What Is Debt Ratios in Financial Analysis? For example, a company that manufactures automotive repair parts may enter the toy production industry. New version of the product will be capable of attracting different groups of customers other than the existing data base of buyers. For example, a computer manufacturer that produces personal computers using towers begins to produce laptop computers. There are mainly three types of diversifications strategies: Concentric diversification strategy; Conglomerate diversification strategy; Horizontal diversification strategy In earlier times, there was rapid growth in the diversification of business. Conglomerate diversification takes place when a firm diversifies with another company that manufactures totally unrelated goods or services. The three types of diversification strategies include the concentric, horizontal and conglomerate. Moving into a totally unrelated industry is often highly dangerous, as the company’s current management is unfamiliar with the new industry. Visit us to find here free business notes of all the subjects of B.com, M.com, BBA & MBA online. Its Objectives, Advantages & Disadvantages. Companies can do this by purchasing or merging with another company in the desired industry. Examples of related diversification include horizontal and concentric diversification strategies. There are three types of diversification: A diversification strategy is that kind of strategy which is adopted by an organization for its business development. When a company introduces a new product in the market then the revenue of the existing products upsurges considerably. For any project that respects itself, the business model, or Business Models, is a crucial point that should not be … [Read More...], The Dividend Policy in Business:- The dividend decision is one of three major corporate finance decisions, such as investment selection - choice of … [Read More...], Cash analysis is an essential part of financial analysis. A ketchup manufacturer may decide to produce salsa, using its current — and very similar — production facilities for the task. Stability strategies 3. The best situation for a company is to compete in an industry where the growth is nil or very slow. 7.1.1 Types of Diversification. The strategy in which an organization plans as to how to enter into a new market which the organization is not in, while at the same time creating a new product for the new market. In essence, diversification involves innovation and market disruption. Growth strategies involve a significant increase in performance objectives (usually sales or market share) beyond past levels of performance. Types of Diversification Strategies. One of the most important aspects of this strategy that the management team of the company must be strong enough to bear the loss if any. Uncategorized; Tags . Diversification strategies help companies increase their flexibility and maintain profit during sluggish economic periods. A company needs to choose a path or approach to diversify its business. THE FOLLOWING IS A SAMPLE OF HOW YOU CAN APPROACH THIS QUESTION. Business can modify its products. Each company in these industries allow for a wider range of customers and the ability to diversify income opportunities when one industry's sales falter and the other does not. Companies will tap into their current market share of loyal customers with products that have little or no relation to products currently sold. The company will tend to market products to current consumers by leveraging the brand loyalty associated with current products. The most common strategies include concentric, horizontal and conglomerate diversification. Types of Diversification Vertically Integrated Diversification: The form of diversification in which the firm intends to enter in the business which is associated with the firm’s present business. When an organization finds a decline in its annual sales and profits. The organizations use this strategy in order to earn more profit in a way that they procure other business or firm and earn profit by breaking and selling it infractions. A conglomerate diversification strategy can be effective to be followed by any organization in some situations, such as: This strategy takes place when an organization introduces a new and distinct product to the existing customers. Companies can also diversify within their own industry. Corporate level strategy addresses the entire strategic scope of the firm. More recently, research by Longboard Asset Management revealed that over the period from … Now we will see them into more specifics. What are the pros and cons associated with each of these? XYZ Company had been dealing in telephone lines for years. The types are:- 1. This week we look at the diversification decision: entering a new business. The following article throws light upon the types of corporate strategy. What Are Its Causes & Process? The three main types of diversification strategies are. This wasn’t always the case. Three forms of diversification strategies are commonly distinguished: focused, relational and conglomerate diversification 4. The following are the types of diversification strategies: Horizontal Diversification. He was the man behind all the basic laws of Modern Economics. If an industry experiences issues or slows down, being in other industries can help soften the impact. For example, a company named XYZ adopted a concentric diversification strategy and introduced cable lines for fast internet across the country. All the images and videos present on the Business Study Notes are not owned by us, if you found anything under copyrights, please, Investment Analysis and Portfolio Management, Guidelines for Concentric Diversification. The general strategies include concentric, horizontal and conglomerate diversification. Each strategy focuses on a specific method of diversification. There are six established types of diversification strategies: Horizontal diversification; Vertical diversification; Concentric diversification; Conglomerate diversification; Defensive diversification; Offensive diversification Diversification mitigates risks in the event of an industry downturn. Discuss some of the various means that firms can use to diversify. Horizontal diversification is typically the diversification strategy with the least amount of risk involved, as you’re working mostly within familiar customer and market segments. The diversification strategy enhanced by General Motors in the production of the Ventec Life Systems V+Pro under the contact of the US Department of Health and Human Services is the concentric diversification. Generally, the final strategy involves a combination of these options. The principal difference between the two is that related diversification emphasizes some commonality in markets, products, and technology, whereas unrelated diversification is based mainly on profit considerations. Give Examples. A television manufacturer may begin producing white goods, such as