DIVERSIFICATION

DIVERSIFICATION

DIVERSIFICATION

We have seen that, when the existing deployment of a company's resources is failing to achieve the desired performance, a diversification of its activities should be considered. As an alternative to the acquisition. of new products, the acquisition of other firms can be undertaken in order to maintain the required return on investment.

There are three primary motives for diversification: (1) to replace an inadequate investment, (2) to complement an existing investment and (3) to insure against future saturation conditions. Any one, or any combination, of these motives will justify a company's decision to redeploy part of its resources by the acquisition of other businesses.

Diversification can be conducted in a number of ways. Narrow diversification covers ventures into activities which are closely related to the company's existing product/market situation. Ventures into completely foreign activities are called wide diversification.

An unrelated diversification is usually limited to the financing and business management of the acquired enterprise. A related diversification relates to the utilization of the company's technical 'know-how', ONLINE MARKETING expertise and production facilities in the development of the business which has been acquired. Vertical diversification is where the firm uses its resources to establish or acquire companies which either supply materials or provide it with market outlets.

Any diversification must involve risk and additional costs. These can, however, be minimized by careful planning and some logical thinking. Every successful business plan is dependent upon

(1) an evaluation of available resources,

(2)identification of business opportunities, and

(3) the construction of specific project plans for selection, decision and exploitation.

The cost of diversification, in the form of investigation and appraisal studies, can be kept within reasonable bounds providing the company's objectives have been established. Diversification objectives should be considered under two headings:

(1) Qualitative: these relate to the type of business; whether it is required purely for investment purposes or for direct operation; and the types of markets in which it is involved.

(2) Quantitative: these relate to the size of the operation; the sales performance of the firm; profits and returns on investment.

We have seen that diversification can take a variety of forms. Before a company decides to embark upon any one method of approach, some consideration should be given to possible alternatives. It is the task of Market Research to establish suitable areas of opportunity. It is for management to decide how to exploit them.

Each of the main methods of diversification poses possible advantages and disadvantages.


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