Diversification Strategies Individual Portion, Research Paper Example

Abstract

This paper will define diversification, and discuss how the strategy can be used to sustain a competitive advantage. I will state the two strategies in diversification, whichrelated and unrelated. The paper will discuss the advantages and disadvantage of diversification to the company. I will indicate my recommendations and why the option is appropriatefor the Company.

Introduction

Diversification is a strategy that ensures that a company enters into novel markets with original products and services. This is when a company enters into new markets with new products. This is sometimes seen as a good strategic option since companies are able tochoose to improve on and in their sales and increase profits.Diversification strategy is an approach to have a new product life cycle and therefore, the existing one will be obsolete. In most cases companies diversify to change their characteristics, enter into new market that is selling better than the existing one (Denis, Denis & Sarin, 2012).

These strategies can be divided into two types thatare Related Diversification and Unrelated diversification. In related s diversification, the companies have a strategy that is fit for the new market. The company will only capitalize on the strength and the opportunities available (Berry?Stolzle, et al., 2011). Unrelated diversification is where the company has nothing regarding the new product. This is refocusing the company and a strategy where the executive use to reduce the risk by operating on, various product lines, to avoid takeover.

Pricing is very important for a company because it is the source of revenue.Considering that most company target market is the mass market price will be lower but the sale will be high. The high sales will cover for the low price. The customer base for the company will be high and will always sell even when the market is down (Brown, Gregoriou & Pascalau, 2012).

Benefits of Diversification

The most important aspect that can cause companies to diversify is to create and exploit economies of scope.  This is where company will open its options to use the available resources and capabilities to explore new markets. This happens in cases where the company is underutilizing its resources or capabilities. This will enable then to attract new customers. For example, is one is operation a Hair Salon;they can extend to inkling selling of beauty products (Denis, Denis & Sarin, 2012).

The other reason for diversification is to be able to reduce production of an item that is not selling much, and introduce a new product that can sell better. This will enable the company to withstand the prolonged price competition period.  The Company will be strong, and create monopoly in a specific field (Denis, Denis & Sarin, 2012).Diversification strategy will enable the company tospread financial risk over different market and product. This will ensure that the company does not depend solely on one product and if one fails, they will still be operational and making profits (Chao, et al., 2012).

Diversification will also enable a company utilize the managerial skills available in the company. This is where it is simple to employ the managerial procedures on other new markets(Chao, et al., 2012).Diversification increases revenue for the company this is because the company will be dealing with new products, meaning they have new revenue coming into the company.Diversification, however, has a majordisadvantage in terms of cost. This is because the coast of staring a new product is similar like starting a new business all together. It is difficult for an existing company to get resources to start a new line of products; this is because the risk of failing is high(Chen& Yu, 2012).

I would recommend a Company to use related diversification strategy because it is easy to share skills and competence since it is already available. It is also easy to implement because the company already has the marketing knowledge and skills needed for the new brand. This also enables the company realize economies of scale.

References

Berry?Stolzle, T. R., Liebenberg, A. P., Ruhland, J. S., & Sommer, D. W. (2011). Determinants of Corporate Diversification: Evidence From the Property–Liability Insurance Industry. Journal of Risk and Insurance,79(2), 381-413.

Brown, S. J., Gregoriou, G. N., &Pascalau, R. (2012). Diversification in funds of hedge funds: is it possible to overdiversify?. Review of Asset Pricing Studies, 2(1), 89-110.

Chao, M. C. H., Kim, S. H., Zhao, H., & Hsu, C. C. (2012). Performance Implications of MNEs’ Diversification Strategies and Institutional Distance. Thunderbird International Business Review, 54(5), 667-681.

Chen, C. J., & Yu, C. M. J. (2012). Managerial ownership, diversification, and firm performance: Evidence from an emerging market. International Business Review, 21(3), 518-534.

Denis, D. J., Denis, D. K., & Sarin, A. (2012). Agency problems, equity ownership, and corporate diversification. The Journal of Finance, 52(1), 135-160.

Neffke, F., & Henning, M. (2012). Skill relatedness and firm diversification. Strategic Management Journal.