Diversification is a strategy aimed at reducing risks by adding assets, services, products, banks to the assets of an organization. This concept is also used in narrower meanings.
In economic activity, diversification is the expansion of the activity 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 changes made by the company in order 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 various industries. And concentric - due to the fact that the company is developing new technologies for the manufacture of products that relate to the profile in other industries. This is based on the in-house development and application of technologies acquired in other areas. Although these 2 directions complement each other, the amount of production increases only with concentric diversification, the conglomerate is responsible for the redistribution of existing 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 an expansion of the product range in order to attract more customers. The best option for an enterprise is the combination of these two types.
Diversification is a moving category. The more activity has directions, the higher its level. It represents an adjustment of the main objectives of the company, and possibly a change in the strategy of the organization. The first is the diversification of the narrow spectrum, and the second is the broad spectrum, which is not related to the main production.
Stimulation of this category is due to the desire of economic entities to strengthen their position in the market in competitive conditions, as well as to respond in time to changes in market conditions.
Relevant today is the search for new areas of production diversification. It is necessary to adapt to new conditions in the economy, which encourages firms to search for the most profitable areas of application of the potential created in the enterprise.
The reasons forcing businesses to produce new products and conquer new market segments are:
1) ensuring a stable financial condition with the release of more profitable products;
2) penetration into industries in which there is a high rate of return;
3) reducing the risks affecting profit.
But remember that diversification is not a means of reducing risks. It, on the contrary, can increase them if the entrepreneur, for example, invests in areas where his knowledge is not supported by anything.