is possible to achieve a significant expansion of production and sales in a calm environment, and competitors, especially large ones, are indifferent to it.

3. Creation of joint ventures.
   This option makes it easier to penetrate foreign markets, combine the efforts of several entities, share the risk between them; get access to local resources, experience, contacts. All this ensures the achievement of more significant competitive advantages.

• Another direction in the implementation of the diversification strategy is penetration into related industries.

It allows:

1. maintain the achieved level of business activity,
2. transfer experience, patents, technologies from one company to another,
3. organize joint production and marketing in a single system, which reduces investment risks and costs (economy of scale is achieved, for example, by centralizing management, unifying sales, etc.).

The most common entry routes into related industries are:

1. buying strong, well-established firms;
2. sharing related technologies, distribution channels, opportunities and advertising;
3. transfer of experience, know-how, trade name;
4. Acquisition of firms in supporting industries to support core production.

• The third main direction in the implementation of the diversification strategy is penetration into unrelated industries (non-core, conglomerate diversification).

When implementing it, it is assumed that any company that can be acquired on favorable financial terms and has good prospects is an attractive investment object.

Typically, these companies include:

• companies whose value is undervalued (there is an opportunity to sell them later at a higher price);
• companies experiencing financial difficulties (may be turned into profitable after restructuring or sold more profitably);
• promising companies that do not currently have funds for investment.

Diversified and non-diversified firms

The following types of diversified firms can be distinguished:

1. A company with a dominant focus, whose resources are concentrated in the core industry, but there are a small number of enterprises in other areas of activity.
2. A narrowly diversified company with two to five interconnected areas of operation.
3. A broadly diversified company with a large number of related businesses.
4. A diversified company diversified into several unrelated lines of related businesses.

The main functions of the governing bodies of such a company are:

• corporate portfolio management, mergers, acquisitions, resource allocation;
• formation of strategies at the level of business units and their coordination with the corporate strategy;
• ensuring coordination between different types of business in order to achieve a synergistic effect;
• exercising control over the activities of business units.

Strategies for the behavior of a non-diversified firm in various situations can be implemented as follows:

1. With a weak competitive position and a high market growth rate, it is advisable:
   • partial abandonment of the concentration strategy;
   • buying other firms in the same industry;
   • related diversification;
   • liquidation of a business (“diversification in reverse”) through a merger or sale of assets to a larger firm.
2. With a strong competitive position and a high market growth rate, the following are preferable:
   • continued concentration in the area;
   • associated diversification.
3. With a low growth rate of the industry and a weak competitive position, the firm needs to:
   • revision of the concentration strategy in one industry;
   • merger with a competing company;
   • diversification;
   • "cream skimming" and liquidation ("diversification in reverse").
4. With a strong position and a low growth rate, the main directions of the company's strategy are:
   • international diversification (expansion);
   • diversification into related industries through the creation of joint ventures;
   • vertical integration;
   • continued concentration.

It is believed that the strategy of horizontal diversification is the most difficult way to develop an enterprise. This scheme provides for the introduction of previously unused technology into production, which makes it possible to create completely new products. At the same time, the sale of goods will be carried out through an already formed distribution network, so the company does not need to search for suppliers and consumers. To establish the production of a product, the company must attract investment and ensure maximum profit after the sale of the product.

There are two main strategies for horizontal diversification: introducing new products into an old market or entering a new market. The first strategy is conditionally called innovative, and the second - proper diversification. When a company's product debuts in an old market, a horizontal diversification strategy is appropriate in three cases: the company intends to introduce a genuine innovation, wants to demonstrate, or wants to launch a product already manufactured by competitors. Pseudo-innovation is old goods that have been updated. Making products manufactured by competitors is a sub-strategy of the "me too" principle, when the company seeks to equalize its chances with other players and balance the market.

Associated horizontal diversification, or horizontal integration, is the association of businesses operating and competing in the same area of ​​activity.

The main goal of horizontal integration is to strengthen the firm's position in the industry by absorbing certain competitors or establishing control over them.

Horizontal bundling allows you to achieve economies of scale, expand the range of products and services and thus gain an additional competitive advantage. Often the main reason for horizontal diversification is the geographical expansion of markets. In this case, companies that produce the same type of products, but act in different regional markets, are united.

In Russia, horizontal mergers are typical of the banking sector. Here they are aimed at expanding the range of banking services and the geographical expansion of activities.

Unrelated diversification. This type of diversification covers such areas of activity that do not have a direct direct connection with the main activity of the enterprise.

Diversification is justified if the opportunities for growth of the enterprise within the production chain are limited, the position of competitors is very strong, and the market for basic products is in decline. With unrelated diversification, there may be no common markets, resources, technologies, and the effect is achieved through the exchange or division of assets of areas of activity.

