What if the company’s performance falls and the usual measures do not help? Is it possible to leave the market? Situations are different, but in any case, before turning off the activity, it is necessary to consider all possible ways to stay on the market. For example, diversification of production often becomes a real salvation.
The concept of diversification
The well-known company Adidas began with the fact that it produced only sports shoes. Today, branded stores of this brand offer a wide range of clothing and some other products for all kinds of sports. Another example is Nokia. The most popular mobile phone manufacturer began with paper making! This is the diversification of production - the expansion of the range of the type of goods produced or the maintenance of unrelated industries and other types of economic activity.
What is diversification for?
Like many other ways to strengthen positions in the market, diversification is needed to increase profits, expand market share or restructure the company's activities in cases where its product is no longer in demand. The essence of the diversification strategy is to extend the company's activities to those areas in which it had not previously functioned. They can be both related to the current activity (for example, a pelmeni manufacturing company begins to produce semi-finished meatballs), and are not related (for example, a retail network of home appliances stores opens the production of microwave ovens).
Associated diversification can take the following forms:
- Vertical integration. Previously, the company produced juices, buying raw materials from farmers. But then it decided to acquire its own farm, that is, to include in the activity one more production, which is included in the technological chain. This example demonstrates the reverse type of vertical integration. There is also a direct type, when the company is interested in strengthening its position in the sphere of distribution and sale of the finished product. In this example, this can happen in the form of a manufacturer opening its own store juices.
- Horizontal integration. Most often carried out with the aim of geographically expanding sales and is usually nothing more than a takeover of competitors. As a result, a competitive advantage and economies of scale are gained. Products of the same type, but different (geographically) markets. You can buy an unprofitable grocery chain of stores in city B and rebrand in accordance with the style of another grocery chain stores, which is popular in city A. It is possible and easy to expand the range when working in the same market. Beer manufacturer may well unite with the manufacturer of kvass.
Unrelated (lateral) diversification of production
In this case, diversification occurs according to the principle of including in the activities of those areas with which there was little (or not at all) in common.
- The strategy of centered diversification involves finding opportunities for expansion based on the technologies already used, an established sales market, and other advantages associated with existing activities. The main business remains the focus of the company, but it also promotes another type of activity. For example, a company produces wedding dresses and accessories and at some point realizes that the possibilities for expansion have ended. Nothing prevents her from creating a new brand, under which clothes for mothers or children's clothes will be sold.
- Conglomerative diversification. To diversify this type is not easy. This is the inclusion of new markets and non-technologically related industries. If the plant that assembles cars, establishes its own tire production, then everything is logical and simple - this is associated vertical diversification. If he acquires an aircraft manufacturing company together with its suppliers, then this is a completely different level of diversification.
Thus, the diversification of production is a way to expand the scope of activity and influence of the company in the market, as well as an anti-crisis measure.