Business diversification is a method of allocating resources, including financial assets and investments, to reduce risks and increase profitability. In business, diversification involves expanding a company's activities, including launching new products, services, and investments in a variety of areas and markets. It allows businesses to manage their assets more efficiently, avoiding dependence on one or more markets.
Read moreDiversification plays a key role for financial institutions. It involves distributing investments across various assets, which allows them to work with them more efficiently.
Mutual funds help reduce risks by investing in different areas of the economy. Venture funds, on the other hand, target high-risk startups. They can bring significant profits, but the level of risk is also high.
Thus, a business diversification strategy is not only a way to minimize losses, but also a growth plan that helps businesses and investors allocate funds efficiently without missing out on opportunities to make a profit.
Diversification of companies' businesses pursues several important goals:
resource optimization: achieving maximum profitability with minimum costs;
creation of a financial reserve: ensuring stable growth, minimizing possible losses;
reducing the likelihood of financial and operational risks;
protection from instability, increasing resilience to crises;
redistribution of resources: reorganization or expansion of business;
formation of new directions: search for alternative development paths in the event of a decline in the core business.
There are several approaches to diversification that help businesses reduce risks and expand their product and service offerings or enter new markets. This also helps increase the stability and adaptability of the company.
Production. To increase the range of products, entrepreneurs use existing resources. For example, a bakery that previously only made bread begins to offer cakes and pastries to attract customers for holiday orders.
Sales. A variety of sales methods helps to reach more customers. A company can sell through stores, cooperate with partners, or use online platforms for online sales.
Purchases. Cooperation with different suppliers reduces risks. If one of them stops deliveries or changes the terms, the business will not stop. This helps maintain production stability and avoid disruptions.
Geographic expansion. To reduce risks, a business can start selling its products in new regions. For example, a furniture factory from a small town begins to supply its products to nearby towns. Even if local demand for its products falls, revenue will come from entering new markets.
Developing employee competencies. Improving employee skills allows a company to offer a wider range of services. For example, a car service can supplement its standard services with new areas, such as engine or electrical system diagnostics.
Diversification of prices. To attract more customers, a business can offer similar products at different prices. This is what Intel did when it released expensive Pentium and budget Celerons. Thanks to this, the company covered the entire market, leaving competitors without a chance.
Diversification of content. This strategy helps attract different audience segments on any platform. The easiest way is to diversify the format of publications. For example, you can post photos, videos, and text on one platform. And publishing materials of different formats on separate platforms is already an example of diversification by distribution channels.
Companies may resort to this strategy for various reasons: from excess financial resources to the need to save a business on the verge of ruin.
The main reasons include the following:
the company has sufficient resources, which gives it an advantage over competitors;
diversification makes it possible to reduce risks and strengthen stability;
development of new markets and directions increases income more than a simple increase in production;
the ability to quickly adapt to a changing economic situation;
reorganization of the structure guarantees more profit for the company in the long term.
There are also other, more subjective reasons that can influence the decision to enter international markets. Let's consider some of them:
Fear of export markets. Many Russian companies are in no hurry to enter international markets, preferring to develop new directions within the country. This is due to concerns about the difficulties associated with the requirements of foreign markets.
Attractiveness of new projects. Sometimes businessmen come across an idea that seems interesting and promising to them. If an opportunity arises to implement it, they are ready to try, even if it requires additional effort and risks.
Adaptation. This strategy allows a company to develop a range of products or services using existing resources: equipment, technology, and employee qualifications. For successful implementation, it is important that the manager is able to motivate the team and convey to employees the importance of the goals.
Expansion. Implies business expansion by increasing the product line, opening new outlets or branches, and updating the technical base. The goal is to increase the company's productivity and strengthen its position in the market.
Acquisition. With this strategy, a large company buys out a weaker firm and integrates its resources into its operations. If the acquired enterprise ceases operations, its assets are transferred to the new owner, strengthening its business.
Merger. It is carried out between organizations that are equal in capabilities and resources. Mergers usually occur between companies in the same industry, which allows them to jointly achieve higher results.
Accession. Within the framework of this approach, one enterprise becomes part of another. In this case, the acquired company retains independent operations, but control and key rights are transferred to the main organization.
