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Business Strategy - The Benefits of Diversification

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					  BUSINESS
  STRATEGY




THE BENEFITS OF
DIVERSIFICATION
           ENTREPRENEURIAL DIVERSIFICATION:

                           A MEANS TO SURVIVAL
The aim is to achieve diversification by building on tradition markets to open up new types of
revenue generating activity and maximizing profit.

A Strategy for Survival and Adding Value

This is about the challenges businesses face; there is concern about businesses being under severe
threat of closing. The issue of the closure is compounded by the loss of the additional value. To
examine the conditions, insight should be on the business operations as well as examining the
possibilities offered by a strategy of diversification.

A Realistic Strategy

To determine how businesses can be supported to maximise the success of their attempts to
diversify. The possibilities of diversification would take into caution the climate required to increase
success level of any diversification strategy.

Value, survival, and the evolution of firm organizational structure

Corporate product diversification is a dynamic process. Diversification reduces the mortality rate of
firms. Mature firms pursue diversification strategies partly as a means to exit stagnant business
segments to its impact on the likelihood of diversification, firm age is also likely to affect the
measured value of diversification. However, these multiples may be affected by factors other than
the firm’s organizational structure. Firm age may be a useful proxy for growth opportunities and
other factors that are likely to have profound effect on the market multiples of individual firms.

Circumstances for diversification

Young firms are less likely to add value by diversifying because these firms trade at the largest
discount relative to their age-matched focused peers. It is likely that these firms are sacrificing good
projects for diversification efforts or that their diversification strategy signals poor investment
opportunities in existing business lines.

Firms tend to become more diversified as they age and grow, which suggest that some firms are able
to redirect resources away from business units experiencing diminishing returns while still benefiting
from synergies.

Furthermore, when young focused firms become diversified, they experience a significant reduction
in excess value, while diversified firms focus experience a significant increase in excess value,
regardless of age.

We also find that diversification is strongly associated with firm survival. Diversified firms are
significantly less likely to go bankrupt than their focused counterparts. Diversified firms tend to have
higher survival rates.
Although it is clear that diversified and focused firms have different characteristics, it is important to
examine the degree to which diversification matters.

The Impact of Firm Size and Value

One advantage of conglomeration is that diversified firms can divert income from one business line
to another so that they can temporarily lower prices and thus eliminate competitors. Alternatively,
firms might become more efficient through their growing expertise in a particular process or
technology, possibly providing them with an advantage over competitors. Diversification and
evolution evaluates how changes impact market value. Analysis on the life cycle of firms show that
nearly 90% of the firms begin as specialized entities, concentrating their efforts within a single
industry. However, as firms age, they typically begin to transition into new product lines. Within
about 20years of their IPOs, nearly half of all firms are diversified. From the patterns in excess value,
it appears that investors are overly exuberant about newly traded firms.

Diversification also increases the likelihood of survival and allows firms to explore new opportunities
and potentially find a better industry match with organizational abilities.

Diversification – Essential to Business Survival

Being in business is a tough job. Contrary to the popular notion that being a businessman is easier
than being an employee, the truth is it’s more challenging, and at times more difficult than being an
employee. A businessman who owns and runs a business is hardly without problems.

The business community is in a constant state of change, the economy can be unstable. A sudden
drop in the economy can potentially kill any business; as such it is unwise not to have contingency in
place for such situations. So, constantly adjusting is the key to surviving with the market’s dynamic
changes. Thus, business owners always have to be prepared for any sudden drop in the economy.
That notwithstanding, the competition for market dominance never stops. All of these factors if left
unchecked can potentially hurt any business. They are just some of the reasons why it is wise for a
business to diversity.

Diversify or Die!

Diversifying is a fallback position. For most businesses, diversification is a point for growth and
expansion thereby allowing a business to explore new avenues in terms of offering new products
and services as well as new markets.

Diversification does not mean being limited to the old market, but also into related markets. In this
case, there won’t be a lot of changes in terms of operations.

However, diversification into completely new markets may require more work and more cost.
Having a mind to diversify gives insight into new potential markets and income generating ventures
where there might be little or no competition. Another benefit of diversifying your products and
services is that you have more to offer and therefore you will be able to tap a wider market and not
limited to a single market segment. This way your business doesn’t have to take a very bad hit from
the drop in the buying trend.
 Diversification increases the likelihood of survival and allows firms to explore new opportunities
              and potentially find a better industry match with organizational abilities



The difference with expansion is that instead of increasing production of a similar product or service
intended for the same market, you are expanding to provide new products and services to a wider
and more varied market.

Understandably there are risks involved and you need to invest as well so you must think it through
carefully before you decide to diversify.



 To be a survivor, you need to have a diversified product, and diversified streams of revenue and
 profits. A combination of; customer demand and (or) the need to find new ways to drive revenue
 and profits can prompt changes. The customer really has changed, and that’s where it should all
                        begin and ends when you’re thinking strategically.

After diversification and price and consolidation, consolidation is going to continue to be a theme,
but more about functionality and service. Having good customer service is one of the areas where
                                people compete to make a difference.

				
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Description: How to benefit and take advantage of diversification in business and beat down competition.