Did you know that in a business there is one strategy called diversification? Perhaps, in your opinion Zara, Stradivarius, Pull and Bear, and Bershka are brands that compete with each other in the fashion industry. If yes, then you’re in the right article! We’ll explain what a diversification meaning, from definition to proper use of this strategy!
Diversification meaning a company’s strategy to create diverse products in order to reach a wider market. As a result, the company will get a greater profit and can avoid losses.
Check out the following article to find out how this strategy should work in a business!
Definition of Diversification
Before discussing the functions and strategies in diversification, it would be nice to know the definition of diversification. Diversification is the process of adding products and services to be more diverse. Not only do variations on the product, but also the location. Usually, the company does this to achieve maximum profits and minimize the occurrence of losses.
Just imagine if a business only provides baby equipment, then the target is only parents who have babies aged 0-12 months. However, if the business also provides equipment for children under the age of 5 years, then profits also increase.
Types of Diversification
The example above is just one small strategy in diversification. There are two types of diversification that are familiar in the business world, namely vertical and horizontal. Here’s the explanation:
1. Vertical diversification
This type will be centered from top to bottom. That is, every company can market its products to the entire company without any restrictions. For example, a certain mobile phone brand company will sell its products to distributor X. However, it is certainly not only distributor X who gets mobile phone products. However, all of the distributor’s competitors.
2. Horizontal diversification
This means that the company will add new types of products that are interesting and focused on developing the products they will provide. This type will focus on the development of the products they will provide. For example, a store that initially only provides baby supplies aged 0-12 months, began adding toddler clothing products.
Generally, companies will diversify this in order to reach a wider market quickly.
Classification of Diversification by Company
Diversification of the company has the goal of increasing profits through the availability of new products and services that can reach new target markets as well. Therefore, here is a classification of diversification based on a company that you need to know:
1. Single industrial company
The following classification is a company that runs and dominates the level of diversification in the company. A single industrial company uses the company’s primary competencies to make improvements. Example: Coca-Cola.
2. Related diversification
Related diversified companies are business people who run in cooperation between several types of industries. They can walk through synergies by creating multiple business units that use resources such as sales, manufacturing facilities, and finance.
In addition, operating synergies have two types of relationships across business units: the ability to group common resources and general core competency capabilities.
3. Unrelated diversification
The company runs several different industries. However, it still has a relationship that refers to the synergy relationship of operations across businesses. Therefore, in this classification, if the company achieves the target in a short period of time, the company can take over other companies.
Previously we have explained what are the functions of using this strategy. However, we will provide a complete explanation of the diversification function. The functions of diversification are as follows:
1. Increase profits
Ccompanies have the opportunity to make improvements to their sales volume. An example is when you have a beauty salon, you can also start to develop it to have an online store that will sell products that your salon usually uses.
2. Make the company’s cash flow more stable
Another function of diversification is that you can minimize losses if there is a product that has decreased sales. Therefore, it is very important to provide a diverse product. So when one product decreases, there are still other products that may experience improvements.
There are two strategies in diversifying the business so that the business can get maximum profits. Here’s the explanation:
1. Concentric diversification
This strategy is a strategy where the company will add a new product. However, this strategy must also maintain the linkage of new products with old products.
2. Conglomerate diversification
If a concentric strategy needs to maintain product interrelationships, it is different from the conglomeration strategy. This strategy is the process by which the company will add a product without having to think about its relationship with a pre-existing product.
In addition, there are also several strategies that the company undertakes to develop its business, including:
- Acquisition, where this strategy will diversify the business in different types of industries.
- Internal development, where the company develops a new type of business from time to time.
- Joint Venture (partnership), is a company’s strategy in owning a joint company. Where the company will manage a business with another company.
Diversification is an important process in a business in order to get maximum profits and can minimize losses. By diversifying, you have many products that can help you minimize losses and reach a wider market. However, you still have to do an analysis to make decisions when doing this so that profits become more maximal.
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