refrigerators, freezers and washers or dryers. Brand loyalty may also be reduced if new management does not maintain current product quality. Each strategy focuses on a specific method of diversification. Sometimes when you observe that current products are declining, it would be the best option to introduce new but related products in the market. Such as; Filed Under: Finance, Strategic Management Tagged With: define diversification strategy, diversification marketing strategy, diversification strategies, horizontal diversification, market diversification, types of diversification, Looking for business model innovation? Diversification is a strategic approach adopting different forms. Some of the guidelines are mentioned below. The first strategy is used when a company wants to expand its product line to include similar products produced within the same firm, the second is used when the company wants to produce unrelated products that appeal to a similar market, the last is used when a company expands to operate in two or more unrelated industries. There are mainly three types of diversifications strategies: One of the most important aspects of this strategy is that it reduces the chances of loss in business since it equally distributes different categories of products among all markets present in the region. Vertical Diversification – Vertical diversification is when the business finds opportunity for expansion by moving forward or backward along the production cycle. One of the primary reasons is the view held by many investors and executives that \"bigger is better.\" Growth in sales is often used as a measure of performance. Solution Summary. Say you’re the CEO of the Dunder Mifflin Paper Company — it might make complete sense to … The company markets the products through the same supply channels to the existing clients. There is nothing in common between the two companies that have not merged nor do the two have any strategy in common. Wikibuy Review: A Free Tool That Saves You Time and Money, 15 Creative Ways to Save Money That Actually Work. This strategy allows the organizations to add a new product(s) that are not associated with the existing ones. This change can come from different causes (involuntary or voluntary) and can have … [Read More...], Any company that wishes to implement a Food Safety, Quality Management System, among others; it must go through periodic evaluation processes or internal … [Read More...], The path that companies have to travel to reach success is not easy. “Diversification” – a lot of people throw that word around when it comes to the Stock Market. Horizontal strategies allow a firm to begin moving outside its comfort zone in terms of product manufacturing. Once we introduce new but related products in the market, the sale will be enhanced automatically. Moreover, both companies have totally different target market and competitive advantages as well as objectives. 1. Many organizations pursue one or more types of growth strategies. But do you really know how to use it strategically? Concentric diversification strategies also exist in other industries, such as the food production industry. Vertical Diversification. Type of diversification strategy; Diversification strategy is the adoption of development processes and ways of a business in an organization. A diversification strategy achieves growth by developing new products for completely new markets. As cash flow is the result of all flows, its degradation is a symptom of a malfunction that needs … [Read More...], Change Management Model: A change is a change from a previous situation. A concentric diversification strategy allows a company to add similar products to an already successful line of business. He laid the foundation of classic … [Read More...], Lionel Robbins turned the tables by proposing a whole new perspective of economic. Generally, the final strategy involves a combination of these options. IF YOU WANT THE FINAL ANSWER, KINDLY PLACE AN ORDER NOW! He was strongly against Marshall’s definition of human welfare and … [Read More...]. There are certain sales patterns designed to encounter the production processes of the new products as well as the current products already available in the market. Types of … Type of diversification strategy; Diversification strategy is the adoption of development processes and ways of a business in an organization. In addition to achieving higher profitability, there are several reasons for a company to diversify. It allows a company to grow by expanding market share in an existing market or by developing a market presence. Management had little clue about newspapers and the publication soon went belly-up. Types, modes, and levels of diversification are the most complicated yet intertwined processes in the strategic management literature for optimization of firm performance. Types, examples, guide and benefit from shared resources and skills. Categories . Business Study Notes is all about business studies or business education. Backward vertical diversification … Competitive Strategy of Starbucks Location Placement July 8, 2019. Corporate Strategies or Grand Strategies: ADVERTISEMENTS: There can be four types of strategies a corporate management pay pursue: Growth, Stability, Retrenchment, and Combination. Diversification is a strategy used to expand market share or enter new markets by launching or acquiring new products (perhaps through licensing, merger, or acquisition). This strategy of diversification refers to an entity offering new services or developing new products that appeal to the firm’s current customer base. Diversification strategies are used to extend the company’s product lines and operate in several different markets. Guidelines for Conglomerate Diversification. Diversification strategies allow a firm to expand its product lines and operate in several different economic markets. 2 comments; 46,470 views; The different types of diversification strategies include the modernization and development of new products, updating the market, new technology licensing, distribution of products by another company and even the alliance with the said company. Depending on the direction of company diversification, the different types are: Horizontal Diversification. B.Com, M.Com. It is a “big picture” view of the organisation and includes deciding in which, product or service markets to compete and in which, geographic regions to operate. The most common strategies include concentric, horizontal and conglomerate diversification. Discuss Cash Analysis in Business. When an organization has ample administrative staff and capital endowment in order to strive in the new industry or business efficaciously. Below are defined types of diversification … Types of Diversification Strategies; McDonalds VS Starbucks July 8, 2019. When companies engage in conglomerate diversification strategies, they are often looking to enter a previously untapped market. Five types of diversification … Types of Corporate