Strategic

Expansion Or Diversification Which One Is Better

The management of a corporation should think many factors before its capacity of production is to be increased. Here are some points to be noted when the management of a corporation wants to increase the capacity of production or want to diversify its products.

Prior to a corporation diversifies, the probability of growing in the existing product line should be considered as it may assist in gaining a larger market share for the present business of the corporation. In terms of implementation, expanding the present activities of the corporation is usually much easier than starting a new activity as the managers are well-known about the existing business.

Tangible as well as intangible, both the alternatives should cautiously be weighed against their returns. The return on investment (ROI) should be compared for the two alternatives keeping in scrutiny the prevailing fiscal policies, taxation, depreciation, incentives for new investments etc.

If the existing product is expected to have a steady and considerable increase in its market size and there is larger, discontented gap between supply and demand, the corporation should consider additional capacity expansion for its existing product(s), unless there are other strategic reasons against sole dependence on the product. Expansion may be more enviable because of advantages of familiarity with the technology and equipment necessary, higher marginal productivity of labor and capital and the availability of the existing infrastructure. Often, manufacturing processes and adding balancing equipment.

While considering expansion, a corporation should also consider the image that customers carry with regard to its product lines. If the brand image is stumpy, the corporation should be cautious in expanding further and should test out whether sufficient customers subsist for its products. Diversification into product lines that will improve the brand image would be an option in such case. The possibility of the customers using the product more frequently or in higher quantities should also be explored.

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