Diversification in firm growth happens when a company expands into new products, services, or markets that are different from its current business activities.
Types of Diversification:
- Horizontal Diversification: Adding related products or services at the same stage of production (e.g., a phone manufacturer making tablets).
- Vertical Diversification: Expanding into different stages of the production process, such as forward or backward integration.
- Conglomerate Diversification: Entering completely unrelated markets or industries to spread risk (e.g., Virgin Group operating in airlines, railways, and mobile phones).
Reasons for Diversification:
- To spread business risk.
- To reduce dependence on a single product or market.
- To use unused resources or internal capabilities.
- To counter the threat of decline in core markets.
- To seek new profit opportunities and achieve economies of scope.
Success Factors:
- Building on existing strengths.
- Ensuring a clear strategic fit.
- Having the management capability to run diverse units.
- Possessing the financial resources to support the expansion.
Risks of Diversification:
- Lack of expertise in new areas.
- Dilution of management focus.
- Overextension of company resources.
- Potential for value-destroying acquisitions.
Examples:
- Google: Started with a search engine and diversified into maps, email, and smartphones.
- Amazon: Started with bookselling and diversified into cloud computing and video streaming.
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