MODERN STRATEGIC ANALYSIS Strategy of Diversification

growth strategies in the Ansoff Matrix, it is a business

development strategy allowing a company to enter additional lines of business that are different from the current products, services and markets.

product or expands into a new market.
Businesses diversify to

manage risk by minimizing potential harm to the business during economic downturns.
The basic idea is to expand into a business activity that doesn't negatively react to the same economic downturns as your current business activity. If one of your business enterprises is taking a hit in the market, one of your other business enterprises will help offset the losses and keep the company viable.
A business may also use diversification as a growth strategy.

has been one of the most powerful motives for diversification

(tobacco, oil, defense).
But, growth satisfies management not shareholder goals.
Growth strategies (esp. by acquisition), tend to destroy shareholder value

not normally create value for shareholders, since shareholders can hold

diversified portfolios.
Capital Asset Pricing Model shows that diversification lowers unsystematic risk not systematic risk.
PROFIT
For diversification to create shareholder value, the act
of bringing different businesses under common ownership must somehow increase their profitability.

internal development of new products or markets, acquisition of a

firm, alliance with a complementary company, licensing of new technologies, and distributing or importing a products line manufactured by another firm. There are three types of diversification: concentric, horizontal, and conglomerate.

the aim of fully utilising the potential of the existing

technologies and marketing system.
The concentric diversification can be a lot more financially efficient as a strategy, since the business may benefit from some synergies in this diversification model. It may enforce some investments related to modernizing or upgrading the existing processes or systems. This type of diversification is often used by small producers of consumer goods, e.g. a bakery starts producing pastries or dough products.

that could appeal to the company´s current customer groups.
The

company relies on sales and technological relations to the existing product lines. For example a dairy, producing cheese adds a new type of cheese to its products.

have no technological or commercial relation with current products, equipment,

distribution channels, but which may appeal to new groups of customers. T
he major motive is the high return on investments in the new industry. Furthermore, the decision to go for this kind of diversification can lead to additional opportunities indirectly related to further developing the main company business - access to new technologies, opportunities for strategic partnerships, etc.

company goes back to previous stages of its production cycle or moves

forward to subsequent stages of the same cycle - production of raw materials or distribution of the final product. For example, if you have a company that does reconstruction of houses and offices and you start selling paints and other construction materials for use in this business. This kind of diversification may also guarantee a regular supply of materials with better quality and lower prices.

Corporate Diversification  involves production of unrelated but definitely profitable goods. It is often tied to large investments where there may also be high returns.