Diversification Strategy - Example

Diversification Strategy Student’s Name Subject Professor University/Institution Location Date Critically examine the argument that firms in emerging economies should pursue a diversification strategy Over the recent past evolution in technology has accelerated the production process in most of the third world countries and the upcoming nations in terms of economic growth. The increased production of goods and services has in return improved the rate at which trade is taking place in these countries. However, one of the problems that these countries are undergoing is the size of the market share that the producers of certain products are serving (Simons, 2009). Due to the type of marketing strategy that is employed by these emerging economies most of the producing companies end up not being able to utilize their production potential to the maximum. This is due to the limited market that the company serves. Therefore, the only possible solution to overcome this is by employing the diversification strategy in marketing of their products and services. (Nath, Nachiappan & Ramanathan, 2010) Diversification strategy is one of the many corporate strategies that are employed by firms especially when entering a new market. The term diversification has further been elaborated as far as a marketing phenomenon is concerned (Duchin & Levy, 2009). For instance, diversification strategy refers to a number of actions that a firm can adopt in a bid to bring up expansion in terms of production and distribution of its products. These include; Production Expanding the existing production process to manufacture another closely related product to what has been there. For example, an automobile company that has only been producing small cars starts to produce big cars such as lorries and busses Producing a very new product but that is in the same line with the one that has been in existence (although the new product has no relationship with the previous one). For example, an automobile company starts to produce iron sheets for sale and also using them to complement its car production Increasing the range of production so as to meet the needs of the consumers who have not been reached. For example, an automobile company that has been producing 100 units per day increases to 150 units per day. Distribution Establishing a new outlet for the product in another region just within the same country so as to capture a market that has not been reached Introducing a product to new users, for example introducing the use of aluminium to an automobile industry Venturing in international markets by making the product globally known in the country where it has never been sold Packaging a product in a different manner so as to reach a particular market segment These forms of diversification are usually aimed at expanding the scope of an organisation in terms of sales and production beyond its existing market segment. Diversification has numerous advantages to firms if well utilised. For instance among the benefits that companies accrue from this strategy is the increased demand for the products as well as extended market share. Moreover, the company can acquire an excellent reputation within a short time if the strategy is well adopted. (DeMiguel, Garlappi & Uppal, 2009) According to recent studies it has been noted that most of the emerging economies encounter problems that are related to the marketing strategies. For example, most of the third world countries are characterised by high dependency on the developed countries as well as investments from abroad (FDI). The foreign investors normally have an open mind in that they look forward to growing the companies into multinational corporations so that they may be able to extend their market segment. However, this has not been possible in some of the countries where these firms are located. This is due to rigidity as well as the rule of law that exist in most of these countries. Nevertheless, where diversification strategy has been employed two primary outcomes have been witnessed. These are the improvement of shareholder's value in the short run and improved firm performance, in the long run. Such advantages are enough to recommend the concept of diversification strategy in marketing of growing economies. Emerging economies can be described as the firms that are located in less developed countries and which have recently been exposed to high and stiff global competition. These firms could be performing quite well within the local market, but the need to expand their market is limited because they cannot be able to stand the competition already existing in the global market. Among the reasons why these firms are unable to stand the competition is because their products have not been diversified to meet the world market specifications. Reasons for recommending diversification strategy in emerging economies Diversification strategy allows firms to be self-sufficient in that they can venture into sectors that call for dependency. For example through horizontal diversification where a firm produces a product that is closely related to the one already in the market, a company can expand its financial ventures in terms of increased market share. Moreover, a company’s market share is also improved when the firm begins to explore new geographical areas and targeting new customers for its products. Emerging economies benefit a lot from such advantages in that their products find a ready market and thus the returns are improved as well. (Khanna & Rivkin, 2001) Another advantage that may accrue emerging economies when undertaking their production and distribution through the use of diversification strategy is that the company is exposed to challenging competition in the global market. Studies show that increased competition in the production leads to the manufacture of quality goods and services that meets consumers’ needs. In addition, when a product is taken into a market where there products that have been produced under highly improved technology, there are high chances for the producers to acquire new skills. (Guillen, 2000) Diversification strategy also enhances the production of tailor-made goods and services that directly