Diversification is a strategy aimed at reducing risks by adding assets, services, products, and banks to the assets of the organization. This concept is also used in narrower values.
In economic activity, diversification isthe expansion of the activity of large organizations or industries beyond the core business. In a broader sense, this is a strategy aimed at multiproduct production. This form of organization is very important in modern market conditions and has a significant impact on the division of labor and competition.
Diversification of production is a change,conducted by the firm in order to increase efficiency, obtain economic benefits and prevent bankruptcy. In industry, its most common forms are conglomerate and concentric.
The first is usually carried out through the acquisition ofhighly profitable organizations and firms in different industries. And concentric - due to the fact that the company develops new technologies for manufacturing products that belong to the profile in other industries. This is based on in-house development and application of technologies acquired in other areas. Although these two directions complement each other, the number of products produced increases only with concentric diversification, while the conglomerate is responsible for the redistribution of existing capital.
There are also horizontal and verticaltypes of production diversification. The latter concerns the stages of assembly and processing of a single product. Horizontal diversification is an expansion of the range of products in order to attract more buyers. 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 is its level. It is an adjustment of the main objectives of the company, and perhaps, a change in the organization's strategy. The first is a diversification of a narrow spectrum, and the second is a broad one, which is not related to the main production.
The stimulation of this category is due to theaspiration of economic entities to strengthen their position in the market in competitive conditions, as well as to react in time to changes in market conditions.
Currently, the search for newdirections of production diversification. It is necessary to adapt to new conditions in the economy, which encourages firms to search for the most profitable spheres of application of the potential created in the enterprise.
The reasons forcing economic entities to produce new products and conquer new market segments are:
1) ensuring a stable financial condition together with the release of more profitable products;
2) penetration into industries in which a high rate of profit is observed;
3) reducing the risks that affect the profit.
But it should be remembered that diversification is notmeans of risk reduction. On the contrary, it can increase them if the entrepreneur, for example, invests in those areas where his knowledge is not backed up.
