What Is Diversification Growth?

Diversification growth is a greater volume of business activity created by expanding the nature of operations. It is one of the techniques businesses can use to grow over time. There are several different forms of diversification available to companies with an interest in using this option to grow their operations. These can include offering related products to enhance an existing portfolio, pushing into new markets, or branching out into entirely new areas of business. This strategy must be planned and executed with care for the best results.

Related products and services are a common driver for diversification growth. They allow companies to trade on an existing reputation and skillset to expand sales to existing customers as well as attracting new ones. This can include activities like offering enhanced or luxury models of products, providing service packages, and selling accessories. Consumers who trust the company because it historically provided good products may be drawn to these new offerings, and will spend more money.

Another way to grow a company is to open into new markets. Diversification growth can rely on expanding beyond a specific demographic or area. A bakery, for example, might start a delivery service to make its products available for sale at regional stores. Likewise, a product originally aimed at young women might be expanded to appeal to women in middle age as well. This should increase the volume of sales by elevating overall demand. In addition, this allows companies to expand their customer base and build on it over time.

Other companies may pursue diversification growth by looking into entirely new business opportunities. One way to do this is to acquire a new division; a pharmaceutical company might, for example, buy a toy manufacturing firm. Businesses can also create new divisions, starting from the ground up with new staff and ideas. They use their reputation and brand to attract customers to the new product, even if it isn’t an expected part of their existing lineup.

Tools are available to track diversification growth. Companies can monitor releases of products and services, advertising campaigns, and other activities to compare against sales numbers. If a measure is effective, a clear correlation should appear, indicating that the business risk was worth it. When attempts to expand do not work, companies can perform a balanced equation to decide when they should pull the plug by dropping a product, spinning off a division, or refocusing branding to pay attention to the primary demographic.