Business diversification is a special way to overcome the crisis. Diversification of the economy, production, business, risks, portfolio - what is it?

Diversification of production is one of the most difficult forms of development of concentration. It means the simultaneous development of unrelated types of production and services, expansion of the range and range of products produced within the framework of one company, concern, enterprise, firm.

Diversification expresses the process of expanding the activity of an enterprise that uses its own savings not only to maintain and develop its own business, but also to direct them to the development of new types of products, the creation of new types of production and the provision of all kinds of services.

As a result of the diversification of production, enterprises turn into complex multi-purpose complexes, including production facilities that often produce products and provide services of completely different purposes and nature. An enterprise is considered diversified when more than 30% of total sales come from goods and services not related to the main activities of the enterprise.

In the context of the country's transition to market relations, the relevance of diversification of production at enterprises increases sharply. This is due to the desire of business entities, primarily industrial enterprises, to protect themselves from bankruptcy and obtain maximum profit.

Currently, the majority of foreign concerns (JBM, Socasola, etc.) are widely diversified enterprises.

The main danger to a diversification strategy is that it spreads its efforts so that it can be carried out by large organizations with great potential.

Diversification of production contributes to:

Greater survival of any business entity in market conditions;

More complete use of enterprise resources;

The most complete saturation of the market with necessary goods and services;

Carrying out antimonopoly policy.

Many industrial enterprises found themselves in a difficult economic situation only because they did not diversify production in a timely manner. But one should not conclude from this that diversification is a panacea for all ills.

Ill-conceived and economically unjustified diversification can further aggravate the financial situation of any industrial enterprise.

Diversification of production depends on many factors, primarily on the type of production. For our conditions, production diversification is most effective if it is carried out on the basis of a combination of production.

There is no ready-made formula for determining a company's readiness to diversify. In general, it is considered that diversification is ripe if:

opportunities for developing current business are narrowing;

diversification opens up new opportunities to increase the consumer value of goods or strengthen the competitive position;

you can transfer existing competencies and capabilities to other industries;

diversification into related industries helps reduce production costs;

the company has the financial and organizational resources to diversify.

When developing a diversified growth strategy, it is advisable to use three criteria:

Industry attractiveness criterion. The industry chosen for diversification must be quite attractive, i.e. provide an acceptable return on invested capital.

Cost criterion for entering the industry. The costs of entering a new industry should not exceed the potential profits from working in it. The more attractive the industry, the higher the barriers to entry.

Additional benefits criterion. Diversification into new areas should improve the efficiency of existing and new divisions of the company.

The likelihood of receiving additional income increases if diversification occurs in an industry with a competitively significant overlap in value chains; this allows for cost reduction, sharing of technology and experience, creation of valuable competencies and capabilities, and efficient use of available resources (eg brand reputation).

An optimal result can be expected if all three criteria are met.

Available two main types of diversification:

– related – represents a new area of ​​the company’s activities associated with existing areas of business (for example, in production, marketing, materials supply or technology);

– unrelated diversification - a new area of ​​​​activity that has no obvious connections with existing areas of business.

Those companies that have competitively significant overlaps in the types of activities that form their value chains are considered related (related).

In empirical studies, the relatedness of industries is determined by the similarity of technologies and markets. This similarity emphasizes relatedness at the operational level - in production, marketing and distribution - those activities where the savings from the socialization of resources are small and involve large management costs. Conversely, one of the most important sources of value creation in a diversified firm is the ability to apply common management capabilities, strategic management systems, and processes for allocating resources across different businesses. These kinds of economies depend on the existence of strategic, rather than operational, commonalities among the various businesses within a diversified corporation.

Related diversification is beneficial if there is a strategic fit between companies' value chains.

The popularity of related diversification is no coincidence. Among other things, it allows you to distribute investment risks across different areas of activity. In the future, family ties between companies in different industries increase management efficiency and make it possible to combine some processes in different areas of the company’s activities.

