Diversification

Since the 1980's, and even more in these twenty first centuries, diversification has become a new trend for companies to expand their businesses, including those whether is large or small, domestic or even foreign, to form strategic alliances within their particular industries; even though it has been argued that diversification in many companies did not led to good performance.. Diversification is known as measurement of the commonality for a population in science and mathematic whereas directions of development that bring an organization to out of its current markets and products are the meaning for diversification in business strategy.

Most people in this world doing their business in two ways, either to be divided “all eggs in different basket” of which means multiple business strategies or “all one’s eggs in one basket” of which means single business strategies. Single business strategies have its number of advantages because it is easier to control and easier to practice specialization, however it also carry its certain number of risks for it just like investing all the money into one, and the risk is often high for there is only either you gain all of it or you loss all you have.

The other way the multiple strategies or diversification is a better way to do business because that has help to spread up corporate risk across multiple industries. Diversification is only making sense when it has enhanced the shareholder value.

Diversification is originally divided into two broad ways, of which are the related diversification and the unrelated diversification. Related diversification simply means the entry of a new business activity that distinctly is a different kind of industry but with related to the existing organization’s value chains possess strategic “fit” in operations, marketing, management, R&D. distribution, labor, and also business activities.

There are three ways in directing related diversification, and the three ways are the backward integration of which organization implemented new business activities that are related to the inputs of current business such as raw materials or suppliers. Follow by the forward integration of which is another kind of developing new organization business activity that will be relating to the products of the organization such as its distribution channel. Lastly but not least is the horizontal integration of which is a new business strategy of integrating its market competitors or complementary to its current market interest.

On the other side, the unrelated diversification is the other way of entering into industries that obviously no connection of value chain interrelationships to any of the existing business value chain activities or even no common linkage of strategic that fit among the previous single business units. Unrelated diversification give opportunity for organization to venture into attractive industries that with solid potential of financial returns. Unrelated diversification also helps to spread the risk of businesses over its different division of industries in order to stabilize the corporate profitability.

There also three categories of directing an unrelated diversification strategy and extending to new products and markets through exploiting the current core competences of an organization is the one of the categories. Follow by diversification through exploiting the core competences that go beyond the existing market, in other word simply means to create a genuinely new market. The third category is one of the most extreme type of which it simply will create new competences for new market opportunities.