As mentioned above, a horizontal diversification strategy will require good and proven distribution channels. The logistics system of the company must be established and work continuously. Otherwise, the search for new customers and consumers may divert all the initial income from product sales.

Unlike the technique of quickly increasing income, horizontal diversification takes time to get the first profit. Companies often sign contracts with major partners before mastering new technologies. For example, a chemical plant can sign a contract with foreign plants that want to buy quality tires for cars. So the plant will have to master the technique of rubber production, but it will not be necessary to look for channels for the sale of these products. Thus, a new niche will be occupied both in the domestic and foreign markets.

The main risk of any business strategy is the investment. With horizontal diversification, the company risks losing most of the available income or credit funds received for the development, implementation of technology and the sale of goods. It is important to remember that only the interest of consumers in new products will determine the maximum profit and pay back all invested funds.

If a company realizes the importance and necessity of implementing a horizontal diversification strategy and is sure that its new product will be of interest to partners and consumers, it is worth mastering new technologies. Ultimately, they will allow not only to receive additional income and gain a foothold in a new business area, but also become a kind of impetus for the further growth of the company - the opening of new branches, structural divisions and offices.

Diversification is a phenomenon that characterizes the degree of diversity of products, types of activities, etc. at the enterprise. The wider the product line or the more unrelated industries, the greater the degree of diversification of the company.

Diversification - what is it

Diversification (lat. diversus - different and facere - to do) is the process of allocating resources (material, monetary, etc.) in order to expand the range of products, increase market share (sales market). The purpose of this phenomenon is to maximize profits and increase the stability of the enterprise.

Diversification associated with a change in the activities of the company is called production diversification. The main difference between diversification and differentiation is the possibility of developing several independent directions at once.

Types of diversification

As part of the diversification of production, allocate unbound and bound type, which, in turn, is divided into vertical and horizontal diversification.

Unrelated type of diversification also called lateral- it involves the creation of a new sphere, which is not directly related to the existing specifics of activity. For example, renting out one of the warehouses while using the rest of the premises in the main activity.

A related type of diversification involves the creation of a new area of ​​activity that depends on already functioning areas. For example, the creation of a network of gas stations by an enterprise that refines oil.

vertical diversification occurs when a company decides to expand production by "stepping" forward or backward along the production chain. For example, an enterprise that produces bolts and washers begins to produce assembly units.

Horizontal Diversification occurs when a company decides to expand its product range based on a typical production cycle. For example, face cream manufacturers are starting to produce eye cream. More often, a new product comes out under the same brand name.

The benefits of diversification include:

• expansion of sales markets;
• profitable redistribution of free resources;
• reducing the risk of bankruptcy;
• increase flexibility and adaptability;
• fully load the existing capacities of the enterprise.

Diversification Strategies

The need to develop a diversification strategy appears for an enterprise in the presence of strong competitors, a drop in demand for current products and a decrease in profits. Such a strategy gives the company the necessary flexibility and ability to adapt to constantly changing market conditions.

The diversification strategy is based on the idea of ​​changing the four components of the enterprise's activities:

• products,
• sales channels,
• areas of operation
• company's position in the industry.

Before developing a strategy, a potential innovation is analyzed according to three criteria:

• costs associated with the implementation of a new project;
• existing barriers/limits to implementation;
• potential demand.

It is also possible to take into account additional effects that will arise only when implementing a diversification strategy. If there are multiple options, a strategy with the following criteria is selected:

• relatively low costs for the implementation of the strategy;
• medium or short payback period of investments;
• steadily growing demand for new products for the enterprise.

The strategy also largely depends on the type of diversification - unrelated diversification is more costly and difficult to implement, the related type is simpler and associated with fewer risks.

Business and company diversification

Diversification of the whole company is possible through mergers and acquisitions, which is a global trend.

Mergers and acquisitions have a number of advantages over the development of production diversification:

• purchase of finished production
• developed market,
• established a network of suppliers and intermediaries,
• there is interaction with other market participants.

The mergers and acquisitions process helps to reduce the costs associated with organizing a new production or adapting the current one to the needs of new products, advertising costs and the conclusion of new supply contracts. Moreover, together with the finished production, the enterprise receives a skilled workforce.

The main risk of the company's diversification is the underestimation of its own production and the overestimation of the purchased one.

Mergers and Acquisitions help to increase the market share of an enterprise, increase production capacity and diversify more efficiently at a lower cost.

Examples of company diversification

The most striking example of hyper-successful unrelated company diversification in today's market is the British VirginGroup. It is difficult to calculate the exact number of directions in which the company is developing.

The company gained its fame by mastering the field of sound recording and creating a store selling music records, cassettes and discs. Currently, the most famous areas of activity are:

• Virgin Atlantic Airlines air travel;
• film production Virgin Vision;
• Virgin Money banking services.

