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Why Diversify? - Diversification Strategies

   Posted On :  26.06.2018 04:58 am

Organizations diversify due to the following reasons. Some of the common reasons are as follows.

Why Diversify?
 
Organizations diversify due to the following reasons. Some of the common reasons are as follows.

Synergy

 
Synergy is cited in the most common cause of diversification. Synergy occurs when two or more activities produce their combined effect greater than the sum of its parts i.e., 2 + 2 = More than 4.
 
Related diversification produces synergies rooted in production technology. With the additional technical facilities, a by-product or joint product may be produced.
 
Both related and unrelated enable the companies to sell the products with same distribution network and advertisement facilities. The advertisement of one product spontaneously advertises other products with enhanced brand loyalty. This is marketing synergy.
 
Synergetic effect can also be noticed in financial operations, when the positive cash flow of one business utilized in other business helps to generate more positive cash flows.
 

Spreading of Risk


Diversification helps to avoid over dependence on one product/ market. It spreads the risk associated with one product line or few products.
 

Better opportunities

 
With diversification, company can exploit the better opportunities in new product line. Every product has it own product life cycle. To gain better market share, company has to either differentiate or diversify.

Better utilization of Resources

 
With diversification, company can better use hitherto unexploited resources like finance, market channels, production facilities, technological capabilities, managerial knowledge, etc. The idle retained earnings could be utilized to produce new products. Their marketing may not be a problem because the same dealers will sell the new products. Same production facilities and technology can be utilized sometimes adding more capacity to it.
 

Competitive Strategy

 
 
Diversification is a good competitive strategy. A company may enter new product lines of business to gain a competitive edge over the competitors or discourage them by entering before their arrival.
 

Market Dominance

 
 
Diversification take place to exploit tremendous market opportunities in home as well as in foreign countries with the objective of gaining market dominance.
 
Finnish producer Nokia leads the world in sales of cell-phone handsets. When the telecom industry crashed in 2000. Chairman Jorma Ollila invested heavily to turn Nokia into a major mobile phone software player. Under his leadership, the organization licensed its interface software to cell-phone competitors. It also invested heavily in billing and messaging service software. The result: millions of customers using Nokia and other software can now use their handsets to get e-mail, send photos, and download games. Research organization IDC forecasts that global mobile-data business will increase almost 47% in 2003 to $29.5 billion. Diversifying into mobile phone software helped keep Nokia on top of a troubled industry.

Source: ”The Comeback kids” “Business week, September 29, 2003 p. 122 

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