Diversification is a strategy aimed at reducing risks by adding assets, services, products, banks to the organization's assets. This concept is also used in narrower meanings.
In economic activity, diversification is the expansion of the activities of large organizations or industries beyond the core business. In a broader sense, this is a strategy aimed at diversified production. This form of organization is very important in today's market conditions and has a significant impact on the division of labor and competition.
Production diversification is the change a firm makes to increase efficiency, gain economic benefits, and prevent bankruptcy. In industry, its most common forms are conglomerate and concentric.
The first is usually carried out through the acquisition of highly profitable organizations and firms in different industries. And concentric - due to the fact thatthat the company is developing new technologies for the manufacture of products that belong to the profile in other industries. This happens on the basis of in-house developments and the use of technologies acquired in other areas. Although these 2 directions complement each other, the number of manufactured products increases only with concentric diversification, while conglomerate is responsible for the redistribution of available capital.
There are also horizontal and vertical types of production diversification. The latter concerns the stages of assembly and processing of a single product. Horizontal diversification is the expansion of the product range in order to attract more customers. The best option for an enterprise is a combination of these two types.
Diversification is a moving category. The more activities have directions, the higher its level. It represents an adjustment of the main goals of the company, and possibly a change in the strategy of the organization. The first is a narrow range diversification, and the second is a wide range, which is not related to the main production.
The stimulation of this category occurs due to the desire of economic entities to strengthen their position in the market in a competitive environment, as well as respond in time to changes in market conditions.
Relevant today is the search for new directions for the diversification of production. It is necessary to adapt to new conditions in the economy, which encourages firms to seekthe most profitable areas of application of the potential created at the enterprise.
The reasons that drive businesses to launch new products and conquer new market segments are:
1) ensuring a stable financial condition along with the release of more profitable products;
2) Penetration into industries with high profit margins;
3) reduce risks affecting profit.
But remember that diversification is not a risk mitigation tool. On the contrary, it can increase them if an entrepreneur, for example, invests in those areas where his knowledge is not supported by anything.
