Jesreel M Alegria Strategic Management

BSE III-B Assessment Task 5

Financial sense

Many people believe in taking more significant risks to achieve higher returns and hence step into
diversification. But, the result may not always be positive.

If you decide to go ahead with your current model, it is safe and cost-free; whereas diversification
involves additional finance. For a smoother ride, a thorough analysis of the financial aspects of the
diversification strategy is a must.

Core competencies of the firm

Business leaders should have a definite idea on the core competencies of their organization. This will
help in continuing with the business without any interruption irrespective of any crisis. In some
instances, it can also lead to the creation of more value to the business houses.

If you a not able to bring together your stakeholders under one roof due to the pandemic, possibilities of
using technology to continue the service can be given a thought.

Evaluating the assets

If there are business assets that could be used for multiple purposes and if there is a market for the new
service offering, then go for it. Let’s take the case of a vehicle rental company. They have a fleet of
vehicles with them, from which some can be used for home delivery services. This will result in
additional income and making cashflows without any extra investment.

The right expertise and resources

Once you make up your mind to expand the business, the next thing would be to question yourself
whether you have the right expertise and resources to carry out the process successfully. If expanding
requires you to bring in additional skills or expertise, the process should be planned cost-effectively.

Diversification doesn’t always require you to make drastic changes to your business plans. Sometimes, a
small step will be sufficient to diversify the business. For example, if you run a training company, you can
include new courses, and in the case of catering business, new categories or cuisine can be added. This
way, the risk factor can be reduced as it does not involve any significant changes.
Diversification might sound little risky and painful, but if done correctly, the results will be wort h the
effort.

If a firm can achieve cost leadership and differentiation simultaneously, the benefits are great because
differentiation leads to premium prices, and at the same time that cost leadership implies lower costs.
An example of a firm that has achieved success in both a cost advantage and differentiation is
McDonald. Therefore, such firm is able to attain above average performance and sustainable
competitive advantage as compared to other competitors who only engage in one generic strategy.
However, one very important point to note is that if a firm is unable to balance the resources and
capabilities well, more often than not the firm would get stuck in the middle position and has trouble
competing with rivals, for instance JCPenney. Hence, it is best for the firm pursuing product
differentiation strategy to minimize its costs yet compete against others using differentiation rather than
both strategies.

If a business decides to follow a cost leadership strategy as well as a differentiation strategy

simultaneously, it has to plan it dual strategy very carefully. It has to find a niche market and decide
what it would have to price its products to have a cost leadership position in that market.

Diversification in corporate marketing can be used for both offensive and defensive purposes. On the
offensive side, business diversification can be used to increase the profits of the corporation through the
business start-up in untapped markets. On the defensive side, it can be used to disseminate the assets
of the corporation in order to protect themselves against the crisis in the market.

The greatest advantage of business diversification is the potential increase in revenue. Business
Diversification means selling the products of a company in a new environment that has not been tried
out in previous occasions; a successful business trip can lead to a whole new revenue stream. Better yet,
these companies do not compete with older holdings of the corporation and tend to offer greater
rewards than those of the pre-existing companies

Cost of diversification:

A significant disadvantage to business diversification is the cost of the launch of new business in new
marketing conditions. It is more difficult for enterprises to secure resources to start these companies
because the element of risk is higher. On the other hand, there is no guarantee that the new company
will begin production in the near future and a corporation may have to endure a loss for consecutive
periods before they achieve sufficient market penetration to begin make a profit. Depending on when
and how much profit, new firms may not be worth the investment.

Another important disadvantage of business diversification is that it is the most risky of all possible
marketing strategies. When a company sells new products in new marketing condition, it has neither the
expertise needed to produce nor to sell it in those markets. In such case, you need to spend the money
to acquire any knowledge or information for both, and there is possibility that your existing
management may not be able to do this effectively, which could turn a potentially profitable project into
a resource that is sinking without return.