Diversification Strategies: Why do organisations diversify?

Diversification is a corporate strategy that involves expanding a company's operations by investing in new products, services, or markets. The goal of diversification is to reduce risk by creating a portfolio of businesses that are not solely reliant on one product or market. By investing in multiple businesses or markets, a company can spread its risk and reduce its exposure to economic or market fluctuations that may affect its performance.

There are two main types of diversification strategies: concentric and conglomerate. Concentric diversification involves expanding into related products or services, while conglomerate diversification involves investing in unrelated businesses.

Concentric diversification is often pursued by companies that want to leverage existing capabilities, resources, and customer relationships to create new products or services that are complementary to their existing offerings. By expanding into related markets, companies can reduce their risk by leveraging their existing strengths and knowledge to enter new markets with a higher chance of success.

For example, a company that produces software for the financial industry may diversify into the insurance industry by developing software that helps insurers manage their claims processing. By leveraging its expertise in software development and financial services, the company can create a new product that addresses a need in the insurance industry. This not only helps the company expand its operations but also helps it capture a share of the insurance industry's growing demand for technology solutions.

Conglomerate diversification, on the other hand, involves investing in businesses that are unrelated to a company's core operations. This strategy is often pursued by companies that want to reduce their risk by diversifying their portfolio and investing in businesses that are not affected by the same economic or market conditions.

For example, a company that produces consumer electronics may diversify into the hospitality industry by acquiring a chain of hotels. While the two industries may not be related, the acquisition allows the company to spread its risk and reduce its exposure to fluctuations in the consumer electronics market.

However, diversification is not without its drawbacks. One potential drawback of diversification is the risk of spreading a company's resources too thin. Pursuing too many diversification opportunities simultaneously can stretch a company's resources and leave it unable to effectively manage its existing operations. Additionally, diversification can also lead to a lack of focus, as companies may lose sight of their core competencies and values as they expand into new markets.

Another potential drawback of diversification is the potential for reduced profitability. By investing in businesses that are not related to a company's core operations, companies may face higher costs and reduced economies of scale, which can impact profitability.

Despite these potential drawbacks, diversification remains a popular strategy for companies looking to reduce risk and expand their operations. By carefully evaluating each opportunity and ensuring that they maintain a focus on their core competencies, companies can successfully pursue a diversification strategy and achieve long-term growth and profitability.

In conclusion, diversification is a corporate strategy that involves expanding a company's operations by investing in new products, services, or markets. The goal of diversification is to reduce risk by creating a portfolio of businesses that are not solely reliant on one product or market. There are two main types of diversification strategies: concentric and conglomerate. While diversification can help companies reduce risk and expand their operations, it is not without its drawbacks. Companies must carefully evaluate each opportunity and maintain a focus on their core competencies to successfully pursue a diversification strategy.