Diversification strategy

A diversification strategy is expanding the scope of a company’s products and markets by adding new businesses to existing businesses . It is a type of product market strategy advocated by Ansoff, and is a management strategy that aims to grow by launching new products in new markets.
This will be achieved by expanding the management resources of a company to new products and markets, and by expanding and developing existing management resources.

It is positioned as one of the important strategic options for corporate growth, and is often promoted with the concern that the profitability of existing businesses will decline, or with the aim of diversifying risks and effectively utilizing unused resources. It is a management strategy.

 

 

Ansoff’s Growth Matrix

Ansoff’s Growth Matrix is ​​a framework used by companies to analyze and consider growth strategies as they expand their businesses.
It is a theory proposed by business scholar Igor Ansoff in his book “Corporate Strategy”, and is also called “growth vector” or “business expansion matrix”.
In Ansoff’s business expansion (growth) matrix, the vertical axis is “market” and the horizontal axis is “product”, which are divided into “existing” and “new” respectively. Looking at the growth strategy of a company in the four quadrants created in this way, I propose that there are basically four ways of thinking about corporate growth.

 

Market penetration strategy

A market penetration strategy is a growth strategy that sells existing products to existing markets (customers).
By increasing the number of purchases per customer and the unit purchase price, as well as the frequency of purchases and the repeat rate, we will work to further expand our market share in the markets we have fought so far. When launching existing products and aiming for growth in the existing market, companies aim to increase market share through aggressive sales promotion activities such as strengthening communication with consumers, increasing awareness and attracting interest. .. However, if the market is mature and saturated, or if the market share is already high, there is a high possibility that it will be a measure with no future, and it can be said that growth is difficult.

 

New product development strategy

The new product development strategy is a growth strategy that develops and sells new products to existing markets (customers) and deeply meets existing market needs. The development of new product development strategies is centered on the development of products related to existing products and upgraded products.
When launching a new product and aiming for growth in the existing market, companies should actively promote to the market and tell consumers that the new product is more attractive than the existing product. It is important to be able to do it.

 

New market development strategy

The new market development strategy is a growth strategy that sells existing products to new markets (customers).
When launching existing products and aiming for growth in new markets, companies need to redefine their marketing strategies, such as reviewing the positioning and segmentation of their products and setting core target personas. In addition, we will rebuild the brand concept and brand message, aiming to expand the market with new communication strategies that have never existed before.

 

Diversification strategy

Diversification strategy is a growth strategy that develops and sells new products for new markets (customers).
Not only does it require careful marketing to enter new markets, but it also requires the development of new products, so it requires careful examination of strategies and comprehensive capabilities including technological development capabilities, sales capabilities, and financial capabilities. It will be the decisive factor.
Of the four strategies in Ansoff’s growth matrix, it is the most difficult and risky .

 

 

Reasons for diversifying business

The purpose of corporate diversification is to bring about benefits such as the willingness of organizational members to contribute, to realize economies of scope by utilizing unused resources, and to diversify risks by diversifying management resources to multiple businesses.
In diversification, it is necessary to formulate a strategy while keeping in mind whether the business is developable and competitive, and whether it can produce ripple effects.

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Entering new business fields

In recent years, the environment surrounding Japanese companies has continued to change drastically. With the development of technology, new business fields are frequently created.
Many companies are embarking on diversification because they are attracted to the new business fields created by the development of technology as described above. This is business diversification for relatively positive reasons.

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Stagnation of main business

Unlike in the past, the current growth rate of the united states economy is declining. Combined with the decline of the market and the shortening of the product life cycle, it is extremely difficult to survive in one main business.
In many small and medium-sized enterprises, it is difficult to continue their business management due to the deterioration of profitability of their main business. It is not uncommon for the main business to diversify without generating sufficient profits. Business diversification for negative reasons, but it is a very rational strategy to break through the current situation.

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Utilization of surplus resources

If you continue to operate for many years, surplus resources (unused management resources) will accumulate in the company. United states companies, in particular, tend to accumulate a large amount of such retained earnings. For this reason, there are many cases in which business diversification is promoted while using retained earnings as a means of utilization.
 

 

Classification of diversification

Diversification is generally divided into “ related diversification ” and “ unrelated diversification “.

Related type diversification

“Related diversification” means entering into new business fields by sharing the management resources (development technology, products, sales channels, production technology, etc.) of SBUs that make up a company.

