Image courtesy of Stuart Miles at FreeDigitalPhotos.net
Tuesday, 7 June 2016
Qualities of diversification that you should consider
Hello readers, today I will be writing about diversification. This could be seen as a situation whereby a business enters a new market by developing a new product (goods or services). Diversification in business is also done to minimize risks just like when you diversify your investment portfolio. However, it is also done to create more profit as well as a competitive advantage for a business.
Some researchers say that diversification could destroy as well as create value. As such caution must be taken to ensure that the business is entering a market that they fully understand. The business must also ensure that they possess the tools to compete in the market. That way value will be created rather than destroyed. Businesses in a declining industry tend to diversify their products, with the goal of mitigating the risk associated with a declining industry.
Porter's essential tests can also be used to know if diversification will add value or not. This includes three tests which are
- The attractiveness test: The new market being entered must possess some qualities your business will find attractive. It could be the market size or the market growth or the profit being made in the market.
- The cost of entry test: The barrier to entry must be low, the cost to enter the market must not consume all your financial resources.
- The better off test: A competitive advantage must be gained when a business decides to diversify its products. If no competitive advantage will be gained then the business should not diversify.
Among other factors will be the condition of the market such as the legislations governing the market, is it practicable by your business if not do not enter the market and other factors. The financial capability of the business will also matter. When all of these factors have been considered and they all seem positive then a business should go ahead and diversify. That is all, keep checking my blog regularly. Cheers!