Diversification Definition

Expanding into Different Markets

Definition:

Diversification in business refers to the strategic expansion of firms into markets that are different from their core business operations. It involves venturing into new industries or sectors unrelated to the company's existing activities.

Example: An airline company acquiring a chain of record shops represents diversification as it combines operations in the aviation and retail music industries.

Types of Diversification

Conglomerate Integration:

In conglomerate integration, a business enters an entirely different market or industry, often unrelated to its current operations.

Example: A grocery store merging with a bank or a car manufacturing company like Ford merging with Nokia, a technology and communications firm, exemplifies conglomerate diversification.

Lateral Integration:

Lateral integration involves a business moving into a different market within a related industry, often leveraging its existing expertise or resources.

Example: A hairdressing salon merging with a beauty therapist's business represents lateral diversification as both are in the beauty and personal care industry, albeit with different specialities.

In summary, diversification in business involves the expansion of firms into markets that are different from their core operations. This can take the form of conglomerate integration, where businesses enter entirely unrelated industries, or lateral integration, where they move into related markets within the same industry. Diversification allows companies to reduce risk, tap into new revenue streams, and explore opportunities in unrelated or related sectors.