What are the best examples of diversification

What does diversification (diversification) mean? (Definition)

What is diversification or diversification?

Definition: Diversification or diversification describes the expansion of business activities in order to market new products or services or the penetration into new markets or business areas. Diversification or diversification often follows a targeted strategy. Often it also arises as a reaction to changed market situations. It harbors opportunities, but also risks.

Diversification - your business definition

Diversification or diversification in the business sense means expanding the service portfolio of a company beyond the core business. The aim of this corporate strategy is to achieve growth or to minimize risks. The opposite of diversification is called monostructure. If it is a question of pure product diversification with the aim of penetrating new markets, the opposite corporate strategy lies in deeper market penetration.

However, not only products or ranges or target groups (opening up new markets) can be diversified, but also business partnerships (e.g. the supplier structure) and the investment portfolio.

What types of diversification are there?

  • External diversification: Expansion of business activities through mergers (acquisition as company acquisition) or mergers or investments such as joint ventures
  • Internal diversification: Launch of new products or services based on research and development (innovation), market analysis, license acquisition or purchase of goods
  • Horizontal diversification: Adoption of new, "related" products or services that are closely related to the previous core business
  • Vertical diversification:New products from an upstream or downstream production stage of the core business
  • Lateral diversification: There is no connection between the core business and the new products or services

What are the advantages of diversification?

Diversification does more than just increase sales. Rather, the risk can also be minimized - if the main product or core business is not a "long-term runner" and the expanded portfolio or "second pillar" means security.

One example of successful diversification was the Finnish company Nokia. Originally it mainly produced tires, especially for cars. Later it came to electronics via the car radio division and advanced to become the world market leader for cell phones in the 1990s and early 2000s. It later lost this position to Apple, which in turn represents a first-class example of successful diversification to this day - from a pure computer manufacturer with its own operating system to the most successful provider and innovator of electronic mobile devices.

What are the dangers of diversification?

Since customer behavior can never be precisely anticipated, diversification is considered risky. Management consultants often recommend focusing on the core business and striving for market leadership in their respective segment. If the core business generates profit and growth, the company can carefully advance into new, obvious business areas that correspond to the company's image. According to an analysis by the consulting firm Bain & Company, market leaders achieve returns on average that are twice as high as their competitors.

Examples of failed diversification are products that “flopped” or mergers that turned out to be cost traps or damaging to the brand image.

What opportunities does diversification offer in franchising?

Classic franchising means in most cases a focus on the core business / main product, combined with area protection and a Simplification of work processes (process optimization). See franchisability. Different with many license systems: Here you can Self-employed people often acquire multiple licenses and engage in business activities (examples: snack box licensed stationery store, multi-brand retail store). Examples of diversification using franchise licenses are shop-in-shop solutions (such as the nail bar in the hairdresser's shop, the bakery in the supermarket). See also - as a further possibility - part-time business start-ups.

  • See also the following learning video "Business Administration - Marketing - Product Diversification"