What constitutes a diversified economy
|Diversification, diversification is the inclusion of new and different products in the program for risk diversification and / or realization of growth opportunities. |
1. Risk diversification. Measure of the bank's risk policy, above all by distributing its lending business to loans, securities, etc., as well as within the securities and loan portfolio by diversifying according to types, debtors, countries, currencies, maturities, etc. m. to achieve a targeted diversification of the risk.
2. Also: diversification. Expansion of a bank's range of services to include new service areas that are mostly related to the previous range of services. This is intended to achieve increased long-term growth and, at the same time, risk compensation.
3. General: risk-reducing principle when managing or disposing of values and custody accounts as well as in asset management. Investment principle for investment funds (investments) prescribed by law for KAG.
Expansion of the production program or range of a company. A distinction is made between the
1. Horizontal diversification, in which the diversification affects closely related products of the previous production level
2. vertical diversification, in which a company moves into upstream or downstream production stages, and the
3. Lateral diversification, in which there is no connection between the previous and the new products.
In finance, the term diversification describes the spread of the components of a portfolio with regard to the type of positions held (e.g. real and monetary assets, shares and fixed-income securities) and the diversity of debtors (e.g. with regard to industry and country). The diversification or the diversification idea is the core of the portfolio theory. In contrast to hedging, the risk-reducing effect of diversification consists in reducing the probability of several negative developments occurring at the same time in the diversification objects under consideration.
The basic idea in any investment is the principle of risk diversification.
For example, the portfolio of an investment fund consists of a large number of different securities. In addition to the opportunities for price gains, every single security also harbors risks that are inherent in the security itself and are referred to as “security-specific risks”.
On the other hand, there are dangers from the development of the individual securities markets (asset class risk) and the global equity market
overall (overall market risk). The first two types of risk can be completely eliminated through a properly understood, systematic diversification, the third cannot. Since the first two types of risk do not necessarily have to be borne, the market does not "pay" a risk premium for them.
Investors who do not diversify away the security-specific and asset-class risk are therefore exposed to risks for which they do not receive a premium.
Systematic diversification therefore means that the risk of a portfolio is lower than the weighted average of the risks of its individual positions.
The development of a new field of activity or business. Companies that persist in their traditional field of activity can neither spread their risks nor take advantage of the opportunities that arise in newly emerging markets. A distinction is generally made between three forms of diversification:
• Horizontal diversification: Most companies use the opportunity to use their acquired know-how for related product or service areas in other industries, for example to use their sales channels for other products.
• Vertical diversification: The company takes over parts of the process chain on its own, for example by becoming its own supplier or, in the future, as a direct seller, continuing the sales channel to the consumer.
• Lateral diversification: Here the company becomes active in completely unfamiliar areas. This is often the case when companies buy up external companies or invest in future-oriented industries because the previous limits of growth show.
see also under:
>>> horizontal diversification
>>> lateral diversification
>>> vertical diversification
is a strategic thrust to enter new markets with new products. If the new products to be developed are closely related to the previous production program, one speaks of horizontal diversification. If the new products to be developed relate to an upstream or downstream production stage, one speaks of vertical diversification. If these products have little or nothing to do with the existing program, there is lateral diversification. New products can also be included in the program through patent acquisition or a license. Another possibility is to take over merchandise from other companies (cooperation). (See also gap analysis, product-market matrix)
Diversification represents an expansion of the company's service program. The aim of diversification is to promote the growth of the company, in particular to increase sales by trying to gain new markets for the products. However, diversification can also be carried out in order to effectively counteract stagnation or contraction in sales of the previous products. Finally, diversification can balance out the risks by allowing the company to "stand on" several "legs". The diversification can take place in a horizontal, vertical or lateral form.
In the case of horizontal diversification, new products or product areas are included at a production level that are factually related to the previous production program at the level of production and / or sales. One example is a brewery that starts producing various types of lemonade. The new products are related to production and / or sales. The horizontal diversification brings about an increase in the breadth of the production program. Vertical diversification is given when products or product groups are taken over from upstream or downstream production stages. Vertical diversification thus represents an increase in the depth of the production program. Pre-stage diversification, also known as "backward integration", is procurement-oriented. It equates to an increase in in-house production or a reduction in external procurement. A clothing company can, for example, add a cloth factory. The downstream diversification, which is also referred to as “forward integration”, is sales-oriented. It is given if, for example, a wood factory also produces furniture.
In the case of lateral diversification, there are no direct connections between the new products or product groups and the previous production program. Depending on whether there is still an indirect performance-related connection or not, a distinction can be made between homogeneous and heterogeneous lateral diversification.
In the case of homogeneous or organic lateral diversification, there is still an indirect performance-related connection between the new products or production areas included in the program and the old products. A manufacturer of food (baking powder, custard powder, ice powder) can also include luxury foods (beer, wine, sparkling wine) in its program. With heterogeneous or inorganic lateral diversification, there is no indirect performance-related connection between the previous and the newly added products. It concerns here the inclusion of a completely different product. An example of this would be an electrical company that also breeds horses.