meet tastes and preferences of the consumers. For example, a company may decide to package its products in particular manner so as to reach a certain group of consumers. In addition, a company is able to undergo a quick growth both in terms of sales and production rate. The production rate improves as the company expands into other regions and establishes new subsidiaries that are made to operate independently. On the other hand, the sales increase as the company gets into the global market where the market is wide. Diversification also helps the firms in these emerging economies to utilize their resources properly. When a firm increases the level of production as well as the scope of its market, it becomes easy for it to take advantage of the available economies of scope. The company is also able to utilize the resources effectively and efficiently so that it can be able to meet the increased demand for goods and services due to increased market share. Most of the developing nations are endowed with resources, but they are unable to utilize them fully due to lack of finances as well as proper exposure to place them in the best usage. (Aulakh, Rotate & Teegen, 2000) Diversification enhances stretching of the competence and the skills of its employees by subjecting them to challenging situations in the international market. Sometimes diversification is defined with the application of skills and expertise of the workers into a wide range of businesses that are operated by the company. This does not only lower the company’s production cost but also helps in improving the employee’s ability to deliver in various lines of production. Market power of a company is also elevated through the joint and mutual management of various subsidiaries all over the world. In addition, the company is able to work on the superior internal processes that are involved in the production of given products. This further enhances synergy strategic management of various departments in the company. For instance, when a company diversifies into production of products that later act as raw materials in another department within the production line the effectiveness of the firm will quickly be enhanced. (Ngah‐Kiing Lim & Das, 2009) The above advantages of diversification are the main critical reasons as to why emerging economies should be encouraged to apply diversification strategy in their marketing so as to easily realise their goals. However, employing other strategies such as market penetration and market development strategies the net effect may not be as that portrayed by the market diversification strategy. Even though, it has been critically shown that diversification strategy is the best method, there also some disadvantages associated with the strategy. For instance, diversification involves taking lot of risk especially when it comes to establishing new firms in other geographical areas including in abroad. (Hoskisson, Eden, Lau & Wright, 2000) Another disadvantage is that diversification strategy is usually associated with high costs since the more the company is expanded the more the resources, as well as employees, are required. This calls for readiness of the company before embarking on this form of strategic form of marketing. However, if the firm is not prepared to incur high costs, there are chances of the company being frustrated before accomplishing its goals. Diversification also calls for a wide range of experiences and skills among the employees so as to be venture into various lines of production, as well as distribution. Outsourcing of is a core aspect of diversification, whereby the company has to ensure that it has the necessary specialists so as to take part in certain lines of production or distribution. (Wright, Filatotchev, Hoskisson & Peng, 2005) In conclusion, diversification is a very lucrative strategy that emerging economies can employ in order to raise their profits, as well as their market share. Moreover, by employing the strategy, the firms within these economies can improve their productivity thus raising their overall returns. However, for the strategy to bear fruits, a close monitoring should be maintained so as to ensure that the company does not loose on the way. This means that the firm managers should also be very keen as they give such subcontracts as supplies of goods required by the company. This will help in maintaining the effectiveness of the company. References Aulakh, P. S., Rotate, M., & Teegen, H. 2000: Export strategies and performance of firms from emerging economies: Evidence from Brazil, Chile, and Mexico. Academy of management Journal, vol. 43(3), p. 342-361. DeMiguel, V., Garlappi, L., & Uppal, R. 2009: Optimal versus naive diversification: How inefficient is the 1/N portfolio strategy? Review of Financial Studies, vol. 22(5), p. 1915-1953. Duchin & Levy, 2009: Markowitz versus the Talmudic portfolio diversification strategies. The Journal of Portfolio Management, vol. 35(2), p.71-74. Guillen, M. F. 2000: Business groups in emerging economies: A resource-based view. academy of Management Journal, 43(3), 362-380. Hoskisson, R. E., Eden, L., Lau, C. M., & Wright, M. 2000: Strategy in emerging economies. Academy of management journal, vol. 43(3), p. 249-267. Khanna, T., & Rivkin, J. W. 2001: Estimating the performance effects of business groups in emerging markets. Strategic management journal, vol. 22(1), p. 45-74. Nath, P., Nachiappan, S., & Ramanathan, R. 2010: The impact of marketing capability, operations capability and diversification strategy on performance: A resource-based view. Industrial Marketing Management, vol. 39(2), p. 317-329. Ngah‐Kiing Lim, E., Das, S. S., & Das, A. 2009: Diversification strategy, capital structure, and the Asian financial crisis (1997–1998): Evidence from Singapore firms. Strategic Management Journal, vol. 30(6), p. 577-594. Simons, A. M. 2009: Fluctuating natural selection accounts for the evolution of diversification bet hedging. Proceedings of the Royal Society B: Biological Sciences, rspb-2008. Wright, M., Filatotchev, I., Hoskisson, R. E., & Peng, M. W. 2005: Strategy research in emerging economies: Challenging the conventional wisdom*. Journal of management studies, vol 42(1), p. 1-33. Read More