DIVERSIFICATION GROWTH STRATEGIES – HOW TO GROW OUTSIDE THE INDUSTRY
When entrepreneurs expand their businesses by investing in or acquiring products or businesses outside their core competencies and industries, they are employing Diversification Growth Strategy. Generally, but not always, this strategy is used when the entrepreneur has exhausted all growth strategies within the current market and industry and now wants to make use of excess capacity or spare resources, adapt to the needs of customers, or change the direction of the company because of impending changes in the market or economy.
One way to diversify is to use the synergistic strategy in which the entrepreneur attempts to locate new products or businesses that are technologically complementary. For example, a food processor may acquire a restaurant chain that can serve as a showcase for the food. Another way to diversify is to acquire products or services unrelated to the company’s core products or services. For example, a manufacturer of bicycle helmets may acquire an apparel manufacturer to make clothing with the company logo on it to sell to helmet customers.
A final strategy for diversifying, conglomerate diversification, entails acquiring businesses that are not related in any way to what the company is currently doing. An entrepreneur might use this strategy to gain control of a related function of doing business – for example, purchasing the building in which the business is housed and then leasing out excess space to other businesses to produce additional income and gain a depreciate-able asset. Many entrepreneurs whose work causes them to travel extensively find it advantageous to acquire a travel agency to reduce costs and provide the greatest convenience.
No matter where a business is located, there are ways to diversify to grow the business. A diversification strategy for growth is not something to undertake without careful consideration of all the factors and potential outcomes, and this is particularly true of acquisition. The entrepreneur can find consultants who are experts in mergers and acquisitions to help smooth the path financially and operationally, but it is extremely difficult to predict with any degree of confidence how the cultures of the two businesses will merge.
Acquisitions and mergers cannot be successful on the basis of financial and operational synergy alone. Organizational styles and the individual personalities of key managers all come into play when an acquisition or a merger takes place. As a result, the human side of the two businesses must be analyzed and a plan developed for merging two potential distinct cultures into one that can work effectively.