Organizations diversify due to the following reasons. Some of the common reasons are as follows.
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 RiskDiversification helps to avoid over dependence on
one product/ market. It spreads the risk associated with one product line or
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
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
Tags : Strategic Management - Strategy Formulation
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