An effective example of related vertical diversification is the Czech company Studentagency. Starting with bus transportation in the cities of the Czech Republic, they gradually entered the market of Austria, Slovakia and Germany with a focus on tourists and travelers. Now the company is also engaged in providing services for booking hotels and organizing excursions.

A well-known example of related horizontal diversification is BIC, which became large and successful through the production of pens. The technology used by the enterprises made it possible to mass-produce low-cost pens. Subsequently, the features of the production cycle were used in the production of disposable razors and lighters, which also began to generate a stable income.

Most companies start out as a solo business. For such companies, maximizing long-term profits means that the company competes well within its market, using price leadership, differentiation, and focus strategies (Chapter 7). However, these strategies can also include vertical integration forward or backward (to gain strategic sales or supply advantages). Another way is to diversify the company's activities.

The growth and development of a company usually includes three main stages:

— concentration on a single business in one national market;

— vertical integration and/or global expansion to a strong position in a key business;

- diversification by investing free resources in other types of business.

All this leads to the growth of the company, but one should keep in mind the "law" of decreasing returns with increasing "degree of diversification".

Beyond a certain point, extensive diversification, vertical integration, and internationalization of the business result in a drop in returns per unit of capital invested, as the company exploits the most profitable opportunities first, and then the least profitable opportunities remain, which limits the firm's growth opportunities.

Vertical integration is a method by which a company creates (integrates) its own input stages of the technological chain (back integration) or its output stages (front integration).

Integration can be full or narrow. Full combines all inputs or outputs. An example of a bottleneck is when a company buys only a portion of its inputs and manufactures the rest in-house.

A company that uses vertical integration is usually motivated by the desire to strengthen the competitive position of its key source business. This should be supported by:
- cost savings;
- departure from market value in integrated industries;
— improving quality control;
— protection of own technology.

However, vertical integration also has its downsides. The most important of them are:
- excessive costs;
— losses due to rapid change of technologies;
- losses due to unpredictability of demand.

Vertical integration can increase costs if the company uses its own input production in the presence of external low-cost sources of supply. This may also be due to the lack of competition within the company, which does not encourage its subsidiaries (suppliers) to reduce production costs.

With a sudden change in technology, there is a risk of a company being tied to an outdated technology. With constant demand, a higher degree of integration allows for better protection and coordination of production. When demand is unstable and unpredictable, such coordination in vertical integration is difficult. This can lead to an increase in the cost of management. Under these conditions, narrow integration may be less risky than full integration.

It should be noted that narrow integration can reduce costs compared to full integration. This, under certain conditions, allows the company to expand vertical integration.

In general, however, while tight integration may reduce management costs, it cannot eliminate them entirely, and this represents a real constraint on expanding the limits of vertical integration based on a company's profitability.

As an opposite strategy, a company may use long-term contracts with suppliers and/or customers. Such ties are especially effective when using credit obligations or collateral investments for the development of production. This allows you to achieve the effect of vertical integration without increasing management costs.

There are two main types of diversification - related and unrelated. Related diversification is a new area of ​​activity for a company that is related to existing areas of business (such as manufacturing, marketing, procurement, or technology).

Unrelated diversification is a new area of ​​activity that has no obvious links to existing business areas.

Most companies turn to diversification when they generate more financial resources than are needed to maintain a competitive edge in their original business areas. Diversification can be done in the following ways:
- through the internal capital market;
— restructuring;
— transfer of specific arts between SZH;
— separation of functions or resources.

Diversification through the internal capital market performs the same functions as the stock market. In the domestic capital market, the main office plays the following main roles:
— performance of strategic planning functions, which consist in determining the corporation's SZH portfolio;
– setting financial goals and monitoring the activities of SZH;
— placement of corporate capital among competing SBAs.

Under these conditions, SBAs are autonomous profit centers that are only under the financial control of the main office.

The restructuring strategy is one of the types of strategies for the internal capital market. The difference lies in the degree of intervention of the main office in the activities of the SBA. Companies that undergo remodeling have usually been poorly managed in the process of creation and development. The goal is to help them revitalize their activities, change the way they operate, develop new strategies at the SBA level, and inject new financial and technological resources into the company.

Where an arts or business transfer strategy is used, the new business is considered to be related to existing SBAs (eg, manufacturing, marketing, procurement, R&D). Typically used are transfers of such arts that reduce costs in a diversified company.

Diversification through resource allocation is possible when there is a significant similarity between one or more important functions of existing and new SBAs. The purpose of resource allocation is to realize synergy in the company's activities using common production, distribution channels, promotional tools, R&D, etc. Thus, each SZH requires less investment compared to a stand-alone solution to this issue.

