What are the Strategic Advantages of Diversification?

Are the Benefits of Concentric Diversification Significant?

Small businesses do not consider the advantages of diversification in their strategic plan. Yet business or company diversification can have significant benefits, such as minimized risk and maximized opportunity.

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The advantages of diversification in your small business are significant to your growth and success. With diversification, you can reduce your business risk by not putting all 'your eggs in one basket' (trite, but true).

Diversification can also maximize your growth opportunities by expanding your business operations while utilizing and leveraging core facilities or administration functions.

Advantages of Diversification:

For example, let's look at Voice Marketing Inc., the business and marketing services company (I'm one of the owners of the company). In addition to the services we provide on a local basis, we have expanded by building this website, More For Small Business, which has a global reach. So our company diversification strategy is, in this example, market diversification.

It is an example of related and/or concentric diversification – the website, which is focused on business and marketing is closely related to the company's business purpose and is part of Voice Marketing Inc.'s strategy. The target market is existing and new customers. (If new products are introduced to existing customers, it's called horizontal diversification.)

Additionally, we own several other websites: Organic Food For Everyone and Build Your Own Computer . These two websites are examples of what's known as an unrelated and/or conglomerate diversification; this means that there is no common relationship between the two websites and the business website; no common relationship between the two websites and the business; no common relationship between the sites and its customers. We believe the advantages of diversification are significant enough to invest resources in all three sites.

So, why then would we build these websites (other than a personal interest in them)? Because they offer a very differentiated diversification opportunity that minimizes the risk of demand fluctuations.

Overall, we have a number of other diversification strategies that we employ, including diversified sales strategies, diversified resources strategies, product and service diversification, and more.

The advantages of diversification for our business are that the business will be insulated from peaks and valleys and that diversification will leverage the capabilities of the organization.

Diversification is funded through investment in your business; typically through capital investment.

Concentric diversification may be a more cost efficient strategy for your business because you will likely enjoy some synergies in the diversification model. (Other capital investments might relate to replacing or upgrading existing systems or processes; those investments will not be discussed on this page.)

Identify, and focus, your investment criteria on your diversification strategy.

Business and/or Company Diversification:

From a diversification perspective, what are your investment criteria?

• Are you following your industry? Don't be a follower. Invest in new technology and/or in capacity or new products/services expansion if it makes sense to do so and if it is part of your strategic plan. Make sure to consider your service or product life cycle in context of your diversification strategy.
• Don't stop spending on capital investments just because your competitor stopped; follow your small business plan but make sure your plan is up to-date and leading you in the direction you want to go. Consider conglomerate diversification: acquire your competitors as a strategy.
• Your business requirements, capabilities, working capital, business strategy and business plan are just some of the determinants in making diversification investment decisions.

Have you considered the full cost/benefit relationships of your investment dollars?

Deciding when, what, where and how to invest in your business will always be a challenge; that challenge grows significantly during tough economic conditions.

Closely link your investments to your diversification strategy: identify the advantages of diversification for each investment. Consider each investment thoroughly.

Make sure that the changing economic climate doesn’t necessitate changing business investment priorities. But don’t think too much on a short term basis; you want your business to survive and grow over the long term.

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Return from Advantages of Diversification to Strategy.

Or Return from Advantages of Diversification to 5 Forces Driving Strategy.