Related Diversification, Its Levels, About And Many More: Hey guys today I am sharing some useful information about related to diversification and some examples.
Related Diversification, Its Levels, About And Many More
In general, diversification means expanding a business by operating in multiple industries at the same time (product diversification), entering multiple geographic markets at the same time (geographic market diversification), or starting a new business in the same industry.
Diversification occurs at the business-unit level when a business unit expands into a new segment of the current industry in which the company is already doing business.
It occurs at the corporate level when a diversified company enters into business outside the scope of its existing business units. Diversification is pursued in order to increase profitability through increased sales volume.
Some management experts have attempted to demonstrate that diversified firms? differ in terms of their levels of diversification.
There are three levels of diversification, according to them;
- Diversification is lacking.
- It ranging from moderate to high.
- Diversification ranging from moderate to high.
This level of diversification can be found in a company that focuses its operations primarily on a single or dominant business. If a company’s revenue exceeds 95% of total sales, it is in a single business.
The company’s business is dominant if the generated revenue is between 70% and 95%. 5M Security Services Limit is an example of a company with little diversification because its primary focus is on the “security guards market.”
Kellogg is an example of a dominant business because its primary products are breakfast cereals and snack foods.
Firms that generate their income from a single product, on the other hand, cannot be called diversify in the true sense of the term.
Diversification Ranges From Moderate To High
Two types of diversification are visible: related constrained diversification and related linked diversification.
In the case of relate constrained diversification, less than 70% of revenue comes from the dominant business, and all SBUs/divisions share product, technology, and distribution channels.
If the company has related linked diversification, less than 70% of revenue comes from the dominant business, but there are only a few links between and among the SBUs.
Johnson and Johnson is an example of a relate constrain firm. Whereas Procter and Gamble is an example of a relate link firm.
Diversification At An Extremely High Level
This level is applicable to companies with unrelated diversification. Its dominant business generates less than 70% of its revenue, but there are no common links between the SBUs.
Strategy For Diversification
Can a company keep producing the same product/service indefinitely?
Therefore universities are the only man-made institutions that have survived for more than 11 centuries on the basis of the same product-knowledge!
However, the way knowledge package and deliver has change dramatically, and not all universities have survive.
This exception merely demonstrates the rule that organisations must develop new businesses as they grow, even if they are unrelated. Another path to success is to venture outside of one’s comfort zone.
Diversification is based on the idea of exploring attractive business opportunity areas that are unrelated to the current business. Consider the following analogy. As an individual investor, you should spread your risk.
Why? Because a diversified portfolio protects you against risk better than a single product investment portfolio.
Similarly, an organisation cannot expect the conditions under which it has done well to last indefinitely. It spreads its risks by diversifying into new and different business areas with better prospects.