Growth and expansion are factors that most companies consider crucial for progress. Companies can achieve these through several strategies. However, they must establish what their goals and objectives are first. It provides a base for the strategy used to achieve growth. Some companies try to expand into their active areas, while others go beyond those.
For achieving growth, companies must have the resources to expand operations. Before that, however, those companies must exploit the preexisting opportunities in their current markets. Once they do so, they can identify potential growth strategies. Usually, companies must choose between expansion through existing products and markets or new ones. These choices will prompt them to select a different market expansion strategy.
While expanding existing products and markets can be more stable, it provides limited opportunities. Thus, most companies prefer to go beyond their current operations. By doing so, they can choose between new products, new markets or both. If they decide to expand into new products while also exploring a new market, they must use diversification. This strategy is crucial for achieving success in those conditions.
What is Diversification?
Diversification is a growth strategy that allows companies to expand into new products and markets. With this strategy, companies take on two expansion strategies simultaneously. The first involves creating or marketing new products. In contrast, the second includes entering a new market. Since it requires expanding into new areas, it can be significantly risky.
Diversification differs from the other expansion strategies. Companies usually prefer to grow into their existing products or markets. However, those areas may have limited growth opportunities. Therefore, companies will try to explore other areas. In those cases, companies select a new product or a new market. For that strategy, one aspect remains the same while the other changes.
However, diversification involves implementing both strategies at the same time. It allows companies to benefit from the new products and new markets. This way, they receive access to a significantly different customer base. By doing so, they can also grow their revenues and profits substantially. However, they also take on more risks which can be more challenging. Nonetheless, it can also introduce more profit opportunities.
Diversification involves deploying resources into new products and markets. By doing so, companies get involved in activities that differ from their current operations. This strategy implies that companies change their product lines selectively. On top of that, it also includes altering the customer targets. In some cases, diversification also requires new production and distribution arrangements.
Overall, diversification allows companies to expand beyond their current operational areas. This strategy involves using resources to access new markets through new products. Diversification can provide significant growth opportunities for most companies. However, they may also introduce them to higher risks. This process also involves undertaking crucial changes. Within this strategy, companies may choose related diversification or unrelated diversification.
What is Related Diversification?
Related diversification is when companies move into a new industry with crucial similarities. With this diversification strategy, companies identify other companies that have similar operations. By doing so, they look for communities with those companies. Therefore, related diversification usually involves the same industry or industries in which a company operates. This strategy can have several advantages and disadvantages.
Related diversification involves developing and exploiting core competencies. A core competency is a process or skillset that provides companies with a competitive advantage. Usually, companies can use these competencies as leverage to attract customers. Similarly, they contribute to the benefits that companies get from a company. With related diversification, companies seek areas where these core competencies can flourish.
With related diversification, companies add or expand their product line or markets. However, this expansion only occurs within similar areas or operations. By doing so, companies can grow into products or markets they already understand. However, it may limit their profit potential due to the similar nature of operations. Despite that, related diversification can result in synergies and economies of scale.
Related diversification is more suitable for companies that want to expand but not into areas. With this strategy, they do not undertake risks differing from their operations. However, they may wind up magnifying their existing risks. Nonetheless, they will have an understanding of those risks. Risk diversification is above growth and expansion but under a similar environment.
What is Unrelated Diversification?
Unrelated diversification involves all the benefits and processes involved in diversifying. It also includes expanding operations into new products and markets. However, it does not focus on exploiting similarities or commonalities. Instead, unrelated diversification occurs when companies go beyond their existing markets or operations. With this strategy, companies expand into relatively unrelated areas.
Unrelated diversification involves adding new or unrelating product lines or markets. It is a strategy that allows companies to diversify in a true sense. As mentioned, related diversification may have lower risks for unrelated products or markets. However, unrelated diversification allows diversifying and moving away from the current areas. With this strategy, companies can reduce their existing risks to a certain extent.
Unrelated diversification does not seek to exploit new markets or products through commonalities. Therefore, it does not require the underlying companies to be similar. In contrast, this strategy involves companies that do not have any similarities. Usually, companies segregate new areas into a strategic business unit. This way, they can manage those areas with a decentralized approach.
Unrelated diversification can be highly crucial in moving beyond existing products and markets. With this strategy, companies can identify areas with significant profit potential. It does not limit companies to a specific industry or market. Another name used for this approach is the conglomerate approach. It gets the name due to the strategy involving exploring and exploiting varying areas.
Related Diversification vs Unrelated Diversification: Which Strategy is Best-Fit for Your Business?
Related and unrelated diversification can have many differences. These differences come from how these strategies work and help companies achieve better results. While both fall under diversification, they are opposites. Due to these differences, companies may find it challenging to choose one to diversify their operations. Companies must consider the following to understand which strategy is best for their business.
Efficiency
Companies must ensure the strategy they choose maximizes their efficiency. For that, it is crucial to consider various areas. Usually, it involves reviewing the costs and benefits obtained from diversification. It may include studying how the strategy helps achieve better results in the following areas.
- Labour cost savings.
- New equipment.
- Improve productivity and workflow.
- Serve existing customers better.
- Increase profitability.
- Diversify by adding new products and services, and markets.
- Address safety and environmental issues.
Risks
Companies must also consider the risks associated with each diversification strategy. With related diversification, companies do not undertake any external risks. Instead, it involves uncertainties related to similar operations. However, companies already understand those uncertainties. On the other hand, unrelated diversification comes with external risks. While these may be unfamiliar for companies, they diversify the existing risks.
Rewards
Companies must also consider the rewards or returns they get from each strategy. Usually, related diversification can provide limited returns. These returns relate to the company’s existing products and markets. On the other hand, unrelated diversification can unlock access to higher rewards. However, these returns are more uncertain. Ultimately, the decision relates to the balance between risks and rewards.
Areas
Lastly, companies must also study the areas where diversification applies. As mentioned, related diversification involves expanding into similar products or markets. It presents a more familiar ground for companies to operate and continue operations. On the other hand, unfamiliar diversification provides access to significantly different areas. It can increase a company’s customer base. However, it may also fail more due to the differences.
Conclusion
Diversification is a strategy through which companies expand their operations. This strategy involves new markets and products. Usually, companies can choose between related or unrelated diversification. They have some differences which dictate how they will impact a company’s business. Companies must consider several factors when choosing a strategy, as listed above.