When deciding on the diversification of a company's activities, the cost of managing such a company should be taken into account. These costs are determined by the number of SBAs and the need for coordination between them. Thus, management costs are higher in a company of 12 SBAs that have a certain synergy than in a company of 10 SBAs that do not have this quality.

Unrelated diversification does not require coordination between SBAs. Consequently, management costs rise with the number of SBAs in a company's portfolio. In contrast, companies with linked diversification incur costs that increase both with the number of SBAs and with the degree of coordination required between them. These increased costs can wipe out higher profits from related diversification.

Thus, the choice between connected and unrelated diversification depends on comparing the profitability of diversification and the additional unit costs of management.

The firm should focus on related diversification where the company's key skills can be used in a wide range of industry and commercial situations, and management costs do not exceed those needed to allocate resources or transfer the skills. By the same logic, companies should focus on unrelated diversification if the arts of basic SBA are highly specialized and not externally applied, and management costs do not exceed the values ​​​​needed to implement the strategy of the internal market.

An opposite strategy to diversification might be to create a strategic alliance between two or more companies in the cost, risk and rewards associated with exploiting new business opportunities (eg R&D). However, there is a risk of partner access to key technology.

lectsia.com

Diversification(from Latin diversificatio - change, diversity) - this is the expansion of economic activity into new areas (expansion of the range of manufactured products, types of services provided, geographical scope of activity, etc.). In the narrow sense of the word, diversification is commonly understood as the penetration of enterprises into industries that do not have a direct industrial connection or functional dependence on their main activity. As a result of diversification, enterprises turn into complex diversified complexes or conglomerates.

An example of diversification is the activities of the Japanese airline JAL after its release from state control. She defined her mission as ʼʼgaining a leading position in the integrated sphere of consumer and cultural servicesʼʼ. Flights over short distances, incl. helicopter; recreational services, including hotel industry, resort and tourist services; commodity circulation, finance, informatics, education.

Separate connected and unrelated (conglomerate) diversification, which is sometimes called lateral (Latin lateralis-side) diversification. In turn, related diversification must be vertical or horizontal. The main criterion for determining the type of diversification is the principle of merger. In a functional merger, enterprises that are related in the production process are combined. With an investment merger, the merger occurs without a production community of enterprises.

vertical integration, or associated vertical diversification, is the process of acquiring or incorporating new industries into the enterprise, which are included in the technological chain of releasing an old product at stages before or after the production process. Vertical integration is essentially the fact that enterprises prefer to create the goods and services necessary for the production process on their own, within the enterprise, instead of buying them on the market from other enterprises. An integration strategy is justified when an enterprise can increase its profitability by controlling various strategically important links in the production and marketing chain. As a result of vertical integration, there is an association of firms located at different stages of the production process.

Most often, such integration is implemented in two basic forms that characterize the direction of integration and the position of the enterprise in the production chain:

‣‣‣ ʼʼbackwardʼʼ integration, or the so-called reverse integration;

‣‣‣ ʼʼforwardʼʼ integration, or direct integration.

With reverse integration, the enterprise adds functions that were previously performed by suppliers, i.e., acquires or establishes control over the sources of raw materials, the production of components, semi-finished products. The purpose of such integration should be to protect a strategically important source of raw materials or access to new technology that is important for the underlying activity.

With direct integration, the enterprise joins the functions previously performed by distributors, i.e., it acquires transport, service services, distribution channels and other functional services related to the main activity of the company. The motivation in this case is to ensure control over the sale of products, sometimes the desire to know their customers better. Vertical integration can be carried out by mobilizing both internal and external factors.

At the Ford plant, the manufacturing process was integrated to the point where iron ore was the input and the finished car was the output. Major chemical company Du Pont has opted for a reverse vertical integration strategy, acquiring an upstream company to meet its oil demand. Some of the benefits of this approach are cost reduction and improved coordination and control.

horizontal integration, or related horizontal diversification, is the association of enterprises operating and competing in the same field of activity.

A classic example of horizontal diversification is the entry of US brewers into the soft drink industry. In this case, there was an expansion of the range of products that are offered to a similar circle of consumers. At the same time, a synergistic effect was achieved due to better loading of the vehicle fleet, sharing distribution channels, etc.

Unrelated diversification or simply diversification i - this is the coverage of such areas of activity that do not have a direct direct connection with the main activity of the enterprise. It is believed that diversification is justified if there are limited or no opportunities for integration, or the position of competitors is very strong, or because the market for the underlying product is in decline.

An example of diversification would be a business selling gasoline, ĸᴏᴛᴏᴩᴏᴇ acquiring a furniture factory. A striking example of diversification is the activity of the West Siberian Iron and Steel Works. The plant produces metallurgical products, along with this, it organized the production of furniture, sanitary products, has a powerful subsidiary farm, on the basis of which the production of sausages, bread and other food products is organized.

