Diversification (or diversification ) is in the business administration a strategy of companies , by extension or modification of the products / services or business areas or risk spreading the odds to improve and / or risk of loss to decrease. The opposite is the specialization up to the monostructure .
Diversification strategies can also be followed by other economic entities such as private households or the state . However, they then do not affect products or services, but their typical risk situation ( capital investment in private households) or, in the case of states, the diversified polystructural economic structure brought about by economic policy , which can also prevent one-sided import or export relationships (import or export dependency on another state) arise. In Germany, for example, the dependence on imports of primary energy sources such as crude oil and natural gas is a question of diversification. Mostly, however, the diversification of companies is examined, whereby the analyzes mainly focus on the products / services and their distribution . This “real diversification” is the “deliberately pursued policy of a targeted expansion of a company's service program”.
The following types of diversification can be distinguished:
- In the horizontal diversification , the production program is expanded to include products that are related to the previous products so that the same production processes , raw materials , technologies or sales channels can be used.
- The Vertical diversification concerns upstream ( intermediate goods ) or downstream products in subsequent processing stages , it concerns new products for new markets . It is based on the value chain and extends the vertical range of manufacture .
- Lateral or diagonal diversification is the riskiest form and creates new products for new markets without resorting to upstream or downstream levels.
In the American specialist literature , a distinction is made between:
- Concentric diversification , in which new products are not technologically related to previous ones, but serve existing customer groups;
- conglomerative diversification concerns new products that are offered in new markets
- horizontal diversification are new products aimed at existing customer groups.
This distinction does not completely coincide with the types of German specialist literature.
Diversification in operational functions
In procurement , dependencies on a single supplier or sub-contractor can be reduced through diversification, which reduces or eliminates the risk of missing redundancies in idiosyncratic business relationships . With backward integration , diversification occurs when, for example, an automobile manufacturer acquires a supplier of individual parts by acquiring a company ; this is diversification through backward integration. The changeover of production from a single-product to multi-product firms reduces the production risk in the production process . Here can system effects with cost reductions occur "if the cost of the joint production of two products are lower than that of a separate production". An increase in total production with a second product leads to lower unit costs , for example by avoiding additional set-up costs or using common components . Diversification is the riskiest part of the product-market matrix according to Harry Igor Ansoff . One possible measure of diversification is the Berry index . The financing is diversified by dividing the capital requirement or capital surplus among several different creditors ( lenders ) or debtors ( borrowers ). This diversification effect can be achieved, for example, through a capital increase in order to reduce the dependency on individual creditors in debt financing or, in the case of debt capital, by rescheduling to many lenders. In sales , customer acquisition can reduce the dependency on bulk buyers or the distribution of products / services on different markets such as regional or national distribution and export . Diversification is even possible when exporting in order to avoid dependencies on individual importers or individual countries ( country risk ). Through forward integration is diversified in sales, as when a producer own distribution chain builds and thereby of downstream marketing stages freed.
The energy security of a state also depends on its energy diversification , i.e. the share of individual energy sources in total energy generation . Germany's own energy reserves are low. That is why the country is particularly dependent on imports . A good energy mix must be available not only for the use of different types of primary energy , but also for imports. Germany's import dependency was around 70% in 2017, with fossil fuels even being 98% (crude oil) and 93% (natural gas), while 100% of renewable energies and lignite each came from Germany. Only the latter are self-sufficient with a high degree of self-sufficiency . The dependence on energy suppliers is particularly high for natural gas and oil. In 2017, 49% of the crude oil imports came from Eastern Europe / Asia, 23% from Western and Central Europe (mainly North Sea), 19% from Africa, 7% from the Middle East and 2% from America. Here, energy policy is called upon to improve the energy mix through further diversification in order to guarantee energy security.
Diversification in finance
Credit institutions can diversify in sales, for example through financial innovations . A risk diversification of the credit risk can be achieved in the lending business by eliminating cluster risks through the granularity of the credit portfolio . There is further diversification through passing on risk in credit trading , hedging through credit default swaps or securitization . Universal banks are more diversified than specialist banks because they offer many types of banking to multiple target groups. Investment companies and capital investment companies may only invest funds in accordance with the principle of risk diversification (cf. KAGB , KAGB), which can be transferred to all investors. In the case of insurers , diversification relates not only to new types of insurance , but also to the development of new sales channels (such as insurance brokers , insurance brokers , all-in-one finance with credit institutions or direct sales ). Pursuant to (1) No. 7 and 8 VAG, insurance companies must also mix and diversify their investments appropriately in such a way that excessive dependency on a specific asset or issuer or on a specific group of companies or a geographical area and excessive risk concentration in the portfolio be avoided as a whole and investments with the same issuer or with issuers belonging to the same group of companies must not lead to an excessive concentration of risk.
Diversification in money and capital market investments
The investor may, at the investment in financial products diversify if it does not invest its assets in a single financial product but in different asset classes (eg. Types of securities such as stocks , bonds , mutual funds and various etc.) financial services provider or issuer - possibly with seat in different countries - distributed.
