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Advantages & disadvantages to corporate strategy diversification

Updated April 17, 2017

In a corporate marketing context, diversification is the strategy of increasing profits through selling new products in new markets. As with all strategies, it has advantages and disadvantages, and management can use these advantages and disadvantages to different ends.

Uses of Diversification

Diversification in corporate marketing can be turned to both offensive and defensive ends. On the offensive, it can be used to increase the corporation's profits through starting up enterprises in untapped markets. On the defensive, it can be used to spread the corporation's assets so as to protect against downturns in one market.

Profit

The biggest potential advantage of diversification is the increase in revenue. Diversification means selling a corporation's products in a new environment that it has not attempted to tap into on prior occasions; a successful venture there can result in an entirely new stream of revenue. Better still, such enterprises do not compete with the corporation's older holdings and tend to offer higher rewards than those from the pre-existing enterprises.

Cost

One major disadvantage to diversification is the cost of starting up new businesses in new markets. It is more difficult for corporations to secure resources to start such enterprises because the element of risk is higher. Furthermore, there is no guarantee that the new enterprise will start producing in the near future, and a corporation may have to sustain a loss for consecutive periods before it has attained enough market penetration to start making a profit. Depending on when and how much profit, new enterprises may not be worth the investment.

Risk

Another major disadvantage to diversification is that it is the riskiest of all possible marketing strategies. Since the corporation is selling new products in new markets, it has neither the expertise to produce and market those products nor the expertise to sell in those markets. As such, it will need to spend the money to either acquire the expertise or the information to do both, and there is a chance that its pre-existing management will not be able to do so effectively, which could turn a potentially profitable project into a resource sink with no payout.

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About the Author

Alan Li started writing in 2008 and has seen his work published in newsletters written for the Cecil Street Community Centre in Toronto. He is a graduate of the finance program at the University of Toronto with a Bachelor of Commerce and has additional accreditation from the Canadian Securities Institute.