Unrelated diversification

“Unrelated diversification” is to acquire a new business by acquiring a company such as M & A when the management resources of the company are not useful in the new market.

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4 types of diversification strategies

Diversification strategies can be broadly classified into the following four from the viewpoint of production technology and market.

Horizontal diversification strategy

The horizontal diversification strategy is a diversification strategy for expanding into new product and service areas in the same market as the existing market . Since the horizontal diversification strategy can utilize existing production technology and distribution channels, it can be expected to obtain the “synergy effect” that will be described in detail later.

 

Vertical diversification strategy

The vertical diversification strategy is a diversification strategy that covers the upstream and downstream fields of the current business. Diversification to the downstream is called “forward diversification” and diversification to the upstream is called “backward diversification”, and it is an advantage to make use of the experience of business relationships and sales staff that have already been accumulated.
 

Centralized diversification strategy

A centralized diversification strategy is a diversification that involves relevance between existing products (services) and new products (services) to either or both technology and marketing. Examples include moving from televisions to car navigation systems, diverting lenses used in digital cameras to medical equipment, or industrial alcohol manufacturers manufacturing shochu. One of the benefits of a centralized diversification strategy is the ability to leverage the technical resources and capabilities accumulated within the enterprise.

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Conglomerate type diversification (intensive diversification)

Conglomerate-type diversification (intensive diversification) is a diversification strategy that aims to enter new markets by developing new products and services in fields that are completely different from conventional business areas. High risk and high return are characteristic because we will expand our business into a completely new field.

 

 

Advantages of diversification strategy

Diversification will only succeed if there is a basis for success in the new field of diversification.
It is said that the combination between the new business and the existing business of the diversification strategy is good in some sense.

Economies of scope

This is a phenomenon that companies run multiple businesses at the same time, and the cost is cheaper than when each business is run independently .
In other words, because it is cheap in terms of cost, if you expand the scope of your business, it will be cheaper and you will succeed in diversification.
For example, there are two companies A and B that operate the semiconductor business and the computer business independently, and there is a company C that operates two businesses with the same scale and business content. If the sum of the costs of two businesses of company C is lower than the sum of the costs of company A and company B, then there is a “range economy” between the two businesses. At this time, Company C has a cost advantage over Company A in the semiconductor business, and has a cost advantage over Company B in the computer business.
 

 

Risk diversification

When all resources are concentrated in a single business, the risk of changes in the industrial environment of that business becomes the risk of the company itself. In that situation, there will be problems with the growth of the company, so it may be possible to diversify and diversify risks.
The biggest risk of an existing business is the risk that the industry itself will go from maturity to decline due to the market life cycle of that business .
In the event of an unforeseen situation, such as the success of a competitor in a technology development that makes one’s main technology obsolete in a certain business, the company faces a major crisis, which is also an existing business. It’s a risk of being focused only on.
However, when you have multiple businesses, even if a crisis occurs in one of them, the impact will be mitigated. In order to achieve this effect, it is advisable to combine businesses whose environmental impacts are irrelevant or vice versa.

 

 

Growth economy

A growth economy is the economic benefit of growth itself, which means diversification of the purpose of promoting growth in new businesses. An economy of growth is easily mistaken for an economy of scale, but economies of scale are typical of mass production because of the benefits of the “big state itself” that arises after a company grows as a result of growth. Economies of scale. But the economy of growth is that the process of growth itself brings economic benefits to the enterprise. In other words, it is most efficient when a company grows at a certain rate, so it tries to start a new business for that growth. In order to continue to realize a growth economy, companies must sustain growth at a certain rate, and when the market for existing businesses is expanding beyond the required growth rate, that market will grow. By riding the wave of, companies can realize an economy of growth. Or even if the growth rate of the market slows down, if you can gain a larger share in it, you can maintain the growth economy, but there are limits, so companies prefer to maintain growth through diversification. Become.
Corporate growth has the effect of giving incentives to people inside the company and motivating people to contribute to the company.
 

