Diversification


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Diversification

 

Beyond a certain point, it is no longer possible for a firm to expand in the basic product market. So the firm seeks increased sales by developing new products for new markets. This strategy towards growth is called diversification. The diversification does not simply involve adding variety in a product but adding entirely different types of products. Products added may be complementary. Diversification is a much-talked about and widely used strategy for growth. Many companies have opted for this.

 

For example, LIC, an insurance concern initially, diversified into mutual funds. State Bank of India diversified into merchant banking and mutual funds. Similarly, Larsen and Toubro, an engineering company diversified into cement.

Hallmark: An Example of Diversification for Profit Stability

Perhaps no industry is more subject to seasonal cycles that manufacturer of greeting cards. Predictably, sales are highest at traditional holidays. Privately owned, Hallmark Cards, Inc. and its Ambassador subsidiary have a 44% share of the greeting card market . In 1910 Joyce Hall as an eighteen year old started selling post cards from his rented YMCA room in Kansas City, Missouri. In 1911 Joyce’s half-brother joined the fledgling enterprise and greeting cards were added to the product line. Hall Brothers store was established specializing in postcards, gifts, books and stationary. When a 1915 fire destroyed everything, the brothers obtained a loan, bought an engraving company and began producing greeting cards in time for Christmas. In 1928 the company covered the U.S. market and introduced gift-wrap. In 1950 Hall Brothers opened their first greeting card store and in 1951 began its “Hallmark Hall of Fame” television production. The company has consistently expanded its lines of products to insure against the seasonal nature of its core product. In the 1980’s Hallmark acquired Binney and Smith, manufacturer of Crayola Crayons and Magic Markers, and Univision, a Spanish language TV network. In 1990 the company acquired Dakin, manufacturer of plush toys. Hallmark also owns the portrait studio chain Picture People and continues to expand its TV programming through Hallmark Entertainment.

A firm may choose the strategy of diversification under the following situations:

 

(a) When diversification promises greater profitability than expansion.

(b) When the firm cannot attain its growth target by the strategy of expansion alone.

(c) When the financial resources of the firm are much in excess of the requirements of expansion. The distinction between intensive growth strategy and diversification strategy

must be carefully noted. In the case of intensive growth, the firm increases the production and sales of its existing products. But in case of diversification, there is addition of new products and new markets.


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