As already mentioned, related diversification leads to cost reduction through the consolidation of one or more links in the value chain of different enterprises, providing the effect of inter-firm cooperation. This is a phenomenon of the same order as the effect of scale of production, the difference is that the latter manifests itself in a decrease in production costs per unit of output due to an increase in production volumes or the number of products produced. The effect of intercompany cooperation means reducing costs due to the coordinated activities of companies from different industries in one corporation. The corporate effect is one of the main advantages of related diversification. It arises in a situation where the operations of several links in the value chain of several enterprises are more profitable to carry out centrally than separately.

Despite the benefits of related diversification, many companies choose the route of non-related diversification, investing in any industry that seems profitable to them. In this case, there is no need to select enterprises with strategic fits. It is enough that the chosen industry meets the criteria of attractiveness and entry costs, and the third criterion (additional benefits) plays a secondary role in this case. Often, the opportunity to acquire a successful company is sufficient reason to decide to diversify into a relevant industry. In other words, any company with good profitability prospects that can be acquired at a profit represents a new area of ​​expansion.

Often, when diversifying into unrelated (unrelated) industries, a company chooses those enterprises that guarantee rapid financial growth. Companies that choose a strategy of unrelated diversification most often choose to acquire businesses rather than create a subsidiary from scratch, because expansion through acquisition provides an increase in the value of the parent company's shares. The strategy does not require revision as long as diversification supports stable profit growth for the company and the acquired businesses operate effectively.

Diversification into unrelated industries has a number of advantages:

business risk is distributed across various industries, i.e. the company invests in unrelated industries with different technologies, competitive conditions, market characteristics, and customer base. This is much safer than consolidating investments in one industry with related diversification.

the most efficient use of the company’s financial results is ensured by their distribution across any industries that are promising from the point of view of making a profit (compared to a limited number of industries with related diversification). In practice, this means that funds withdrawn from businesses in industries with low growth rates and questionable profit prospects are used to acquire and strengthen companies in more successful industries.

the company's profitability is more stable, since the decline in one industry is to some extent compensated by the rise in others - ideally, the development cycles of the industries in which the companies operate are in antiphase.

The more successful a company's management is in acquiring new businesses at favorable prices (provided that these companies have significant potential), the faster the wealth of shareholders grows.

Disadvantages of unrelated diversification:

The larger the manufacturing conglomerate, the more difficult it is for top management to make adequate decisions and find the right strategy for a number of completely different companies in different industries and competitive conditions.

Without strategic alignment, the level of profit of the entire business portfolio of a diversified company does not exceed the sum of the profits of all divisions, as if they were operating separately;

Unrelated diversification is theoretically thought to provide more stable earnings later because it operates across multiple industries at different stages of the life cycle. However, in practice, it is almost impossible to ensure that different industries work in antiphase.

Despite all of these disadvantages, in certain circumstances the strategy of unrelated diversification is very attractive, for example, if a company wants to leave an industry that has become unattractive, but does not have the experience or capabilities that could be transferred to a related industry; or if the owners for some reason choose to invest in several unrelated industries. Typically, the choice of unrelated diversification is dictated solely by profit considerations.

When unrelated diversification occurs, it is very important to determine its extent. In this regard, management must have a clear idea of ​​how many units it can manage. It is necessary to establish a minimum and maximum level of diversification: the first is determined by the necessary indicators of profitability and growth, the second by the possibilities of effective management. The optimal level of diversification lies somewhere between these two points.

Thus , diversification of production contributes to the greater survival of any economic entity in market conditions, to a more complete use of the enterprise's resources, to the fullest saturation of the market with necessary goods and services, and to the implementation of antimonopoly policy, which can help the enterprise in a crisis situation.

Even successful businesses require changes over time in order to remain competitive and meet the ever-changing and growing demands of the market. One of the most reliable and proven solutions in this matter is diversification.

What is diversification?

Diversification is a broad concept and is applied in numerous areas of economic activity. The term itself comes from the Latin diversificatio - diversity. In general, diversification refers to the distribution of capital across different assets in order to reduce the risk associated with investments.

