Haven’t you woken up one morning thinking that the market you bet everything on might not be tomorrow? Because eternal markets do not exist, diversification is a strategy of choice to protect against the future and work on the “coup d’après » as one of the senior executives of the French large group for which I am employed, uses to say.
To put it simply, we can cite 4 main types of diversification:
· Related diversification: This strategy involves adding related or complementary products or services to your existing business. For example, a shoe retail business might diversify its business by also offering handbags or fashion accessories.
· Unrelated diversification: This strategy involves adding products or services that are unrelated to your existing business. For example, a shoe retail company might diversify its business by investing in real estate or technology.
· Horizontal diversification: This strategy involves expanding your business into related but distinct areas. For example, a telecommunications company might diversify its business by offering cable or Internet services.
· Vertical diversification: This strategy involves expanding into activities upstream or downstream of your existing business. For example, a car manufacturing company might diversify its business by investing in the production of auto parts.
In the context of this article, this month I want to tell you more about conglomerate diversification, because I have been practicing it for several months on projects and after interesting questions on the table, of course I thought it was worth sharing it with you.
II. Conglomerate diversification: what are your challenges?
What exactly is a conglomerate diversification ? A conglomerate diversification, its somewhat barbarous name I grant you. A diversification unrelated to the core business of a company consists of investing in activities or sectors that are not directly related to its main activity or to their basic skills. This strategy is also called conglomerate diversification or portfolio diversification.
To make this more concrete for you, here are examples of companies that have implemented diversification unrelated to their core business:
· Virgin Group: This company, headed by Richard Branson, started out as a record company before branching out into airlines, telecommunications, financial services and even space.
· General Electric (GE): This company started out as a light bulb manufacturer before branching out into the energy, aerospace, healthcare and financial services sectors.
· Samsung: This Korean company, which started as a food and textile company, has branched out into consumer electronics, home appliances, shipbuilding and even theme parks.
The chances of success of unrelated diversification depend on many factors, including the company’s ability to enter a new market, the demand for the products or services offered, competition and potential synergies with the core of business.
The challenges of unrelated diversification include the financial risks associated with entering a new market, the need to develop new skills and capabilities, and the difficulties in finding synergies with the company’s core business.
To overcome these challenges, it is important that the company carefully assesses the potential risks and opportunities of diversification, invests in the skills and capabilities needed to succeed in the new market, and actively seeks synergies with its existing core business.
III. Conglomerate diversification: what ideal process for a company?
Indeed, conglomerate diversification is good to talk about, but the most impressive thing happens when a company manages to successfully implement it in practice. As always, I’ll be frank with you. Implementing conglomerate diversification can be a complex and risky process, but the payoff is worth it.
Here are some general steps that can help guide the process:
1/ Assessment of the current situation: the company should examine its competitive environment, its strengths and weaknesses, and its current resources to determine if conglomerate diversification is appropriate.
To do this, I refer you to the 3 articles of the strategic tool box that I wrote a few months ago and that you can use very easily. With a little will and a little time anyone can do it.
2/ Identification of potential business sectors: the company must identify the business sectors in which it wishes to diversify and assess their attractiveness and growth potential.
3/ Assessing potential risks and benefits: The company should assess the potential risks and benefits of each line of business, including market entry costs, competition, barriers to entry, and market trends. market.
4/ Strategic planning: the company must develop a strategy for entering each business segment, which may include acquiring existing businesses, establishing a new business, or cooperating with strategic partners.
5/Implementation: the company must implement its conglomerate diversification strategy by allocating the necessary resources and following its strategic plan.
Implementing conglomerate diversification can be difficult and involves many risks, including managing multiple lines of business, integrating new skills and corporate cultures, and achieving sufficient financial results to justify the investments. To overcome these difficulties, the company must have strong management, adaptability, effective communication and rigorous monitoring and evaluation processes.
To carry out a conglomerate diversification project, the human resources required may vary depending on the size and complexity of the company and its activities. However, generally it is important to have competent leaders with a strong background in business and project management, as well as employees with technical, financial and business skills to help assess and manage new sectors. of activity.
IV. Conglemerate diversification: the case of the Virgin group, study of strengths and weaknesses
I already told you about Virgin a few lines above. And I voluntarily chose this example because I love the person of Richard Branson. A businessman who was originally a completely dyslexic child with poor results in school. His teachers had predicted that he would end up either in prison or a billionaire.
In a few words, the Virgin Group is a British company founded by Richard Branson in 1970. Over the years, the group has diversified its activities and become an important player in several sectors, including music, television, aerospace, telecommunications and trips.
Here is an overview of the Virgin Group’s strategy and its strengths and weaknesses.
Virgin has a strategy of diversification, which involves investing in new sectors to reduce risk and dependencies on a single market. This strategy has enabled the group to grow rapidly and become an important player in several sectors.
Marketing: Virgin is also known for its effective marketing strategy, which uses corporate branding to promote its products and services. The group relies on creative and original advertising campaigns to attract the attention of consumers.
Strong Brand Image: Virgin is a globally recognized brand associated with innovation, quality and adventure. This strong brand image allows the group to easily attract new customers and retain existing ones.
Diversification: The diversification of the group makes it possible to reduce risks and dependencies vis-à-vis a single market. It also allows you to explore new opportunities for growth and learn new skills.
Innovation: Virgin’s spirit of innovation makes it possible to offer original and innovative products and services that set them apart from the competition.
Dependence on the Virgin brand: The strength of the Virgin brand can also be a weakness, because the dependence on this brand can make the group vulnerable in the event of a crisis or a change in the image of brand.
Dependence on partnerships: Virgin has often established partnerships to grow its business, which can leave the group vulnerable if these partnerships break down.
Strong competition: In some industries, such as music or travel, competition is strong, which may limit Virgin’s growth and profit margins.
As the saying goes, « don’t put all your eggs in one basket ». The diversification strategy seeks growth by spreading financial and industrial risks, skills, strategic business areas and their scope of application.
The goal for the company is to achieve higher competitiveness and increase profitability. The desire to sustain entrepreneurial activity means being attentive to rapid changes in the market and putting forward planning at the heart of its overall strategy. It is foresight that makes it possible to anticipate changes and adapt to them instead of undergoing them.
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