Perhaps your current industry is stagnating or perhaps you are no longer performing well in the market.

When you're considering this as a motive, keep in mind profitability too. Risk Reduction: If you put your eggs in different baskets your business will be more resilient.

Having a diverse portfolio reduces economic risk by lessening your exposure to market conditions, such as those seen in Five Forces , or external events such as those listed in a PESTLE Analysis. Whilst one business unit may be under strain, others could be performing better than ever. Survival: For some companies diversification is about survival. In these situations, the diversification is against a challenging backdrop, and ideally, you would recognize the need for diversifying before it becomes impossible to find the investment to do so.

Exploitation of Potential Synergies: Finally, companies may spot synergies in their processes, operations and assets, and wish to exploit them in other markets. Internal development: This is developing the business unit, product, or service entirely in-house with your existing team or hiring new members of the team. Partnership with other companies: It may not be possible to invest in building a new product or service in-house, so look for partnerships with other companies to enter new markets and create opportunity for both sides.

Acquisition of another company: You could acquire a company already operating in the market you wish to enter with the capabilities you want to develop.

Each approach has different considerations to balance. For example, partnerships can be high risk but low cost, whereas acquisition can be high cost but be quick to complete. That might be Operational Relatedness, which would stem from synergies in manufacturing, marketing, distribution activities and result in cost savings, or it could be Strategic Relatedness stemming from synergies deriving from the ability to apply common management capabilities to different businesses e.

Unrelated Diversification: Unrelated refers to diversification where the company is entering a completely new market with new products.

Types of diversification strategies

In these cases success largely depends on the expertise of the people in the business and their approach to strategic planning. Companies that perform Related Diversification tend to perform better than those who go for Unrelated Diversification. You could argue that the Unrelated approach may produce higher revenues, as it stems from the idea any company can move into any market, but it is significantly more risky than Related. So take a look at each of these three tests.

Ask the core question for each test and note down your answers. If the three tests have a positive outcome then you have a good chance of succeeding in diversification, if one or more are negative then you are in greater risk of failure. There are thousands of examples of failed diversification, including some really strange ones. Check out our article on weird diversification for more information! In order to give you a top-notch experience on our website, Lucidity and our partners may use cookies and similar technologies to analyse usage, personalise content and ads, and optimise our site.

Our Privacy Policy has lots more info on the cookies we use and how to amend your settings, if you fancy taking a look. If a turnaround is not possible, a liquidation or divestiture strategy is the last resort. Many reasons may cause a decline in sales and profits of a company, in a profit-declining company, the strategy-managers may consider retrenchment strategy to recover the situations. This strategy is employed through either cost reduction or asset reduction or a combination of both. Cost reduction occurs when employees are terminated or laid off, equipment is teased rather than purchasing, advertising campaigns are slowed, down, and other efforts like these are undertaken.

Asset reduction occurs when the company sells any fixed or other assets that are not very essential, elimination of company-owned vehicles for executives or staff transportation, pruning product lines, closing obsolete factories, etc.

Harvest Strategy

The principal purpose of the retrenchment strategy and turnaround strategy is similar — recovering a weak business-unit. Both are designed to fortify the basic distinctive competence of the company. The ways of recovering may be somewhat different; if the ways are the same, then there will be no difference between reduction and turnaround strategies. When a company is in a weak competitive position, it may apply a turnaround strategy. Turnaround strategy is the strategy of reversing a weak business-unit to profitability. To make a poor company profitable, management may redeploy additional resources, instead of divestment or liquidation.

However, the company must have enough resources and capable managers to turn the business unit around. Lee Iacocca applied a turnaround strategy to regain the position of Chrysler Corporation one of the giant American car manufacturers in the s and Was tremendously successful. It may be noted that a turnaround strategy can be applied for both a single-business company and a diversified company.

Restructuring strategy involves divestment of one or more business units of a diversified company and acquiring new business units. Thus, the business makeup of the diversified company takes a new shape. This strategy calls for reorganizing the business portfolio of the company. For this purpose, sick business units are sold off, and prospective new business ventures are undertaken. For example, a diversified company, over 5 years, sells off 2 units, closes down 3 weak units, and adds 4 new lines of business to its business-portfolios.

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These efforts of the company can be called a restructuring strategy.