The idea of diversification is usually associated with an increase in the variety of products offered.
Diversification is the result of the action of diversifying . This verb , for its part, refers to making that which had uniformity or lacked variants , become varied and heterogeneous. To diversify, in other words, is to provide diversity (plurality).
The notion of diversification is frequently used in the field of commerce to name the strategy that certain companies adopt with respect to their product offering. If a company
Benefits of a greater offer
What does a company look for when betting on diversification? Generally, the intention is to reach new market niches and generate business that, until then, was outside its scope of action. A company that only produced salty foods can diversify its offer by including sweets and candy, which will expand its sales possibilities.
Diversification can be achieved through a direct investment in a certain sector (buying machinery, raw materials, supplies, etc.) or even by acquiring another company. In the previous example, the company can invest to produce sweet foods in its plant or directly buy a firm that takes care of it.
It should be noted that diversification also reduces a company's risks . If the business focuses on a single product and, for some reason, demand for it collapses, the company will be in serious trouble. The case is different when the company markets twenty different products.
The idea of diversification, however, can appear in other contexts. A television channel that specialized in sports can diversify its offering and include general interest programs and shows in its programming.
Diversification of investments reduces the risk of losses.
Related diversification
Related diversification is called diversification that seeks to combine previous and new activities so that they offer better results than they would give separately. This can be achieved thanks to technological compatibility between the two, or because they share certain aspects of their marketing. It is possible to distinguish two types of related diversification: vertical and horizontal integration.
Vertical integration consists of a company beginning to carry out activities necessary for its normal production, but which until now it has sought from third parties; For example, it begins to manufacture certain inputs that are vital for the construction of its products. In other words, the company becomes its own supplier, and this is known as backward integration .
The reverse case may also occur, that is, the company decides to start businesses to which its previous products or services were aimed, thus becoming its own client; This is called forward integration . Both decisions aim to reduce transaction costs, since they integrate two or more complementary processes into the same structure, which improves the company's efficiency.
However, this type of related diversification has its downside; For example, the company becomes less flexible, its overall risk increases, its organization becomes more complex and it runs the risk of losing profitability by not participating in economies of scale (the benefits obtained with respect to the average cost per unit of a product by increasing the scale of production) or the experience of others.
Horizontal integration
On the other hand, there is horizontal integration, a type of related diversification that consists of adding products or services in the middle of the current production chain.
These additions can be complementary or substitutive. It is possible to take advantage of the raw materials and inputs used so far or require new ones.