An emerging economy refers to an economy with low to medium per-capita income, and they fall in at least 80% of the world population, representing about 20% of the global economies. The countries in such category are considered to have not fully industrialized but they pursue those characteristics which are almost similar to the developing countries. In most emerging economies, there are high rates of unemployment and poverty levels. Emerging economies are certain Latin American, Asian, and African countries with rapid and volatile growing economies. They also include developing countries which are third-world countries. These economies majorly comprise 27 countries in the world (Setianto, 2020). In addition, they are developing countries that have progressively manifested some qualities of developed countries but have not yet met the standards. Therefore, these economies attain this status due to their engagement levels with global markets and also their rapid transition from natural resource-driven economies to newly industrialized countries.
Firms in emerging economies usually aspire to grow, and they apply a diversification strategy in their management activities. Diversification strategy refers to the practice of introducing new products into a company’s supply chain process to increase its profits levels (Henry, 2021). These products, therefore, can at times, form, part of the new market segment of an industry that the firm already occupies. Firms can either apply business-driven diversification, which focuses on the products sold, or corporate-level diversification, which majorly occurs when they enter into new markets.
Depending on the firm size, industry, and firm objectives, four different growth strategies can be applied for business success. These strategies include; penetration, product development, market development, and diversification. Penetration focuses on how a firm enters into new markets at low selling prices to gain a competitive advantage over other firms and also to reduce the competition level. Product development involves developing and conducting tests of new products within the industry of the firm’s operation. Market development refers to entering new markets which are outside the current industrial operating environment (Rajesh & Rajendran, 2020). Finally, diversification involves coming up with various products, both new and existing, to ensure that a wider market is accessed and all customers are satisfied.
Diversification Strategies Used by Firms in Emerging Economies
There are three common types of diversification strategies applied by firms in emerging economies which include; Concentric, Horizontal, and Conglomerate Diversification. In Concentric Diversification, there is the development of new products and services which are similar to the already existing products (Frynas & Mellahi, 2015). For example, an orange manufacturing company can introduce alongside its products, a more superior product that adds value to its already existing orange juices. This strategy, therefore, enables firms to increase their sales revenue and expand their products share in the market.
In Horizontal Diversification, there is the development of products that are somehow related to the original product line in the industry. For instance, an agricultural company dealing with plants and other related products can decide to introduce a variety of herbs and other flowers to add value to the existing plants in the market. Therefore, in applying this strategy, firms in emerging economies expand their product lines and extend their market access to other parts of the countries in the world market.
Finally, in Conglomerate Diversification, firms develop products that are unrelated to the already existing products in the market. For example, a cotton company decides to diversify its product lines by introducing metal-related products. Therefore, this diversification strategy enables firms to introduce new product varieties to the already brands, and this enlarges the company size and shares in the market. However, Conglomerate diversification is a much riskier strategy than both concentric and horizontal diversification since it requires an elaborate outlay in terms of product development, introduction, and marketing. In addition, the conglomerate strategy focuses on penetrating new markets and this poses more threats in terms of its survival in the new industry.
Value of Diversification Strategy to Firms in Emerging Economies
Mitigation of Market Risks
Due to the volatility of the markets in emerging economies, most firms introduce more product lines to curb the market risks. With the introduction of these products into already existing products, firms spread their investment across various multiple supply channels, and while one product might lose its sales, the other products would have a high probability of sustaining in the market. Hence, firms would not have the overall financial constraint in the end. Besides, there is general risk measurement which helps firms to analyze how successful they would be when they introduce new products to their distribution line (Bartlett & Beamish, 2018).
Firms, therefore, have to satisfy the porter’s level of attractiveness test, ensure that the entry costs are less than the predicted future profits, and also conduct a better-off test to ensure that the new product has a competitive advantage in the firm. When firms diversify to mitigate risks, they do so because of the unsystematic risks relating to the specific market of the operation and are caused when a competitor gets stronger or gets out of the business.
Curbing Competition Level
With a high level of competition in the industry, most firms tend to compare their available strategic assets and company resources to gain a competitive advantage over others. In this scenario, strategic assets, therefore, are those particular resources or firm capabilities which are very difficult to replicate by other companies in the same industry. Hence, firms diversify to protect themselves from the high competition likely to emerge from other companies. Diversification strategies are applied to help the companies reduce competition and share the profit among themselves in the industry (Henry, 2021). In addition, diversification assists in reducing the available options to the consumers and this ensures that there are fewer consumer options indicating that the pricing levels among the firms have become less competitive.
Due to the adverse nature of markets in emerging economies, firms diversify to help them increase their profit levels. In this case, Concentric diversification is the most popular and proven strategy for ensuring that companies raise profits. For instance, when a coffee manufacturing company introduces some supplements in their product line such as sandwiches, they aim to increase their sales through diverse products, and this increases their profits. The risks associated with diversification remain small as the products are similar to the already existing products in the market.
In conclusion, most firms in emerging economies have continued implementing various diversification strategies in their operations for various reasons. The common reasons include mitigation of risks, reducing competition, and increasing profits. Diversification assists firms in increasing their revenues significantly through leveraging existing products, recognizing their brands, and reaching out to their customers. In addition, firms diversify to lower their company’s risks, remain profitable when there are ups and downs in the industry, and allow firms to maximize their available resources which might be underutilized when firms do not diversify. Hence, it is important for firms in these countries with low per-capita levels to continuously diversify in various products and services for their future growth and survival in the market.
Bartlett, C. A., & Beamish, P. W. (2018). Transnational management: Text and cases in cross-border management (8th edition). Cambridge Press.
Frynas, J., & Mellahi, K. (2015). Global strategic management. Oxford University Press.
Henry, A. E. (2021). Understanding strategic management (Fourth Edition). Oxford Press.
Rajesh, R., & Rajendran, C. (2020). Relating environmental, social, and governance scores and sustainability performances of firms: An empirical analysis. Business Strategy and the Environment, 29(3), 1247-1267.
Setianto, R. (2020). Corporate diversification and firms’ value in an emerging economy: The role of growth opportunity. Journal of Asian Business and Economic Studies, 27 (2), 195-207. Web.