Business strategy planning is involved in creating a path for the company in the chosen product market, to position the product so that it gains a competitive advantage over its competitors and as a long-term phenomenon to enter a new market or develop a new product. in an attempt to maintain its competitive advantage. As noted above in an attempt to maintain a competitive advantage or increase business value, some companies diversify. Diversification is moving away from your current markets and your current products at the same time. In this article, diversification will be discussed under three forms of related, unrelated, and multinational diversification.

Related diversification occurs when the organization moves or diversifies into a new product and a new market that are considered related business activities. For example, a paper producing company may diversify into book publishing also known as concentric diversification, it is sometimes argued whether this is a true form of diversification. The flood of companies using diversification as a form of expansion cannot be overemphasized due to the benefits and likelihood of reaching similar customers in similar markets. Some of the reasons for the related diversification are discussed here.

The company distributes the risk by participating in a related product and market using the same experience in most cases. To ensure continuity of supply, a manufacturer may try to own its own outlets; Let’s say an automobile manufacturer produces its own components. The aircraft manufacturer, Boeing Integrated Defense Systems, for example, is a subsidiary established to integrate and provide instant, accurate, and protected information to decision makers and soldiers in the field when they need it, anytime, anywhere. any place.

Sometimes it is difficult to distinguish when a strategy is a generic differentiation or a related diversification. The rationale for related diversification is strategic. In other words, companies diversify into businesses with strategic adjustment, thus sharing the opportunities that may exist in the companies’ value chains. By strategic fit is meant when the company identifies the opportunities that arise from the environment – shared technology, common job skills, common distribution channels, similar operating methods – and the adaptation of resources to take advantage of them, which invariably leads to obtaining an advantage. competitive. to achieve the desired goal.

Another reason for related diversification is that it helps the company achieve economies of scope. These economies of scope arise from the ability to eliminate or reduce costs significantly by operating two or more businesses in a corporate headquarters; or when cost saving opportunities can derive from interrelationships anywhere along business value chains. Synergy is another reason for related diversification. This occurs when the combined effect of the two is greater than the sum of the parts. This is a claim by Benetton in 1995 that there were synergies as a result of its diversification.

Unrelated diversification is based on the prevailing concept that any company that can be acquired in good financial condition and offers good profitability prospects is a good business to diversify into. It is basically a financial approach. This means that the strategic position of the business gives you the advantage of diversity in an unrelated business that expects financial gains compared to strategic fit as in related diversification. Companies that generally pursue unrelated diversification as a strategy are called conglomerates without a unifying strategic theme. Until recently, the diversification literature had only focused on an environmental perspective, representing limited benefit beyond the company’s current product and market base and outside of its value chains. Introducing the resource-based perspective expands the degree of relationship and the opportunities it brings. Unrelated diversification can be addressed by any of the following methods.

Exploitation of the current core competencies of the organization by expanding existing markets to new markets and new products. It could also come about by creating entirely new markets. This is generally seen as opportunities that arise as a result of the core business, for example, Kwik Fit offers insurance services.

The other approach is to develop new skills for new market opportunities. Some of the benefits that come with unrelated diversification may include spreading business risks across a variety of industries; providing opportunities for quick financial gains if bargain-priced companies with high profit potential are found, increasing shareholder wealth. Once again, earnings or earnings largely stabilize as the tough times in one industry are offset by the good times in others.

However, certain drawbacks prevail in following that path. The achievement of these aforementioned advantages is a great demand for business management. They had to be extremely small to detect problems. The more business in a conglomerate, the more difficult it is for management to judge the strategic plans of the business manager in any subsidiary or business unit. Finally, it is argued that the consolidated performance of unrelated businesses tends not to be better than the sum of individual businesses or their own or may be worse; Unless managers are highly talented and focused, unrelated diversification cannot be used to increase shareholder wealth over related diversification. It should be noted here that development in new related or unrelated businesses can take any of these three forms: internal development – where strategies are developed by building the resources and competencies developed by the organization by taking over from another; and joint developments or strategic alliances where two or more organizations share resources and activities to pursue a strategy.

Multinational diversification is considered one of the four strategic paths to improve the performance of a diversified company once diversification is achieved. Multinational diversification implies business diversification and the diversity of national markets. It presents a great challenge for strategists. Management must update and execute a substantial number of strategies (at least one for each industry with as many multinational variations as appropriate). Despite the challenges they pose, multinational diversification strategies have considerable appeal. They offer two avenues for long-term revenue and profitability growth: one is to grow by entering additional businesses, and the other is to grow by extending existing business operations into additional country markets. You could say that Virgin is following that strategy.

In addition, multinational diversification offers six ways to create a competitive advantage:

I. Total capture of economies of scale and experience curve effects. As the market and the company’s product base increase, you can spread the cost

Ii. Opportunities to capitalize economies of scope between companies using the talent available in the company’s value chains

Iii. Opportunity to transfer competitively valuable resources from one company to another and from one country to another

iv. ability to leverage the use of a powerful competitive and well-known brand

v. ability to capitalize on opportunities for collaboration and strategic coordination between companies and countries and

saw. Opportunities to use intercompany or cross-country subsidies to fight sales and market share from rivals.

It is worth noting that diversification is one of the most researched business areas, with some research studies specifically attempting to investigate the relationship between diversification as a business strategy and the financial performance of the organization. For quite some time, researchers suggested that unrelated diversification was considered unprofitable compared to related diversification. Like the diversification of car manufacturers towards car rental. These early research findings were later questioned regarding the link of diversification to the financial performance of an organization. However, the main problem has been the failure of organizations to determine the nature or degree of kinship.

Nagyar (1992) identified two areas of possible relationship:

i. Opportunities for the use of resources: argued that two businesses are related if all types of tangible and intangible resources can be achieved through the physical transfer of resources from one business unit to another; copying resources between each other and using resources simultaneously, for example, using the same brand.

II. Opportunities for strategy alignment: argued that two businesses are related if alignment of their market strategies generates benefits. In other words, coordinated behavior between companies gives them the necessary competitive advantage. For example, horizontally related businesses band together to multiply their effective market power over competitors, just as vertically related business units may be preferable to independent buyers and suppliers.

Although diversification may be difficult to fully achieve in practice, diversification may simply be necessary to achieve continued growth when today’s markets become saturated.