Advantages & Disadvantages of Diversification

Advantages and Disadvantages of Diversification

Chapter 5

Karen J Forte

Miami Dade College

Abstract

Diversification is a form of corporate strategy. It seeks to increase profitability through greater sales volume obtained from new products and new markets. Diversifying into new products and service lines can provide an effective path to fast growth. Diversification is a tried and trusted growth strategy.

Advantages and Disadvantages of Diversification

Diversification refers to a strategic direction that takes companies into other products and/or markets by means of either internal or external development (David, 2013). There are two basic forms of diversification: related and unrelated. Related diversification occurs when a company develops beyond its present market while remaining in the same area. Unrelated diversification is used to describe a company moving its present interests into unrelated markets or products (David, 2013).

Whether related or unrelated, there are major advantages and disadvantages of diversification. Some advantages are control of inputs, leading to continuity and improved quality. While the disadvantages include a slow growth in core business, and overextension of company’s resources (Clauson, 2013).

Taking advantage of existing expertise, knowledge and resources in the company when expanding is a major advantage of diversification. Another advantage is the ability to control markets by guaranteeing sales and distribution. This is possible through a combination of linkages in the value chain (Clauson, 2013). Lastly, it provides better risk control through no longer being reliant on a single market.

Diversification through acquisition can be a major disadvantage when there is a mismatch between core competencies or experiences of the acquirer and acquired business (Clauson, 2013). In addition to direct financial costs, the necessity to coordinate and control core activities can also be a major disadvantage....