EXAMINATION TICKET №4

studopedia.ru

Diversification is one of the most effective ways for a company to overcome crisis and problem life cycle stages. There are horizontal and vertical diversification - in our article we will focus on the first.

Horizontal diversification- a strategy aimed at expanding the range of products. The company increases the number of industries in which it is present, thus minimizing industry risk (that is, the risk of falling into the abyss after the industry itself). Two companies are relevant as examples of the successful application of horizontal diversification:

• Sony. The Japanese giant under Akio Morita began by selling radios. Now Sony devices can be found in any industry related to electronics (up to virtual reality glasses).

• Yamaha. If the previous company adhered to diversifying one market (electronic products), then this company produces completely heterogeneous goods. By the way, the famous motorcycles and drum kits for drummers are all products of the same company.

Another famous proponent of horizontal diversification is Richard Branson. His Virgin Group corporation includes more than 400 companies of completely different profiles (for example, an airline and a recording studio).

Pros and cons of horizontal diversification

All the advantages and disadvantages can fit in one scheme:

The advantages are:

1. Survival Guarantees It may sound rather pompous, but it is Truth. There is practically no chance that all the industries in which the company operates will collapse (this should be very “lucky”). However, there is advice for entrepreneurs: the more diverse the diversification, the better.

1. Possibility of borrowing between companies. There is no need to apply for additional funds to investors and banks - in case of problems, one organization can simply borrow them from another, more successful in terms of profit.

There are also disadvantages:

1. The complexity of managing an organization. A diversified business cannot be managed linearly - it will be necessary to “branch” the management structure, look for new smart leaders (because one manager cannot be an absolute dock in all industries).

1. The need for accurate calculation. In order not to make a mistake in choosing an industry, an entrepreneur will have to spend more than one hour for numerous analyzes. Moreover, it is necessary to use not only qualitative methods of analysis, but also quantitative ones (which causes difficulty for many managers) - only in this way is objectivity of the assessment achieved. One of the most popular quantitative methods that is recommended to all managers is the BCG matrix (Boston Consulting Group).

1. Difficulty attracting investors. As a rule, investors are not eager to invest in different divisions of one company, but tend to divide them among several firms.

utmagazine.ru

What is diversification?

This is a strategic approach to the reconstruction of production facilities, reorientation of production to develop new opportunities, expand sales markets and increase profitability.

Diversification means:

• Synchronous organization of other activities: release of new products, their implementation in new markets.
• Expansion of production capacities aimed at producing a larger range of products.
• Development of new sales markets, the ultimate goal of which is to obtain additional profitability of production capacities.

The purpose of diversification is:

• Ensuring greater profitability of the company by entering other markets.
• Decreased subordination to one sales market, product group.
• Balancing possible fluctuations in product sales

Types of production diversification:

An effective market lever is the diversification of production, aimed at reducing possible risks, the growth of manufactured products is achieved, the sales market, the company's assets are increasing. The consequence of the transformation is the transformation of the company into a complex industrial complex.

Related production diversification

This type involves the opening of a new production related to the old business: marketing strategies, one supplier or technological process.

Related diversification, in turn, is divided into two types:

1. Vertical type involves the promotion of a product group in the direction of the vertical: down or up the production line. Very often, a manufacturer has the opportunity to open a new niche for the implementation of his product group more successfully, for example, organizing the delivery of goods to a client, or opening his own outlet. Or vice versa, buy a business from a supplier of materials.
   Such a strategic approach ensures the security of doing business, reduces dependence, for example, on a supplier's price increase or a store's rent rate.
   Vertical Diversification Is Ascending or Descending at the production stage, for example, the company began to produce additional spare parts for its products, or begins to dispose of obsolete models.
   Or another vertical diversification strategy situation: the manufacturer of one group of goods begins to sell them himself, or additionally began to produce goods related to this product group: hard drives or monitors are produced for computers. The new product group has the same brand name, trademark.
2. Horizontal production diversification. It often happens that the release of the same product already has an expected return. The value of the company's shares is declining, there is no way to pay interest rates on loans taken, former investors stop working with the company, and new ones do not appear - there is no desire to work with a loss-making company.
   This difficult economic situation is forcing companies to develop new production strategies. One such strategy is horizontal diversification, which will radically change production activities and significantly expand the range of products.

This type involves revising the range of products produced, using new technological solutions.

The company continues to work with former clients: suppliers of raw materials and distributors of products, but the products themselves are undergoing a significant transformation: new lines of the assortment are being added. For example, a dairy company has developed a new technology for the production of cheese products, a new variety has appeared.

What is the difference between horizontal diversification?

Here you can work in two directions: either develop a new production technology at the same production facilities, or master a new market.

The first direction can be attributed to the innovation strategy, and the second - to the diversification one.