Kinds

Depending on the methods, direction and production areas involved in the process, the following types of diversification are distinguished:

• Related- the range of products is expanding due to the offering of new services or goods that are not basic, but have close technological connections with them. There are also two subtypes of related diversification:
  • horizontal - new products in expanded production are not used for the company’s primary purposes, but are manufactured using existing technologies;
  • vertical - related products are used during the production of main products, or new products are made exclusively with the help of the main one.
• Unrelated- this type of diversification is the study of a new area of ​​industrial production and is carried out by attracting the enterprise’s own funds and capital. The main feature is that the new production line has no connections with the old line of business of the company. The main advantage is that the company becomes more flexible in the market and reduces the risks associated with the potential unprofitability of other lines.
• Combined- borrows the principles of the two previous types, its implementation is possible thanks to:
  • distribution of resources and administrative forces of the enterprise between its individual structures, the development of which is built on related diversification;
  • acquisition of assets coordinated with several business areas of the company.

Important: often combination manifests itself in the form of a merger of several enterprises that are opposite in their field of activity with the aim of further overall development within the framework of a single entity.

Goals

Diversification has numerous goals that can be grouped into three classes:

• Flexibility goals:
  • improving the company's position in the market in a highly competitive environment;
  • compensation for seasonal fluctuations;
  • reducing dependence on one product, market, asset, etc.
• Growth goals:
  • increasing production profitability;
  • the need to increase the workload for staff;
  • the opportunity to get more profit through diversification rather than through increasing volumes, etc.
• Stabilization goals:
  • survival in the market;
  • reducing risks by distributing them;
  • ensuring the financial stability of the company, etc.

Where is it used?

The introduction of diversification is possible in almost any area of ​​business and entrepreneurial activity. The wide scope of application is due to its division into types:

1. Diversification of production- a strategic change in the orientation of the company’s activities, aimed at expanding the range and increasing sales markets. The meaning of this process is to strengthen the stability of the enterprise in a situation when one of the business areas becomes unprofitable. New production lines make it possible to correct this situation.
2. Business diversification- distribution of company assets between different sectors of the economy. The main idea is to maximize profits and increase the status of the company.
3. Diversification of the investment portfolio is a management system based on the distribution of finances between different instruments for earning them. The main principle is that the overall risk of the portfolio should be several times lower than that of the individual package included in it. This system allows you to achieve a stable increase in invested capital in the long term.

Important: experts recommend filling the investment portfolio not only with securities (stocks, bonds, etc.), but also with raw materials, precious metals, real estate and other classes of property in order to achieve minimal correlation of financial instruments. With this approach, the risks of individual investor instruments will be compensated, rather than amplified.

1. Economic diversification- distribution of state cash flows aimed at the proportional development of all its sectors. Such a system of managing funds at the country level makes it possible to create an economy that is resistant to the influence of crises. Diversification can be called a necessary step for any state. Thanks to it, connections between industries are significantly improved, the growth of different types of industry is achieved, small and medium-sized businesses are stimulated and, as a result, the economy as a whole is strengthened.
2. Diversification of risks in Forex- a special case of the previous type, which requires a more detailed consideration and will be of interest to those who are planning. There are three main diversification methods used in this market:
   • for trading accounts - it is assumed to use several accounts, systems and currency pairs in order to be able to compensate for losses;
   • for trading instruments - several dependent currency pairs are used, which can compensate for mutual losses;
   • for trading systems - one currency pair is selected, but several systems are selected.

How to choose a diversification strategy?

