Diversification involves directions of development which take the organisation away from its present markets and its present products at the same time. (Johnson Scholes page 323) Diversification is traditionaly under two broad headings: related and unrelated diversification. Related diversification is developemt beyond the present product and market, but still within the broad confines of the ‘industry’ (i.e. value chain) in which a company operates. (Johnson Scholes page 323) Unrelated diversification is where the organisation moves beyond the confines of its current industry. (Johnson Scholes page 330)
Synergy is the most common reason for both related and unrelated diversification to happen. Pottentialy synergy can happen, when two or more products or services combine to complement each other to the extent that, the two services added together have an effect that they become stronger that the sum of the two parts (2+2=5).
By moving backwards in intergration it becomes possible to have more control over your supplies coming in. You can then decide on the quantity at which you require so if demand is slow then production can slow and vice versa.
As production would then be in-house, cost can then be monitored more closely and savings can generaly be made without cutting corners. The product could still be sold at the same price to make a greater profit of it could be sold at a cheaper price and become more competitive
Some manufactures aquire there own distribution outlets to guarantee distribution, this can be important for new competitors as often it can be hard to secure new distributors until the product has been tested for its sales potential. Abu Garcia one of the worlds leading fishing tackle manufacture started out once this way, before world war one and although they no longer have there own distribution points without them they may have never got where they have today.
Abu Garcia have there own alloy plant where the alloy is refined and pored directly into the moulds to produce blocks and shapes that they require to save on re-melting and transporting. This saves time and money and brings down the cost of the already expensive product.
When entering a new market it can also have the advantage of spreading the risk. If one market was to slow or drop into a slump and the product was not selling and not generating a satisfactory income. Then there is always going to be the other product in the other market, which may on the other hand be booming.
Unrelated diversification has as many benefits as related diversification and on some occassions is the only way out. Some times it is used to escape from there current business, when a company is in decline and has little or no alternative but to diversify into a new market which is not in there own industry and just hope they escape in time.
Spreading risk is an advantage of diversifying into unrelated areas and there is a famous saying which is used in the stock market ‘Don’t put all your eggs in one basket’. This is to suggest that if you put all your money into one market then there is a higher risk of coming away with less than if you were to spread the risk over several markets and or products.
By exploiting underutilised resources and competences you potentially benefit from something you had but just wernt using to its potential. Currently folkestone harbour is a dirty little tidal harbour what attracts mainly fishing vessels and day craft at very low cost. They have now planned to change it into a marina, which will be capable of holding hundreds of boats and thus gain a substaintaily higher income for the harbour board. Also it will create more work for local companies and hopefuly improve the amount of visitors which visit the town every year.
There are always dangers when moving into new markets and industries, esspecialy when you have little or no experience in that area of expertise. There is also the possibility that a move could be made and then the industry starts to go into decline, this leaves the company at a higher risk as it becomes less easy to deversify else where.
Related diversification generally has less risk involved as the move is within the same industry that they already work within. Knowledge is generally good and it is normally just an extra part of the value chain which is created.
By moving into a new area i.e. backward intergration it does not gaurantee improved performance for the organisation. It does not even gaurantee better value for money for the retailer or customer. It could realisticly have the oposite effect and end up turning a good product into an un-competitive product, which ends up more expensive. This is a common mistake made as they belive by moving backwards they cut cost when infact they have no experience in that industry and end up with a worse senario.