The greatest effect from the introduction of the strategy can be achieved if:

• The manufacturer produces products using innovative technologies that are of interest to the buyer.
• Production of a product already on the market that has already gained popularity with the buyer, the so-called "pseudo-innovative" . That is, already familiar goods are produced, but slightly modified, having their own presentation. Such production is typical for those companies that do not have the technical ability to produce completely new products.

A horizontal diversification strategy is characterized by investing additional funds to launch a new production line to make completely new or improved products.

This type of sabotage horizontal strategy can be attributed, for example, to the production of bricks, with the development of a new type of production - paving slabs.

Unrelated production diversification

It is based on the production of products that are not related to the main production activity either in production technologies or on the commercial side.

This type of development of the company has a favorable effect under the following conditions:

• The company's assets do not have a high value.
• For financially disadvantaged companies.
• For developing companies that do not have sufficient investments.

Such a development strategy is more complex and risky, since in this case new production technologies and sales markets are mastered.

In this case, the company is looking for new production opportunities that will match its image. The former production continues its activity, and new opportunities are based on the production capacity.

Diversification Strategies

If the company has decided to diversify production, then it is necessary to develop an appropriate strategy for further development.

It is necessary to develop and decide on its implementation: will it work with a familiar type of activity, with a new type, or will they find a combination of both types of business.

After the introduction of diversification of production, it is necessary to determine the mode of management of all invested funds of the company.

There are six main types of strategies:

• Introduction to a completely new type of industry: the purchase or organization of a new business, or joint production.
• related diversification.
• Unrelated.
• liquidation strategy.
• Reconstructive strategy: with the use of production reduction and renewal of its activities.
• Multinational type of strategy.

Analysis of potential innovation

There are several criteria for the analysis of innovations:

• Identify the risk of capital outflow from market saturation and pricing policy.
• The need for marketing for innovation, it is necessary to identify the potential of the project and its payback.
• Identification of the buyer's demand for new products, establishing the reasons for the lack of demand for a new project.

There are other methods of analysis that are specific to a particular company, and the company itself must identify all the positive and negative aspects of the project.

Accounting for additional effects

To take into account the effect of additional innovations, value added tax should be taken into account, while production costs and sales volume should be calculated, and a general table of expenses and receipts from the new project should be compiled.

VAT is set at 15%, to determine it, the diversification costs incurred (acquisition of a raw material base, raw materials, equipment), funds received from the project implementation are taken into account, the amounts are deducted and the result is taxed at 15 percent.

All remaining funds are net income from diversification of production.

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Diversification - what is it

Diversification (lat. diversus - different and facere - to do) is the process of allocating resources (material, monetary, etc.) in order to expand the range of products, increase market share (sales market). The purpose of this phenomenon is to maximize profits and increase the stability of the enterprise.

Diversification associated with a change in the activities of the company is called production diversification. The main difference between diversification and differentiation is the possibility of developing several independent directions at once.

Types of diversification

As part of the diversification of production, allocate unbound and bound type, which, in turn, is divided into vertical and horizontal diversification.

Unrelated type of diversification also called lateral- it involves the creation of a new sphere, which is not directly related to the existing specifics of activity. For example, renting out one of the warehouses while using the rest of the premises in the main activity.

A related type of diversification involves the creation of a new area of ​​activity that depends on already functioning areas. For example, the creation of a network of gas stations by an enterprise that refines oil.

vertical diversification occurs when a company decides to expand production by "stepping" forward or backward along the production chain. For example, an enterprise that produces bolts and washers begins to produce assembly units.

Horizontal Diversification occurs when a company decides to expand its product range based on a typical production cycle. For example, face cream manufacturers are starting to produce eye cream. More often, a new product comes out under the same brand name.

The benefits of diversification include:

• expansion of sales markets;
• profitable redistribution of free resources;
• reducing the risk of bankruptcy;
• increase flexibility and adaptability;
• fully load the existing capacities of the enterprise.

Diversification Strategies

The need to develop a diversification strategy appears for an enterprise in the presence of strong competitors, a drop in demand for current products and a decrease in profits. Such a strategy gives the company the necessary flexibility and ability to adapt to constantly changing market conditions.

The diversification strategy is based on the idea of ​​changing the four components of the enterprise's activities:

• products,
• sales channels,
• areas of operation
• company's position in the industry.

Before developing a strategy, a potential innovation is analyzed according to three criteria:

• costs associated with the implementation of a new project;
• existing barriers/limits to implementation;
• potential demand.

It is also possible to take into account additional effects that will arise only when implementing a diversification strategy. If there are multiple options, a strategy with the following criteria is selected:

• relatively low costs for the implementation of the strategy;
• medium or short payback period of investments;
• steadily growing demand for new products for the enterprise.

The strategy also largely depends on the type of diversification - unrelated diversification is more costly and difficult to implement, the related type is simpler and associated with fewer risks.