A diversification strategy is a set of company actions aimed at opening new branches in the business, achieving stability in the market or reducing the risk of bankruptcy by redistributing existing funds and assets. Main types:

• Centered Diversification Strategy is finding new opportunities using existing technologies, product lines and basic products or services. The best characteristics of old products are used as the basis for creating new ones. The operation of new production lines occurs in isolation from the main portfolio.
• Horizontal diversification strategy- is associated with the creation of products that do not have similarities with those products that the company produced previously. At the same time, old tools can be used to implement it. As a rule, we are talking about the creation of related products and services.
• Conglomerate diversification strategy- consists of producing products not related to the company's main products. The difficulty is that the success of the implementation depends on many factors: the qualifications of managers and employees, a sufficient amount of finance, seasonal market fluctuations, etc.
• Concentric diversification strategy- the emphasis is on the production of new products using existing technologies and expanding the consumer base through proposals that take into account the client’s social environment.

Choosing the right diversification strategy is like... To make an informed choice, you need to:

1. Analyze the business. Diversification is impossible without first studying the strengths and weaknesses of the company. The analysis should address the economic and technological aspects of the organization's activities to determine the further path of its development. The result of this stage should be answers to the following questions:
   • What advantages does the existing production have?
   • How stable is the company's position in the market?
   • How many free resources does the company have?

Advice: for a more objective assessment, an independent one can be carried out.

1. Find the direction of diversification. At this stage, the company's management is faced with the task of conducting macroeconomic research and identifying industries in which the organization can successfully realize its potential in the short term. Often, the choice of area for production expansion is based on the personal experience of managers and the preferences of the owner.
2. Evaluate new business. This includes analyzing the competitiveness of the new production line, studying market trends and company development options. This stage should give the company's management answers to questions related to the company's long-term prospects, future marketing campaign, financial planning, etc.
3. Analyze portfolio. This refers to an assessment of the feasibility of a new asset or a new product within the existing portfolio, which will help predict the fate of the business after a change in structure.

Some examples of diversification

Diversification is based on theory, but the most interesting thing is its implementation in practice. Below are some striking examples.

1. The world-famous Hilton chain initially specialized in luxury hotels. To increase profits, the organization used a strategy of centered diversification and began building hotels with more affordable room rates.
2. In the late 2010s, IBM successfully diversified its business by entering the software development and hardware maintenance market. This allowed the company to increase profits at a time when sales of its main products - computers and their components - fell.
3. The United States has shown by its own example how to successfully diversify a state's economy. For more than a quarter of a century, the US government has been distributing funds among the most promising industries, which has allowed the country to take leadership in many international markets.
4. A company producing mineral water can diversify its products by producing sweet soda.

Even the largest and most stable business cannot operate and make a profit forever. The market is constantly changing, so entrepreneurs try to keep up with it. Diversification is considered one of the most effective types of business development. But is this really so? Can it guarantee business stability even in times of crisis? Let's figure it out: Maxim Sundalov, head of the online school EnglishDom, based on his experience, describes the mechanisms and conditions for diversification for different forms of business

What is diversification?

Diversification is the simultaneous development of several unrelated or loosely related business sectors.

If a clothing company starts producing children's toys, this is diversification.

But the concept of diversification itself is very broad. After all, it can be different. The company can expand its product line, markets or suppliers, open a new direction or enter the market of another country. These are all elements of diversification. They do not have to be used all together - the business owner is looking for options that are suitable specifically for his business and market.

Types of diversification

Entrepreneurs distinguish three main types of diversification:

1. Diversification of production. When an entrepreneur decides to release a new type of product or service.

In the first case, it will be related diversification. That is, the new product will be somewhat similar to the old one, and the production line will require only minor changes. But in the case of a training course, this is already an unrelated diversification, because the shoe production and training industries are too different. Therefore, the creation of educational materials will be diversification in this case, which will expand the circle of clients and add sustainability to the business.

2. Diversification of suppliers. When all the necessary raw materials are purchased from different companies.

For example, a manufacturer of nails and bolts purchases metal from three different metallurgical companies.

3. Diversification of investments. When an entrepreneur does not invest all his funds in a business, but also forms other investments: buys stocks and bonds, invests in real estate or precious metals.

Such dispersal of investments helps reduce the risk of loss, but does not affect the development of the business itself. Rather, it serves as a financial safety net in unforeseen situations.

