Diversification and Other Economic Motives
Diversification strategy is observed when new products are introduced in a completely new market by the company. The strategy is loaded with hurdles because it requires a lot of investment and a lot of man power as well as focus of the top management. But still, in the long run, diversification strategy is one of the best growth strategies in the long run. Here are seven reasons for the support of diversification strategy.
1) You get more product variety
When diversifying your products, you are bound to do good research and development which results in introducing more variety and options of products in hand to capture the new market. With more product variety, you capture more customer attention and your brand receives a tremendous boost as well as the profitability of the company rises. Thus having more products is good for your business.
2) More markets are tapped
Your reach increases when you have more products and you need more markets to sell them. New products plus new markets is what defines the diversification strategy. More markets mean your distribution increases and overall turnover increases. Although penetrating the markets involve a lot of cost and expenditure, once penetrated, the new market will bring regular profits, which is the goal of any business oriented company. Thus, the diversification strategy is a good market penetration strategy as well.
3) Companies gain more technological capability
With more R&D expenditure, it is likely that the company will develop technological capabilities. The goal of R&D is mostly technological advancement – bringing new and better products in the market. Thus, once you implement diversification strategy, you are bound to gain more technological capability for your company.
4) Economies of scale
Economies of scale comes in the picture when you are using same fixed Cost for more output. Whenever you are using the same factory to manufacture more number of products, naturally with advantage of economies of scale, your cost comes down and margins goes up. This is another advantage of diversification strategy.
5) Cross selling
Cross selling becomes more possible with the diversification strategy. You can introduce older products in the new market or introduce the new products in older and more mature market. An example in this case is LG which gives a large variety of products to end consumers and hence cross sells its own products.
6) Brand Equity
Because brand equity receives a substantial boost with more products and more presence in the market, your brand surges in brand recall as well as brand reach. This results in long term benefits for your brand. Perfect example in this case is Samsung. Samsung smart phones have created a tremendous boost for the Samsung brand, which has resulted in all of its products receiving a positive vibe because its Samsung.
7) Risk factor is reduced
Due to diversification strategy, and introduction of new products in new markets, your reliance on one single product or one single market is reduced and you begin to have advantage of more products and more markets to rely on. Thus, overall risk of the company is reduced.
All marketing experts say, that a business which does not keep adding new customers is bound to fail in the long run. At the same time, a company which does not expand at the right time is bound to lose a lot of its customers and market share. The diversification growth strategy helps the company expand in the right direction and manages risk for the company at the same time contributing to the bottom line. Thus, Diversification strategy is very beneficial for the company in the long run.