The background to this widespread investment strategy is risk diversification , i. H. Avoiding a possible total loss by simultaneously investing partial amounts in alternative, differently risky forms of investment, so that the total assets are spread over various financial products. The desired effect of risk reduction is achieved by combining two or more securities that have a low correlation with one another in a portfolio . The asset structure obtained in this way shows a lower risk overall than the respective individual securities. The prerequisite for this effect is that the underlying securities are not 100% positively correlated; they have a correlation coefficient to one another which is less than 1.
A certain investment amount is not only invested in shares of a manufacturer of parasols, but also proportionally in shares of a manufacturer of umbrellas - whatever the weather is, not everything is put on a single card. Each issuer on its own may generate a good return and have individual risks, but together in a portfolio , the return is generated with significantly lower risk. This is how mutual funds and even hedge funds operate .
The risk diversification depending on the correlation coefficient
In portfolio theory, return and risk are statistically interdependent ( risk-return ratio ). To simplify matters, it can be referred to as the share / annuity ratio in a securities account. The variance or the standard deviation of the securities or the portfolio is considered to be the risk . A portfolio with minimal variance can be derived depending on the correlation coefficient . If all securities in the portfolio are 100 percent correlated, the security with the lower risk is weighted more heavily.
A common measure of the price risk of a listed security is its volatility , expressed as the standard deviation - this is what is known as the second moment of the probability distribution . There are also higher-order moments as risk measures . The skewness (third moment) measures the deviation from the expected value of the normal distribution . A distinction is made between right and left skew. In addition, there is the kurtosis (fourth moment). It measures the values at the respective end of the normal distribution curve. With the emergence of hedge funds, risk measures of higher moments are gaining in importance, since their return distributions are usually inadequately captured with traditional risk measures.
On the volatility than gebräuchlichem risk measure is the so-called English short-fall -Risk indicating the profit or loss probability. In pronounced bull phases or in the event of market anomalies , these values are often missed, i. i.e., there is no profit. Considerable losses can even arise because this risk measure falls short.
The task of an investment advisor is to offer the investor the right mix of different asset classes (see asset class ) according to his objective or subjective risk attitude (see risk class ) and thus to achieve an adequate long-term performance of the invested capital.
Products - Technologies - Markets
In 1959, Edith Penrose named three dimensions that can be different when diversifying, namely the product, the technology and the market, and varied them so that the following combinations are possible.
- More product types based on the same technology in existing markets,
- new products based on the same technology in new markets,
- new products based on different technologies in existing markets or
- new products based on different technologies in new markets.
These combinations represent an increasing improvement in opportunities for the diversifying company, but at the same time also involve an increasing risk of diversification because, for example, the company is uncertain whether new products based on different technologies will even meet demand ( market potential ) in new markets .
Diversification has only been successful if its marginal costs are at least covered by marginal revenues . The marginal costs after diversification include, in particular, additional costs for personnel costs , higher production costs due to investments in new technologies and higher research and development costs , as well as higher advertising costs that have to be recovered when marketing. As diversification increases, the likelihood that a company will leave its core business increases . It must also be taken into account that diversification can encounter barriers to market entry .
Diversifications reduce the susceptibility of companies to economic changes (such as a recession ) or structural change, for example through shifts in supply or demand , because they address different groups of buyers with several products and / or serve different markets that do not necessarily have to be affected by recessions or shifts in demand at the same time. They also reduce one-sided dependencies on suppliers, creditors, debtors, importers or customers.
- Daniel Dumke: Strategic Approaches to Risk Reduction in Supply Chain Network Design. Cologne 2013.
- Heiko Staroßom: Financing in the life phases of a company (= corporate finance. Part 2). Wiesbaden 2012.
- Gerhard Bartels, Diversification: The targeted expansion of the company's service program , 1966, p. 33
- Hans Jung, General Business Administration , 2010, p. 579 f.
- Philip Kotler / Friedhelm Bliemel, Marketing Management , 2001, p. 129
- Gerry Johnson / Kevan Scholes / Richard Whittington, Strategic Management - An Introduction , 2011, p. 331
- David J. Teece, Economies of Scope and the Scope of the Firm , in: Journal of Economic Behavior and Organization vol. 3, 1980, p. 224
- Philip Beckmann, Der Diversification Discount on the German Capital Market , 2006, p. 41
- Matthias Bank / Wolfgang Gerke, Financing: Basics for investment and financing decisions in companies , 2016, p. 210
- Konrad Liessmann, Gabler Lexicon Controlling and Cost Accounting , 1997, p. 150 f.
- Ralf T. Kreutzer, Praxisoriented Marketing , 2010, p. 164
- World Energy Council , Energy in Germany , 2018, p. 111
- Working Group on Energy Balances 03/2018, p. 4
- World Energy Council, Energy in Germany , 2018, p. 117
- Jörg Baron Frank von Fürstenwerth / Alfons Weiß, VersicherungsAlphabet (VA) , 2001, p. 173
- Edith Penrose, The Theory of the Growth of the Firm , 1959, p. 110 f.