Business and company diversification

Diversification of the whole company is possible through mergers and acquisitions, which is a global trend.

Mergers and acquisitions have a number of advantages over the development of production diversification:

• purchase of finished production
• developed market,
• established a network of suppliers and intermediaries,
• there is interaction with other market participants.

The mergers and acquisitions process helps to reduce the costs associated with organizing a new production or adapting the current one to the needs of new products, advertising costs and the conclusion of new supply contracts. Moreover, together with the finished production, the enterprise receives a skilled workforce.

Mergers and Acquisitions help to increase the market share of an enterprise, increase production capacity and diversify more efficiently at a lower cost.

Examples of company diversification

The most striking example of hyper-successful unrelated company diversification in today's market is the British VirginGroup. It is difficult to calculate the exact number of directions in which the company is developing.

The company gained its fame by mastering the field of sound recording and creating a store selling music records, cassettes and discs. Currently, the most famous areas of activity are:

• Virgin Atlantic Airlines air travel;
• film production Virgin Vision;
• Virgin Money banking services.

An effective example of related vertical diversification is the Czech company Studentagency. Starting with bus transportation in the cities of the Czech Republic, they gradually entered the market of Austria, Slovakia and Germany with a focus on tourists and travelers. Now the company is also engaged in providing services for booking hotels and organizing excursions.

A well-known example of related horizontal diversification is BIC, which became large and successful through the production of pens. The technology used by the enterprises made it possible to mass-produce low-cost pens. Subsequently, the features of the production cycle were used in the production of disposable razors and lighters, which also began to generate a stable income.

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A diversification strategy is a marketing strategy that allows a company to identify and develop additional lines of business that differ from its current products and services. In an increasingly competitive environment, a production diversification strategy is becoming an excellent tool for risk management; avoids excessive focusing of efforts on one direction of the company's work.

When implemented correctly, a diversification strategy helps keep a company operating and profitable during a period of economic recession, stagnation, or a sharp change in the way an industry operates. The strategy can bring clear benefits to the firm and improve business stability, but requires a detailed assessment of the company's internal resources, environmental factors, and a deep knowledge of market trends. In the article, we will talk about the possible types and classification of corporate diversification strategies, give examples of successful strategies and consider the correct process for developing a business diversification strategy.

Classification of diversification strategies

The main essence of the diversification strategy is the division of assets and capital of one company between different lines of activity to reduce the risk of losing future income. Diversification can take various forms: in modern practice, there are 4 main types of product diversification strategies: horizontal, vertical, concentric and conglomerative. Let's look at each type of strategy in more detail.

Horizontal diversification

A horizontal diversification strategy involves the acquisition or development of new products that can be sold to current customers or customers of the company. In such a strategy, the company relies on the existing level of sales and production technology. An example of horizontal diversification is the addition of a new type of cheese to a dairy company's sales mix. Risks in a horizontal diversification strategy are reduced by increasing product diversity. In the event that one type of product loses its relevance, the company will still have a range that allows you to receive a stable income.

Vertical integration

The vertical diversification strategy involves the movement of the company "up or down" along the production chain. In other words, the company enters the stages preceding its production cycle or moves forward to the stages following its production cycle. The vertical diversification strategy reduces the company's dependence on third party solutions, prevents third parties from making excess profits, and closes all important processes within one firm.

An example of vertical integration is when a company stops selling its products through individual retailers and opens its own retail and wholesale store. Or a company acquires a supplier of resources and raw materials for the production of its goods. Or a company opens a subsidiary business of selling paints and building materials to its main home remodeling business, ensuring the best prices and supply process.

Concentric diversification

The concentric diversification strategy is also called the related diversification strategy. Such a strategy means expanding the production portfolio with products (or lines of business) that allow more efficient or full use of existing technologies and company resources. In other words, following a strategy of concentric diversification, the company creates complementary products or introduces complementary services that help facilitate and improve the consumption of the main product. This type of diversification is often used by small companies, and new products created are usually closely related to the company's core business.

For example, a manufacturer of children's products may acquire other small toy manufacturers around the country to increase distribution of its products and gain access to new markets. Another example would be the introduction of a small bakery in addition to ready-made pastries, semi-finished products and homemade dough. The advantages of a linked diversification strategy are gaining access to ready-made solutions and experience, reducing competition in the segment (when buying competing products), and increasing the efficiency of using available resources.

conglomerate diversification

The conglomerate diversification strategy is also called the unrelated diversification strategy and involves running two completely independent lines of business that do not improve each other's performance. Following the strategy of conglomerate diversification, the company develops completely new lines of business and gains access to completely new consumers. In fact, this is an investment of the company's current profit in new growing and highly profitable industries. Sometimes this kind of diversification in the future allows the company to access new technologies that can improve the current product.