Pros and cons of diversification

It is worth understanding that diversification is not a magic wand for an entrepreneur. It can either stabilize a business or destroy it. Therefore, it is worth highlighting the main advantages and dangers of this process.

Pros:

• Diversification gives an entrepreneur new footholds. Even if certain business sectors become unprofitable or the market switches to a new product, the diversity of production will not allow the company to go bankrupt;
• Successful expansion increases the company's profits;
• With the help of diversification, you can create a closed production cycle, which will reduce dependence on other enterprises;
• Expansion can neutralize market fluctuations in seasonal business sectors. For example, in tourism or the agricultural sector;
• In related business areas, diversification provides financial synergies from general management.

Minuses:

• Expansion requires a lot of money. And the more different the areas are, the more funds are required for diversification;
• Realizing the financial returns from diversification takes time;
• Certain areas of business can be unprofitable for up to several years, which greatly increases the load on the main type of business;
• Diversification requires qualified personnel, so a team for a new industry must be created from scratch. Including senior managers, because the specifics of industries can differ radically.

That is why diversification should be carried out only at the moment of greatest financial stability of the company. In crisis conditions, expansion may fail due to lack of resources, simultaneously ruining the main activity.

Expansion must be planned very carefully and risks to the core business must be prevented as much as possible.

Mistakes of Diversification

The main and most common mistake when diversifying is overestimating your own capabilities. The business owner believes that he will pull several directions at the same time, but physically this is very difficult - especially if the direction is just opening and there are no proven schemes of interaction and work.

Then there are three options:

• Try to manage everything yourself. But there are risks here that, due to fatigue, the businessman will stop correctly assessing the situation and making adequate decisions on how to conduct the business;
• Transfer the new industry to the manager. If you managed to find a manager with successful experience in this particular area, that’s great. But this option is rare, especially if the entrepreneur has not worked with him before. Otherwise, there is a risk that the new direction will develop completely differently than the businessman would like;
• Transfer the established business to the manager. This is psychologically difficult for an entrepreneur. After all, if something unexpected happened in the main business, everything could collapse.

All three options have their drawbacks, so it is important for an entrepreneur to find a balance between total control over all processes and delegation of important powers to managers.

Many entrepreneurs neglect deep analysis and planning. As a result, it turns out that entering new markets or expanding production into related areas requires many times more material resources than the company can afford.

Therefore, for each diversification process, it is necessary to develop a separate detailed business plan and calculate its payback.

Diversification of small and large businesses

Savvy business people see diversification as a way to avoid putting all their eggs in one basket. And newcomers to business also begin to think the same way, trying to diversify their business as early as possible.

But there is a huge difference in this process between small and large companies.

Big business

Large businesses in most cases benefit from proper diversification. This is especially felt in conditions of great competition in the market.

One type of diversification is the merger or acquisition of companies. An excellent example is the Google concern. Over its entire history, it has absorbed more than 100 independent companies. Among their purchases: video hosting YouTube, the Android mobile operating system, mobile device manufacturer Motorola and other world-famous companies.

Google has long become much more than just an online search engine. Even if one, two or even ten next transactions turn out to be unprofitable, the company will continue to operate steadily.

Proper diversification strengthens the position of large businesses and reduces risks.

Small business

Small businesses initially operate in conditions of severely limited resources: both financial and labor.

Even if a small business operates stably, its diversification is a huge risk. Resources are already limited, and if you scatter them across two separate industries, you can burn out in both.

The entrepreneur himself begins to balance between two areas. This can lead to poor business decisions and loss of team trust in the leader. Almost 80% of small business diversification attempts fail and often destroy the business entirely.

Instead of conclusions

Diversification is an excellent tool for business that will help maintain stability even in times of crisis and an ever-changing market. But only if it is done correctly.

Otherwise, diversification may scatter the businessman’s efforts and resources and not bring any results or even significantly worsen the entrepreneur’s position.

Therefore, any expansion requires careful planning and a significant supply of financial and labor resources. And a decision to launch diversification should be made only after a deep analysis of the business’s capabilities and resources. This is the only way you can strengthen your business and increase profits. Good luck with this!