Diversification is a special case of innovation. The subject of diversification decisions is the inclusion of new products in a range of products (innovation) that are sold on new markets for the company. Diversification h. a product category not previously offered is marketed by the company. Diversification projects represent an essential form of growth, risk or security policy. Diversification measures are often typologized according to: the economic levels concerned: The company expands its activities to areas that are on the same economic level (horizontal D.) or on an upstream or downstream ( vertical D.) lie; the factual connection: the new product category has a close factual connection with the previous product range or parts of it (e.g. manufacturing technology, materials, branch etc.) or hardly any connection (lat rale D.).
(Diversification) Expansion of the service program to include products or product lines with a high degree of novelty with regard to manufacturing or procurement technology (operational innovation) and / or with regard to the previous sales market (program policy). Diversification thus always includes a strategic (marketing strategy) as well as a product and program-political decision-making component. In order to specify the degree of novelty in more detail, a distinction is usually made between various forms of diversification, which are explained using the example of a pants manufacturer: • Horizontal diversification: Introduction of products from the previous production or sales level (e.g. consumer goods) that are factually related to the previous program ( e.g. same target group, same distribution system, same material), but create a new sales market for the company (example: shirt, clothing or sporting goods production). • Vertical diversification: inclusion of services from an upstream (backward integration) or downstream (forward integration) production or sales stage in the production program (example: weaving mill, establishment of your own boutique chain). • Lateral (conglomerative) diversification: integration of products that are completely outside the previous field of activity (example: beverage production). The goals of diversification are to increase profits through high-growth products, realize cost advantages in advertising, sales, insurance, transport and credit, reduce risk through compensation options in several markets, weaken competitive pressure through expansion into substitutive markets and through market heterogenization. Disadvantages for companies can result from unused economies of scale and from the fragmentation of forces in economic and technical terms. The effects of diversification that restrict competition are to be seen in the expansion of dominant positions (company concentration), the hindrance, discipline or displacement of competitors, in tied and reciprocal transactions, in the selection according to the performance endangering compensation calculation and in the establishment of market entry barriers. There is evidence of increasing diversification in the industry of developed economies. However, it mainly operates in areas related to technology and sales and adheres to the limits of the respective basic industry (economies of scope). Diversifications are usually associated with considerable costs, a great deal of time, financial requirements and risk, as well as organizational problems. The extent of this depends primarily on the type of entry into the new field of work. The following are important alternatives: in-house development, licensing, company acquisition or participation, joint ventures, inclusion of merchandise. Literature: Ansoff, H. Strategy Management, London 1979. Borschberg, E., Diversification as a form of growth in industrial companies, Bern, Stuttgart 1969. Schumacher, H., Diversification, Competition and Structural Flexibility, Göttingen 1976.
(in product policy), way of the alternative use of resources, which is carried out by entering new product-market combinations. It is therefore a matter of expanding the range of services compared to the previous, different products that are new to the company. This can be done either through acquisition or establishment of a permanent establishment. With horizontal diversification, the range of services is expanded to include product categories that are classified at the same economic level and are factually related to the previous program. In the case of lateral diversification, the service program is expanded to include product categories that have no material connection with the previous program. In the case of vertical diversification, the range of services is expanded to include product categories that are to be classified at an upstream or downstream economic level and that are factually related to the previous program. See also product policy, diversification, horizontal and diversification, vertical.
Alignment of the company's actions towards (for the company) new products and new markets. Diversification is a form of growth strategy. Stagnating markets and increasing competitive intensity are causing more and more companies to seek their corporate growth outside of their traditional product and / or customer spectrum. A distinction is made between three types of diversification: 1) Horizontal diversification, i. H. the expansion of the previous production program to include products from the same production level of an industry chain, for which the same or similar customers are often considered (e.g. beer and lemonade; men's suits and women's clothes). 2) Vertical diversification, i. H. the inclusion of services from an upstream (backward integration) or downstream (forward integration) production or sales stage in the production program (e.g. beer and bottles; fabrics and suits). 3) Lateral diversification, in which the new products have no material connection with the previous ones (e.g. beer and door frames). In the American literature, the types of diversification are sometimes delimited differently. A distinction is made here between 1) concentric (technical and / or marketing similarity with the existing product line), 2) horizontal (technologically new products for old customers) and 3) conglomerative diversification (new products for new customers). According to an empirical study (Becker 1990), horizontal diversification was the most common type of diversification in Germany from 1976 to 1980 (64%), followed by lateral (26%) and vertical diversification (10%).
