What is diversification?

The term "diversification" is usually used by businessmen and business people when they talk about expanding the scope of the company. The reasons and goals in this case can be very different for different companies. The very word "diversification" comes from the Latin diversus - different and facere - to do, literally: different to do. Thus, diversification in the modern sense is a type of strategy, in accordance with which the company expands the range of goods or services, organizes new activities focused on new markets.

Reasons for diversification

They may be based on:

- the desire not only to survive in a difficult economic environment, but also to strengthen its influence and position in the harsh conditions of competition;

- the formation of excess finances that exceed the level necessary to maintain competitive advantage;

- attempts to reduce entrepreneurial risks by distributing them between different areas of activity;

- the possibility of getting more nailed than with a simple increase in production volumes.

For example, a company producing shoes, in the process of diversification, begins to additionally produce bags, because Too many competitors, “shoe makers”, have formed in this region.

However, the reasons for diversification may be the need to respond to the variability of the situation, and the logical expansion of a normally functioning production, and the need to load people shortened at the main enterprise with a new job, etc.

The objectives of diversification are similar to the reasons. This is the same desire to survive, strengthen its position among competitors, reduce possible risks, increase profits, etc.

Types of diversification

Related diversification. The definition speaks for itself. In order to expand the scope of its activities, the company is developing directions with which it is directly or indirectly connected. That is, it uses the technologies already applied, return raw materials from its own production, developed distribution channels (sales), available production capacities, etc. In other words, with the associated diversification, the company takes advantage of the advantages that it has achieved in its familiar, traditional sphere.

For example, the same shoe company used to throw away production waste or handed it over to another organization. In the process of diversification, waste began to go to the production of handbags, purses, cases for glasses and so on. The assortment expanded, jobs increased, profits increased.

Unconnected diversification is the opposite of related. The company partially "sets foot on uncharted lands", i.e. Mastering completely new areas of business space. Employees master new technologies in new areas of production (services), study other market needs. This type of diversification is aimed primarily at minimizing risks (if there is a fear of collapse of an existing business) and earning additional profit (if there is confidence or at least hope that new goods or services are in demand among the population).

As a result of justified and successfully completed unrelated diversification, highly specialized companies are turning into large diversified conglomerates, whose constituent units are not functionally interconnected.

A striking example of unrelated diversification is the Yukos oil company, which is actively creating firms that are engaged in computer technology, untwisting local networks and providing Internet services to its divisions and third-party customers, programming, etc.