A business cannot develop as long as its development strategy remains at the same level. To ensure the sustainability of a business model and minimize the risks of bankruptcy, a technique such as diversification is often used in practice. We’ll look at what diversification is in the article.

General concepts

The external operating conditions of an enterprise change virtually every day, so any business model passes or fails the strength test. To avoid failure in such an audit, entrepreneurs must constantly be aware of new trends, and also direct all efforts to the quality development of their business in accordance with the latest economic trends.

Diversification is a process of risk reduction

If we describe the concept of diversification more generally, we can say that this term is the opposite of specialization. Diversification is aimed at expanding certain aspects of the enterprise - sales markets, production capacity, product range, assets, and so on, while specialization involves more narrowly focused development. In the broad sense of the word, diversification is the search for alternative ways to solve a particular problem, ensuring risk reduction and keeping the system afloat.

Economic diversification

Economic diversification is an event carried out with the aim of restructuring the industry, including expanding the list of manufactured products. For Russia, economic diversification is a necessary measure, since the country’s economic development is dominated by the fuel, raw materials and military-industrial sectors, while the production of consumer goods lags far behind.

Diversification is developing on a large scale and includes several main areas:

1. Banking. Capital restructuring is being carried out - funds are being redistributed between clients and the bank. In some countries, there are certain restrictions regarding the provision of loans: for example, if the loan amount exceeds 10% of the bank’s assets, then the bank cannot issue such an amount to one person.
2. Investment. Investments and company policies as a whole are being reviewed. The company opens new directions for investment, and also considers new sources of income; there should be several of them, so that in case of losses in one direction there is profit in the other.
3. Production. In this case, measures aimed at expanding production activities in all aspects are considered: new equipment is purchased, new employees are hired, and the range of products is expanded.
4. Business diversification. This is the company’s development of sales markets or new industries in order to improve the situation and increase profits.
5. Agricultural. Expansion of the main activities in crop and livestock production - growing new types of crops and so on.
6. Conglomerate. It is planned to expand the list of services provided within one organization.
7. Risky. Search for alternative ways and tools for earning money. This is the purchase of bonds, in addition to shares during investment work, the creation of a new policy in business areas, the elimination of dependence on the world price level (import substitution).

Let us consider in more detail the main varieties of this event.

A diversified economy will not suffer even during a crisis

Diversification in business

Every business owner is actively searching for new directions to ensure the growth of the company. In order to have the opportunity to “survive” in times of crisis, there is a need to have several main directions in business, namely, to diversify it.

Business diversification involves defining a process strategy in terms of setting goals, attracting resources and taking risks. The process can be conditionally divided into two main directions of development:

1. Production – presupposing, as already stated, an expansion of the product supply and material and technical base.
2. Investment – ​​the enterprise begins to actively invest available funds in assets.

Read also: What does a Sberbank overdraft card mean?

Both directions will help the company minimize risks and avoid bankruptcy. Many companies prefer to choose the first path – production diversification.

The advantages of this line of business are as follows:

• helping an enterprise survive over a long period of time;
• major opportunities for expanding sales markets and product lines;
• ensuring financial synergy;
• efficient use of excess resources.

But before carrying out this event, you need to take into account its main weaknesses. For colossal success in the development of a company, large scale is necessary, and to effectively manage a larger production, it is necessary that employees have sufficient experience. In addition, significant investments will be required for such actions, and it will also take some time to implement the project.

Often, to conduct an objective analysis and assessment, the high-quality services of a competent specialist may be required.

Diversification is a reasonable measure in any industry

Industrial diversification

In this case, all capacities are directed to the development of several aspects of production, which may not be interrelated. Diversification of production is necessary in order to increase the efficiency of the enterprise, make liquidity and solvency indicators higher, and avoid risks. Recently, this measure has attracted businessmen due to the demonopolization of the economy and increased competition.