The aim of horizontal or vertical diversification is, in particular, the exploitation of synergies, or economies of scale and scope, as well as the effort to weaken competitive pressure through expansion into substitutive markets. In the case of lateral diversification, however, synergies are usually not to be expected. The aim here is to spread the risk through compensation options in several markets and to open up the company to new, more promising business areas. In the 1970s, lateral diversification was seen as the “royal road” to ensure the company's growth. With the help of the portfolio analysis, it should be possible to control large conglomerates of unrelated product areas in a company and to better survive the increasing market saturation in many industries thanks to the risk compensation achieved in this way. With the return of strategic marketing to the importance of competitive advantages and synergy management, however, this form of diversification has lost its paramount importance. Many companies are even separating from their former fields of diversification and concentrating on their own business with the highest level of competence. Diversifications are usually associated with considerable costs, a great deal of time, financial requirements and risk, as well as organizational problems. The extent of this, however, depends on the type of entry into the new field of activity. The most important forms of implementation of diversification are self-development, cooperation in the form of license acquisition (licenses), purchase of merchandise or joint ventures as well as acquisition. Fig. 1 compares these forms with regard to important selection criteria. For the economy as a whole, the empirically ascertainable tendency towards diversification can have negative consequences. Effects restricting competition can be seen in the expansion of dominant positions, the hindrance, discipline or displacement of competitors, in tied and reciprocal transactions, in which the selection for performance endangering compensation calculations and the increase of market entry barriers can be seen.
Literature: Ansoff, H. /., Strategy Management, London 1979. Becker, J., Marketing-Konzeption, 1. Aufl. Munich 1992. Borschberg, E., The diversification as a growth form of the industrial enterprise, Bern, Stuttgart 1969.
(Diversification): The distribution of the available capital between different activities. Diversification always exists when a company consists of several strategic company units (SUE). As a rule, a strategic company unit has its own production apparatus.This does not exclude that it also makes use of the productive services of other strategic units, similar to outsourcing in independent companies. However, it can also exist within a single strategic corporate unit. This is the case when goods are manufactured with the same production apparatus that are sold in different markets.
The concept of diversification therefore relates to the products manufactured, whereby it plays only a subordinate role whether these products are manufactured by the same strategic company unit or by different units.
Diversification means the distribution of the available capital over several strategic company units or activities, i.e. the manufacture and sale of a specific product or a specific product group with a single market. Assuming that the size of the market share is positively correlated with the profit and that capital is only available to a limited extent, it becomes clear that diversification only makes sense within clearly defined limits.
In addition to flexibility, diversification represents a second possibility to counteract the risk that results from the uncertainty or the unpredictability of future developments.
In the product and assortment policy, diversification refers to the expansion of the range of products and services of a commercial enterprise with a product or service that has not yet been manufactured or offered, with the aim of increasing its overall turnover or averting its own Decline or its protection against market risks (policy of risk diversification through the creation of new markets).
In stagnating or shrinking markets, in which further growth by crowding out the competition (and the associated high marketing expenses) is not possible or too expensive, diversification can be the best way to utilize unused spare capacity of a company. As an instrument of risk diversification, diversification is more promising, the more negative the correlation between the starting market and the diversification market of a company is. Another motive for diversification can be the effort to open up growth industries when the existing sales markets are saturated.
In Ansoff's product-market matrix, diversification together with market penetration, market development and product development represent one of four possible strategic alternatives of long-term corporate policy.
Studies have shown that diversifications that were related to the previous activities of a company were usually more successful than those that broke completely new ground.
A general distinction is made between diversifications:
I. according to the type of expansion of market activities: (1) horizontal diversification: the program expansion takes place at the same economic level on which the company was already active in the past, either on the production level or on the sales level (the Expression homogeneous or media diversification used). In this way, the diversifying company can build on its previous know-how, usually also turn to its previous customers or at least to customers from the same economic level and thus generally reduce the risk of diversification and make better use of existing capacities.
(2) vertical diversification (upstream and / or downstream diversification): In this case, a company extends its range of services into upstream or downstream economic levels. This means that either upstream economic levels (e.g. raw materials or means of production) are integrated in order to become independent of suppliers, backward integration, or downstream economic levels (e.g. the sale of previously produced goods) are integrated in order to use market knowledge to reduce costs , Forward integration.
(3) Lateral diversification: The expansion of a company's range of services to include products that have no material connection whatsoever with the previous product market area of the diversifying company. It is the typical form of diversification of conglomerates and serves primarily to increase the return on equity or to develop growth sectors.
(4) Structural diversification: Actually in the broadest sense a form of horizontal diversification, which is characterized by the fact that “an existing need is satisfied by the products of another branch of industry” (Edwin Borschberg).
II. According to the type of new product: (1) Diversification through market novelties: The expansion of a company's range of services through the - innovation of a product that has not yet been offered on the market, i.e. the creation of a completely new market.
(2) Diversification through company innovations: The expansion of the range of services to include a product that already exists on the market, but has not yet been part of the range of the diversifying company.
III. According to the type of implementation: (1) Diversification through the use of existing capacities
(2) Diversification through the establishment of new businesses or branches of business
(3) Diversification through the acquisition of companies that were not previously part of the own company.
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