A company resorts to a conglomerate diversification strategy when it can effectively apply its knowledge and experience in new markets; when it has technologies that allow it to gain competitive advantages in new markets; when new markets and industries have significantly high potential. An example of such a strategy is a situation when a shoe manufacturer enters a new (for itself) clothing market (using its knowledge and experience in consumer preferences and behavior).

The main benefits of a decoupled diversification strategy are that a company can find and develop a more profitable business in the future, as well as reduce the impact of seasonal downturns in core business sales. The disadvantages (or risks) of such a diversification strategy are the need to allocate significant resources to the development of a new line of business and investments that may not pay off with poor management work.

International diversification

An international diversification strategy can take one of the two forms described above: linked or unlinked. But we talk about it separately because of its high importance for the company. International diversification is one of the main strategic ways to diversify the company's activities. They pass to it when the diversification at the national level is fully completed. This process requires high managerial competencies and a properly built management structure.

The company must develop a marketing strategy not only for each business, but also for each country, taking into account the national and regional characteristics of the market and the model of consumption of the product. By using the right international diversification strategy, a company can achieve significant economies of scale, access to rare and valuable resources, maximize the use of its resources, and reduce the risk of sales stagnation and decline.

Development of a diversification strategy

A business diversification strategy can be a tool that will significantly increase a company's revenue and competitiveness, or it can lead to failure. How to properly diversify your business? Which diversification strategy to choose? Our little checklist will help answer these questions. Follow this plan to help you develop a diversification strategy as well as choose the right direction to diversify your business.

Step one: analysis of the strengths and stability of the business

Before proceeding to the choice of a diversification strategy, pay attention to a detailed analysis of the current activities of the company. Three key things you need to understand:

• What are the strengths of your current business?
• How stable and problem-free is your current business?
• Are there free resources and are they sufficient?

A successful production diversification strategy can only be built on current business. Therefore, do not focus on successful examples of competitors, you are not fully informed about their capabilities and resources, and you may make an erroneous decision when choosing a form of diversification. Analyze all the internal resources of the company and make a complete list of strengths.

The second important point that we mentioned above is the stability of the current business. Any initiative, any new idea requires resources and investments that you use in your current business. Therefore, before developing new directions, make sure the stability, profitability and productivity of current activities. And if you already see flaws, then invest the available resources in eliminating them and only then consider options for diversification.

And the last point that you should consider in the first stage is the sufficiency of resources. Any new project requires financial and human resources for its implementation. Make sure your company has the minimum resources to consider and evaluate possible areas for business diversification. Otherwise, either postpone this project or find alternative ways to increase market share (search for subcontractors, joint ventures, affiliate programs, etc.)

Step 2: Finding Direction to Diversify

Ideally, the choice of a market (or market segment) for business diversification should be based on sound macroeconomic and sectoral analysis, as a result of which it is possible to identify areas with high growth rates and a favorable investment climate. But more often it happens that the directions for diversification are determined based on the knowledge and experience of the business owner, as well as taking into account personal contacts and connections.

If you are not yet sure in which direction to expand your business, you need to find ideas whose potential and viability you can evaluate. The easiest way to gather ideas is to brainstorm. Gather a small group of people who understand your business, are specialists in narrow areas, or have a strategic mind. These people include department heads, market experts, young ambitious professionals. Often, interesting ideas come from third-party experts who have a “non-soapy” view of the market and can look at the business differently.

Step 3: Assess areas for diversification

Planning to diversify a company is no different than planning to start a new business. At the stage of evaluating alternative options for sales growth, it is important to study the market in detail, the intensity of competition and about, to determine consumer preferences, general trends and market dynamics. As a result, you will get a list of parameters by which you can evaluate the overall and choose the most suitable option for your business. At the end, for each possible direction of diversification, draw the following conclusions:

• Do you really know the long-term prospects and potential of the market, as well as understand the business model of the key players?
• Do you really know how to sell effectively in a new market and understand the key sales drivers?
• Do you really have enough resources to enter the market and capture the target market share?
• Do you have a clear diversification funding plan that includes investment in technology, equipment, promotion, and customer experience?
• Do you have criteria for evaluating the effectiveness of the chosen diversification strategy and a clear work plan for 3-5 years ahead?
• Is diversification really the best strategy for entering a new market and there are no more effective solutions (partnership, cooperation with companies, etc.)

Step 4: Analysis of the company's total portfolio

After you have assessed all possible areas for diversification, take a test action and evaluate each area within the overall product portfolio of the company. A company's portfolio is a combination of all the products and services that a company offers to its customers. The position and role of each product, product line, line of business must be clearly recorded. Perhaps the most successful diversification strategy will not fit into your portfolio. Various portfolio analysis techniques will help you in the assessment:, etc.