What if the company's performance falls, and the usual measures do not help? Really leave the market? Situations are different, but in any case before turning off, it is necessary to consider all possible ways to stay on the market. For example, diversification of production is often a real salvation.
The notion of diversification
The well-known company Adidas started out by producing 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 manufacturer of mobile phones began with the manufacture of paper! This is the diversification of production - the expansion of the range of produced goods or the maintenance of unrelated production and other types of economic activity.
Like many other ways to strengthen market positions, diversification is needed to increase profits, expand market share or restructure the company 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 previously did not function. They can be either related to current activities (for example, the pelmeni company starts to produce semi-finished cutlets), and are not connected (for example, the retail network of household 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 part of the technological chain. The example above demonstrates the reverse type of vertical integration. There is also a direct type when the company is interested in strengthening its position in the distribution and sale of the finished product. In the example under consideration, this can happen in the form of opening by the juice producer of its own store.
- Horizontal integration. Most often conducted for the purpose of geographical expansion of sales and usually represents nothing more than the absorption of competitors. The result is a competitive advantage and economies of scale. Products of the same type, but different (geographically) sales markets. You can buy a loss-making network of stores in the city of B and make a rebranding in accordance with the style of another grocery store chain that is popular in the city of A. It is not out of the question just to expand the range when working in the same market. The producer of beer can quite unite with the manufacturer of kvass.
Unrelated (lateral) diversification of production
In this case, diversification takes place according to the principle of including those spheres in the activity that were not previously (or were not) common.
- The strategy of centered diversification involves looking for expansion opportunities based on already used technologies, an established sales market and other benefits associated with existing activities. The core business remains at the center of the company's attention, but it also promotes another type of activity. For example, the company produces wedding dresses and accessories and at some point understands that the opportunities for expansion have ended. Nothing prevents it from creating a new brand, under which clothes for moms or children's clothes will be sold.
- Conglomerate diversification. The diversification of this type is not easy. This includes the inclusion of new markets and industries that are not technologically connected. If the plant that assembles cars establishes its own production of tires, then everything is logical and simple - it is related vertical diversification. If he buys an aircraft building company together with its suppliers, then this is a completely different level of diversification.
Thus, diversification of production is a way of expanding the scope of activity and influence of the company in the market, as well as an anti-crisis measure.