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Not every business can succeed with a diversification strategy. This is because it involves higher risks than simply entering other markets and releasing new products. Here, the dangers associated with consumer expectations and the actions of competing companies also come to the fore.
An example of unsuccessful diversification is Harley-Davidson's eau de toilette. Most customers did not want to smell like a sweaty biker, so the production of this perfume was completely discontinued after only a couple of years.
Another bad example of the application of the business diversification strategy is the fizzy drink like Coca-Cola from the Virgin Group. The market share in England was less than 3%. The main reason for the failure was that the company underestimated the competition in the industry and was wrong in its expectations that the drink would be able to fully compete with the original recipe from The Coca-Cola Company.
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Pros and Cons of Business Diversification
Many entrepreneurs believe that companies developing according to the diversification model may have quite a lot of difficulties in managing and expanding their activities. In addition, the profitability indicators of such enterprises are usually low, since profitable industries overlap new and unpromising areas.
Proponents of a diversification strategy are of the opinion that companies that have several production lines at once are more resilient to crises and have a better chance of developing than companies that produce goods from one product line.
The advantages and disadvantages of the diversification strategy are reflected in the table below.
Disadvantages of Diversification The benefits of diversification
Difficulty in planning and allocating budgets for the development of new areas of the company's activities. Financial stability, allowing the company to overcome crises and minimize the risks of corporate raids.
Difficulties in managing production sectors that are not related to each other. Efficient distribution of finances between all business areas with the aim of developing new production sectors.
High level of risk when investing: unpromising areas can bring losses, which will significantly affect the overall profit of the enterprise. Competitive advantage in the form of an expanded product range.
High labor intensity in centralizing business processes and making settlements between different branches of production. The ability to borrow funds from more successful production areas for the purpose of investing in new ones and supporting existing ones.