Level Strategy – Top 2 Types: Growth Strategy and Diversification Strategy . In the 50’s, Nobel laureate Harry Markowitz demonstrated a portfolio’s risk dropped considerably as additional stocks were added to the portfolio—even if the individual stocks were all of equal risk. This is dangerous if the new products do not garner the same favor as the company’s older products. The application of concentric diversification requires certain favorable conditions. Types of Strategies: In the last chapter we have already mentioned about corporate, strategic Business Unit strategies, and functional Strategies. Depending on the applied criteria, there are different classifications. But you need to be careful not to stray too far out of your "comfort zone" of what you know how to do well. As such, it is inherently more risky than product development because by definition the organization has little or no experience of the new market. What are the pros and cons associated with each of these? Types of Diversification There are three general types of diversification strategies: concentric horizontal, and conglomerate. Horizontal diversification can be very effective for a company in some situations. Diversification is a form of growth strategy. PDF | On Nov 9, 2012, Kannan Paulraj and others published Diversification-strategies for managing a business | Find, read and cite all the research you need on ResearchGate Types of Diversification Horizontal Diversification: It is a strategy in which a firms long term strategy is based on growth through acquisition of one or more similar firms operating at the same stage of the production-marketing chain. 7 – Qualities of an Auditor You Must Know, What is an Operational Audit? The diversification strategy enhanced by General Motors in the production of the Ventec Life Systems V+Pro under the contact of the US Department of Health and Human Services is the concentric diversification. Nowadays, it has become extremely difficult for an organization to perform in diversification mode because the scenario and market conditions have changed a lot. An example could be an iron mining company seeking to purchase the steel factories. A downside to horizontal diversification strategies can be the company’s dependence on one group of consumers. BBA & MBA Exam Study Online. The technical knowledge necessary to accomplish the new task comes from its current field of skilled employees. 2. The percentage of risk in horizontal diversification strategy is less as compared to the conglomerate diversification strategy because the organization already knows about its existing customers. The strategies of diversification can include internal development of new products or markets, acquisition of a firm, alliance with a complementary company, licensing of new technologies, and distributing or importing a products line manufactured by another firm. I once took a job at a newspaper that was owned by a company that operated call centers. This is how they jointly work with ABC Company to provide cable internet access to the customers of ABC. Diversification allows for more variety and options of products and services. Diversification can clearly help a business stay afloat in tough times and grow during prosperous times. Moreover, once you offer new but related products, the price must be reasonable as compared to competitive products in the market. Types of Diversification. But it became difficult to manage expanded activities of any organization. To achieve this, they should not devote all their resources solely to earn more and … [Read More...], Adam Smith is termed as the father of modern economics. I agree with the statement "Moving into a totally unrelated industry is often highly dangerous, as the company’s current management is unfamiliar with the new industry." The different types of diversification strategies The strategies of diversification can include internal development of new products or markets, acquisition of a firm, alliance with a complementary company, licensing of new technologies, and distributing or importing a products line manufactured by another firm. A key decision in corporate strategy is determining which businesses a firm should be active in. This strategy guides us as to how we can introduce new and correlated products in the new market we are entering. Even if profits rem… If you get stuck on the quiz or assignment, you should post on the Discussions to ask for help. Diversification strategies can help mitigate the risk of a company operating in only one industry. Guidelines for Horizontal Diversification. Types of Diversification Strategies. The different types of diversification strategies include the modernization and development of new products, updating the market, new technology licensing, distribution of products by another company and even the alliance with the said company. This form of diversification takes place when a … It may choose either related diversification approach or unrelated diversification approach or a combination of both, depending on circumstances. Many researchers in the field of strategic management have dealt with the question of diversification and the pros and cons involved 5. The strategists must consider the realities of the situations for selecting the right … Each strategy focuses on a specific method of diversification. PLEASE NOTE THAT THIS IS NOT THE FINAL ANSWER. When a firm finds a complete saturation in the market for the existing product. Some firms have acquired and some are trying to acquire financial collaborations. The first strategy is used when a company wants to expand its product line to include similar products … What Is Change Management Model? Welcome to week 2! Types of diversification strategies. The upside to this diversification strategy comes from increasing flexibility and reaching new economic markets. Discuss some of the various means that firms can use to diversify. Types of Diversification Strategies. For example: 1. If done correctly, Forward vertical diversification attempts to find advantages closer to the integration when a company is at the end of the supply chain. For example, a dairy company producing cheese adds a new variety of cheese to its product line. Expansion/growth strategies 2. The company is considered to be more viable which has low limits and revenues. It’s easier now than ever before to get a diversified allocation to stocks through a bevy of different index funds. Later they spent huge amounts and acquired cable television. Published by on July 8, 2019. What Is Business Model Innovation? Diversification is one of the four alternative growth strategies in the Ansoff Matrix. Diversification strategies allow a firm to expand its product lines and operate in several different economic markets. Overall, such diversification should result in higher ROI, as revenues increase, and the companies are expected to achieve cost efficiency due to shared resources. 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