We have seen how product diversification is a strategy with different purposes.
It can be useful to cope with a drop in sales, or to respond to the challenges of a market populated by fierce competitors.
It involves, as Ansoff’s matrix shows, both a change in the company’s product range and an evolution of its target markets.
This transformation may be related or unrelated to the company’s core business. In the case of related diversification, expansion occurs in a market related to the company’s current market.
Conversely, in the case of unrelated diversification, the development of new products allows entry into sectors distant from the current ones.
Both types of operation entail high costs and varying lengths of time.
Related diversification is usually the less risky and more controllable option, since the similarities between old and new productions allow processes to be set up more readily.
In contrast, unrelated diversification is usually more difficult to manage, but characterized by higher financial results, as confirmed by economic research in this area. Especially in this case, it is common to rely on consultancy and market studies to assess the feasibility of the operation.
The solutions adopted in both cases are usually internal development, joint ventures and M&As.
Internal development has medium to long timeframes as the company will have to implement internally what is planned in the diversification strategy, integrating new professional skills – if necessary – and acquiring state-of-the-art infrastructure.
Joint ventures allow companies to share the risks and costs associated with diversification operations, while at the same time bringing together the necessary expertise. Joint ventures also usually have long times, mainly due to the definition of the details underlying the agreement between the companies.
Finally, M&As represent the most complex but also the most effective choice, especially in cases of unrelated diversification: in particular, acquisitions of companies that are already established make it possible to enter unexplored markets without developing activities from scratch.