It is important for organizations to be able to evaluate when diversification would be an appropriate course of action and when it would be an inappropriate course of action. When a business is experiencing a strong competitive position and rapid growth in the market, this is not a good time to diversify. When the organization’s position is competitive, yet its growth is slow, diversification should be a top priority. A weak competitive position and slow market growth are also situations in which diversification should not be an option. A weak position with slow market growth merits the consideration of diversification as a competitive strategy. Diversification may be ideal for gaining competitive advantage and cost-saving opportunities (Nickel, McHugh, ; McHugh, 2004)..
There are many options available for an organization that is considering diversification as a strategic management tool. Organizations can build shareholder value by capturing fits with other related businesses. Skills and capabilities of an organization can be transferred from one business to another. Facilities and resources can be shared to reduce costs. Diversification can also allow for using a common brand name as a leveraging tool. Finally, new competitive strengths and capabilities can be created by merging resources (Daft, 2004).
The structure of a firm plays an important role in deciding whether or not diversification is an appropriate competitive strategy. A small firm that is managed by relatively few people may be unable to diversify because of a specialized product line or a lack of knowledge in other businesses. Diversification would not be an appropriate business strategy in this case because the organization would be unable to successfully operate other businesses, whether they were related or unrelated. A larger firm that has a strong market share in their industry and has rapid growth must consider diversification as a competitive strategy. Because of their stronghold position and rapid advancement in the market, diversification could give the organization a stronger position with other businesses, whether they are related or unrelated to the original business type (Nickel, McHugh, ; McHugh, 2004).
Manager motives are also an important concept when studying diversification. Because different managers have different business goals and objectives, diversification will be affected by different managers. General managers looking to reap the benefits of diversification will be in favor of diversification and will attempt to persuade other managers to branch into other businesses. Risk managers, more concerned with the potential losses and risks of diversification, will be more motivated to find less risky alternatives. Persuading this type of manager to diversify will require data supporting the benefits of diversification as well as extensive planning. Operations managers, concerned with both the risks and the benefits of diversification will also need data supporting the benefits of diversification, but may be more easily persuaded to try diversifying as a competitive strategy (Daft, 2004).