Production expansion is aimed at manipulating the company's funds so that they can ensure an improvement in the overall situation. The choice of direction and diversification depends on the current financial condition of the company. This measure reached its peak in growth in the 90s, after the collapse of the Soviet Union. Companies reached a new level of development, but other enterprises began to crowd them out, and to stay afloat they had to look for many alternative methods of development.

The main task of every owner of a manufacturing enterprise is to find a middle ground between production specialization and its diversification. It is quite difficult to assess the feasibility of taking the selected measures, because there is no single algorithm of action in this case. The owner of the enterprise, having decided to diversify, takes into account all aspects related to production, as well as the goals that need to be set and achieved.

It is very important for managers of domestic companies to find a direction for diversification, since in the Soviet economy the main direction was the creation of specialized rather than diversified industries. Industrial diversification is a good tool for transferring capital between different industries, and by ensuring it is carried out competently, you can improve the organization’s profit performance and avoid the risks of bankruptcy.

Don't put all your eggs in one basket - protect your business

Portfolio diversification

Many entrepreneurs know two main types of securities: stocks and bonds. But portfolio diversification presupposes the fact that everyone has the right to invest in other types of assets - gold and foreign exchange funds, real estate. When carrying out this event, each investor must find the safest ways to invest and invest in assets.

In practice, it can be noted that not all investors have a clear understanding of the issue of diversification: they think that investing money in not one, but two types of securities of one company is diversification. In fact, this is not always the case. Indeed, the phenomenon can be called diversification, but it does not have such a wide scale that we are considering.

Diversification - this is the expansion of the company’s economic activities to new areas (expansion of the range of manufactured products, types of services, geography and field of activity). In the narrow sense of the word diversification - This is the penetration of enterprises into industries that do not have a direct production connection or functional dependence on their main activities. As a result of diversification, an enterprise can turn into a complex diversified production complex or conglomerate.

It is believed that every company, in order to be confident in its future, must grow, and there are only two basic growth strategies at the company level:

1. concentration of efforts in one industry;

2. diversification into other industries.

Diversification is associated with such advantages of large enterprises as diversity effect. This effect overshadows the effect of mass production of homogeneous products. The main commercial goal of diversification is to increase profits by better exploiting market opportunities and establishing competitive advantages. The actual ways to obtain these advantages, and therefore the incentives for diversification, are different.

Diversification can be related or unrelated (conglomerate).

Related diversification can be vertical or horizontal.

The criterion for determining the type of diversification is the principle of merger. At functional merger enterprises connected by a common production process are united. At investment merger unification occurs in the absence of production community.

Related vertical diversification, or vertical integration, is the process of acquiring or incorporating into an enterprise new production facilities that are part of the technological chain of production of an old product at stages before or after the production process.

It lies in the fact that enterprises prefer to create all the goods or services necessary for the production process themselves within the enterprise instead of buying them. An integration strategy is justified when an enterprise can increase its profitability by controlling important links in the production and distribution chain.

As a result of vertical integration, firms are united at different stages of a single production process. The following forms can be used:

1. complete vertical integration;

2. partial integration (part of the products are purchased from other enterprises);

3. quasi-integration - the creation of alliances between companies interested in integration, without transfer of ownership rights.

Most often, such integration is implemented in two main forms, which characterize the direction of integration and the position of the enterprise in the production chain:

Backwards integration (backward integration);

Forward integration (forward integration).

At backward integration the enterprise takes over the functions that were previously performed by its suppliers, that is, it acquires control over the sources of raw materials and components. The purpose of such integration may be to protect strategically important sources of raw materials or access to new technology.

At direct integration the company takes over the functions previously performed by distributors, that is, it acquires transport and service services, distribution channels and other services related to the company’s core activities. In this case, the motivation is to ensure control of sales, and this is quite logical for corporations with a significant market share in an attractive industry.

