Diversification is a corporate strategy used to expand an organization’s operations by entering into new market niches, adding stages of production to the existing ones or introducing new products and services. In other words, diversification is an act of branching out by an existing organization into a new business opportunity ( Bowen et al., 2015) . It is one of an organization’s growth strategy pursued primarily through entering into a new market segment. Diversification can be implemented either at the corporate level or at the business level. Organizations should value diversification due to the myriad benefits yielded such as an enhanced competitive advantage.
Reasons for Valuing Diversification in Organizations
Organization should value diversification since the strategy significantly minimizes risk of loss. Diversifying into a new business segment or new product line cushions an organization from huge losses in case one area of business underperforms. As Mendoza-Abarca and Gras (2019) explain, if one investment performs dismally over a certain period, other portfolios may record an exceptional performance over the same period ultimately leading to reduction of losses. Concentrating an organization’s capital on a single type of investment carries substantial risk in case the portfolio fails to record expected results. Organizations should value diversification to avoid potential downturns. A corporation is therefore able to evade major repercussions in the event a sector or industry suffers a major downturn. Some organizations which focus on only one line of business are not able to survive in case of a major decline in their industry. For example, a fashion retailer businesses often diversifies into multiple product categories to cushion the organization from risks since fashion is usually trendy and unpredictable ( Bowen et al., 2015) . Other fashion retailers expand their operations into new store formats for example babies or children to diversity. Spreading an organization’s investment portfolio into multiple lines of businesses lessens dependence on the success of only one asset or market. In case a particular market suffers from an unforeseen event, an investor will not lose the resources in an instant. Valuing diversification therefore protects companies from adverse changes.
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Valuing diversification earns an organization competitive defense against rival businesses. Diversifying into underserved market segments yields an additional market share. The unexploited locations or customers possess available revenue for a firm to tap. Failing to diversify and expand to exploit the additional demand would pave way for competitors to take advantage of the opportunity. Tapping the new niche first would increase an organization’s customer base. Introducing a service department would provide an organization competitive advantage over businesses whose line of business is only manufacturing ( Bowen et al., 2015) . Acquiring the new unexploited market would make organization establish itself as a top provider thereby giving the business a competitive defense against rival firms. Valuing diversification and actually implementing the growth strategy would protect an organization from competing companies. Blockbuster, a movie rental provider failed to earn a competitive defense since the firm failed to protect itself against rival companies which were diversifying into new online streaming formats such as Netflix.
Valuing diversification in organizations plays a vital role in stabilizing a business’s influence. Diversification either into a new market segment, new line of products or services helps a business to build its stability. Heavy concentration on a single product, service or industry exposes an organization into high volatility risk in resources and earnings as demand oscillates ( Bowen et al., 2015) . Stretching a business across multiple categories and industries gives an organization an enhanced predictability. Advertising agencies diversify customers to avoid instances of revenue drops and having to lay off employees in case a single industry losses momentum. If an organization is diversified, losing a client would not be destabilizing since the organization would still rely on other clients from the expanded operations.
Valuing diversification is important in allowing for multiple options and variety for services and products. If correctly implemented, diversification would tremendously boost a firm’s profitability margins and brand image. Introducing a new service or product line implies more variety options for an organization’s customers. The increased choice for clients enhances the customer’s perception of a businesses’ product or service offering leading to improved brand image ( Bowen et al., 2015) . The product extension or brand expansion increases the number of customers due to the rise of sales volume. Entrance into new markets provides a means of reaching new customers and a platform to double, triple or quadruple an organization’s profits.
Valuing diversification is important in reigniting growth in an organization. Failure to diversify leads to stagnation or plateauing of an organization’s operations. Notably, when an organization reaches a maximum potential or when a new low-cost competitor enters an organization’s niche, expanding into new locations or introducing new product line would provide a platform for growth ( Mendoza-Abarca & Gras, 2019) . Valuing diversification by entering a new market opens up new customer groups and new markets leading growth and improved organization performance.
Conclusion
Diversification is a crucial business strategy which organizations should strive to pursue. Valuing diversification benefits business in myriad ways. Diversification into new markets, products or new service line mitigates risks in case of an unforeseen downturn. Organizations can diversify as a form or protective defense from competitors. Valuing diversification also provides a significant boost to a firm’s profitability and brand image.
References
Bowen, H. P., Baker, H. K., & Powell, G. E. (2015). Globalization and diversification strategy: A managerial perspective. Scandinavian Journal of Management , 31 (1), 25-39.
Mendoza-Abarca, K. I., & Gras, D. (2019). The performance effects of pursuing a diversification strategy by newly founded nonprofit organizations. Journal of Management , 45 (3), 984-1008.