 

Synergy effect

Diversification of a company also has the advantage of being able to obtain synergistic effects, and synergistic effects are also called “synergistic effects” and mean that it is possible to obtain a combined profit that is greater than the sum of partial management resources. It is sometimes said that “a positive effect that makes 2 + 2 = 5”, and Ansoff lists the following four types of synergistic effects.
1. Sales synergies
This is an effect obtained by sharing distribution channels, sales organizations, advertisements, trademarks, and warehouses.
2. Operational synergies
These are the effects of “highly utilizing facilities and personnel,” “dispersing overhead costs,” “common learning curve,” and “collectively purchasing in large quantities.”
3. Investment synergies
These are the effects obtained by joint inventory of raw materials, joint use of machinery and equipment and plants, diversion of R & D results to other products, investment base, material procurement, and common investment opportunities.
4. Management synergies
It is an effect obtained by transferring the ability and experience of the management team, and know-how of business operation and site management.

If synergistic effects are created by diversifying companies, it will be possible to maximize the use of management resources such as assets, human resources, technology, knowledge, and experience, and to minimize surplus.

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Can adapt to the life cycle of the market

By implementing a diversification strategy, you will be able to adapt to the market or product life cycle. The product life cycle means that a product has a life in the cycle of “introduction period-> growth period-> competition period-> maturity period (saturation period)-> decline period”.
During the introductory period, new products are introduced to the market and demand is small, but large investment is required to create demand. At the Growth Commission, when demand is growing rapidly, the inclusion of competitors will increase and prices will fall. Demand will increase further during the competitive season, but there will be fierce competition for market share among competitors. Product differentiation and market fragmentation will also be clarified, and some competitors will be weeded out from the second half. During maturity, demand begins to stagnate, prices fall further, and competition among competitors intensifies. During the decline, demand shrinks and many companies begin to withdraw.
When one product enters a period of decline, the company will withdraw, but if the business is diversified and other products enter a period of growth, the sales of the company as a whole will remain stable. I can do it.

 

 

Disadvantages of diversification strategy

Costly

Diversification strategies inevitably diversify capital and workforce, and must carry the risk of rising costs not found in single management.
Diversification of a company makes it possible to reduce costs and increase profits due to synergistic effects and economies of scope in the long term, but in the short term, diversification means launching a new business. Therefore, a large amount of investment is required for marketing, product development, and sales activities. Therefore, in order to diversify a company, it will be a prerequisite that investment for that purpose is possible.

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Management tends to be inefficient

Diversifying companies can reduce costs due to economies of scope, but on the other hand, it also tends to make management inefficient. It can lead to inefficient management because resources cannot be concentrated in one business. The more types of businesses we have, the more specialists we need, the more funds we need separately, and the more management resources we can share between businesses depending on the economies of scope, but they are inevitably duplicated. There are many things that will be lost.

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Company example of diversification strategy (representative example)

Epson

Epson, which provides inkjet printers, was originally a manufacturer of watches.
The metal precision microfabrication technology accumulated to settle watches was used in the production of inkjet heads, and succeeded in developing a printer with overwhelmingly superior image quality compared to other companies’ products, and now holds the hegemony in the printer industry. I am.
The dynamic synergies of information management resources such as metal precision microfabrication clothes were a major factor in making Epson a major player in the printer industry.
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The future of the diversification strategy

The most important benefit of developing a diversification strategy is economies of scope. Economies of scope is a typical combination of resource use, but this economic effect has a complementary effect (complement effect) and a synergistic effect (synergy effect) .
If you follow the growth process of a highly successful diversified company, dynamic synergies are often at the core, and it is said that the diversification strategy should aim for this dynamic synergy . ..

 

Corporate domain

By determining the corporate domain, the enterprise determines the degree of diversification. To what extent will the business field be expanded? In the case of a conglomerate, its size is about the same as the size of the entire economy, or even the entire manufacturing industry.

 

 

Summary

In previous studies, various considerations have been made regarding the effectiveness of diversification strategies and the relationship between these types of diversification and management results.
There, as a whole, (1) profits of companies that are conducting “related diversification” compared to companies that are developing businesses limited to their main businesses and companies that are promoting “unrelated diversification”. It became clear that the characteristics are relatively high, and that companies with centralized diversification have relatively high growth potential and profitability.
It is said that the reason why related / centralized diversification management results are high is that synergistic effects between businesses work strongly. Synergistic effects are mainly generated by the common use of management resources in multiple businesses.
Therefore, for companies, we will diversify into business fields where basic technology can be applied, existing production equipment and distribution channels can be shared, or the brand and reputation built in existing businesses can be spread. It is important to keep going.
 

 

Related Terms

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2021年7月14日
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