Vertical integration can be achieved by mobilizing internal and external capabilities. For example, Dupont Corporation chose a backward integration strategy when it acquired an oil production company. The advantages of this type of approach are reduced costs and improved control over your own enterprise. The reason for choosing such a strategy is often the unequal price level for raw materials and finished products. Control over raw materials is aimed at reducing their cost and ensuring guaranteed access to sources of raw materials. This control is an important advantage when implementing a cost leadership strategy.

At the stage of production of finished products, there are more opportunities to differentiate products through competition and differentiation itself, and control over distribution channels or interaction with sales services allows for a synergistic effect. Although backward integration is generally more profitable than forward integration, it can reduce a corporation's strategic flexibility because it involves the acquisition of expensive assets that are difficult to sell off quickly. Thus, it creates a high barrier to exit from the industry.

Vertical integration typical for metallurgy, paper production, chemical products and the oil complex. In general, it ensures profit growth due to synergies in the sharing of resources and interaction between various departments of the enterprise. In the process of integration, it is possible to increase the technological level of the enterprise, reduce transaction costs and gain access to sources of raw materials.

Transaction costs - these are operating costs in addition to the basic costs of production and circulation; indirect, associated costs and expenses associated with organizing a case, obtaining information, negotiating, searching for suppliers, concluding contracts, and providing legal protection.

The most striking Russian example of vertical integration is the oil complex. Oil companies cover all stages of production, refining and marketing of petroleum products: from geological exploration to the sale of gasoline. There are about ten such companies in Russia.

Horizontal integration is an association of enterprises operating in the same field of activity. The main goal is to strengthen the company's position in the industry by absorbing competitors or establishing control over them. Horizontal consolidation can help achieve economies of scale, reduce the risk of competition, and expand the range of products or services.

An important reason for horizontal integration is also the geographical expansion of the market. In this case, companies that produce similar products but operate in different regional markets merge. A classic example is the penetration of brewing companies into the production of non-alcoholic products.

An example of horizontal integration pursuing the goal of expansion into a new market is the acquisition by the Volkswagen automobile group of a 70% stake in Skoda in the Czech Republic.

Unrelated diversification - This is coverage of such areas of business that are not directly related to the main activities of the enterprise. Diversification is justified if opportunities for integration are limited or absent, or competitors are very strong, or because the market for the underlying product is in decline. With such diversification, there may not be common markets and technologies, and the effect is achieved through the exchange or division of assets or areas of activity, that is, diversification of capital occurs, not production - this conglomerate diversification. The benefit here is possible as a result of optimizing the management of cash flows and investment resources. The most important motives for such diversification include the desire to gain a foothold in growing or highly profitable industries, risk distribution, and the use of management experience. Sometimes tax benefits also play a role. To increase profitability and use of CFU associated with market expansion, enterprises are striving to enter fast-growing commodity markets, the presence of which is inseparable from significant risks:

1. the number of competitors in the industry market is too large;

2. existing distribution channels cannot ensure the sale of products from all enterprises;

3. changes in technologies, forms and methods of sales lead to changes in the CFU;

4. Market growth is sometimes deceptive.

According to I. Ansoff, diversification criteria arise from an analysis of the shortcomings of the enterprise’s existing portfolio. There are two possible approaches to identifying new business areas:

1. trial and error method (with adjustments during activity);

2. systematic approach.

The optimal combination of both approaches is: diversification through accumulation of strategic experience.

There are two ways to diversify:

Internal growth - diversifying the activities of an existing enterprise;

External growth-diversification through mergers and acquisitions.

There are known phenomena such as merger- merger of capitals of two or more companies (friendly merger); absorption- when one of the companies acquires a controlling stake in another company and turns it into a division of the acquiring company (aggressive merger).

Vertical complex (concern) an economic association based on the participation of the parent company in production relations and in the capital of its member enterprises (Gazprom).

Financial and industrial group (FIG) a group of financially related enterprises, including specialized financial institutions created to solve common problems.

Strategic Alliance- a group of independent enterprises that is created for a certain period of time and is connected by modern information technologies. These enterprises pool their resources and efforts to effectively exploit favorable market opportunities. In the USA, such associations are called virtual corporations.