Diversification is important in every dynamic organisation.
a) What circumstances would make it necessary for a company to diversify?
b) Explain the different forms in which the diversification would take.
a) Circumstances that may render it necessary for a company to diversify include:
• The need to achieve operating economies
• Growth opportunity
• Availability of extra finances/huge retentions
• Tax-friendly investment destinations/Favourable investment concessions
• Shareholder interests (The dictates of shareholders)
• Better access to capital markets because of the large size “big is mighty”.
• Risk spreading:- entering new products into new markets offers protection against the failure of current products or markets
• High profit opportunities: -stability in profits because if there are hard times in one industry they offset losses from others.
b) The different forms of diversification include:
Diversification occurs primarily when a company decides to make new products for new markets. The company gets involved in activities that differ from those in which it is currently involved. The company selectively changes the product lines, customer targets and manufacturing and distribution arrangements.
Diversification can either be related or unrelated.
Related: – is development beyond the present product market but still within the confines of the industry. It therefore builds on the assets or activities which the firm has developed. It takes the form of vertical or horizontal integration: – development into activities which are competitive with or directly complementary to a company’s present activity (ies).
Vertical integration: – occurs when a company becomes its own supplier or distributor. Can either be backward or forward.
Horizontal integration:-occurs when a company joins together with another company for which it is in the same state of production, distribution or area of business.
Unrelated: or conglomerate is development beyond the present industry into product/markets which, at face value may bear no close relation to the present product/market.