Diversification can result in result in two forms of synergies – savings that come from cost savings associated with operating across multiple areas, and benefits that come from opportunities to increase revenue. This article explores the revenue-enhancing side – how related diversification can result in greater revenues than if the two business areas operated completely independently of one another. Stated slightly differently, revenue-enhancing opportunities are ways that a firm can have more revenue opportunities from moving into a new area than a new organization would have pursuing those opportunities.
Example 1: Increases access to distribution channels
One of the first revenue-enhancing opportunities for operating different businesses within one organization is that distribution channels can be shared. While a separate organization may struggle to gain access to sales channels, a firm diversifying firm can take advantage of its existing distribution channel.
Example 2: Sharing of the brand and reputation
As well as sharing the distribution channel, diversifying firms can benefit from sharing the brand and reputation. The shared brand may give customers greater confidence in the product offering than a separate firm lacking the pre-existing brand.
Example 3: Items more valuable together
An additional revenue opportunity from having multiple different areas within the same firm is that the items may be more valuable together. Potentially greater incompatibilities can be achieved by co-development of the products, which in turn increases the value of both products relative to if they were developed by two separate organizations.
Final thoughts: Don't overstate the opportunities of revenue-enhancing synergies
A key danger when exploring diversification is that you end up seeing synergy opportunities everywhere. Many such synergies often do not end up materializing. It is important not to overstate the supposed benefits of synergies in diversifying.
This article explores some of the reasons for the discrepancy between expected and realized benefits when firms diversity or merge with others.
This article explores the advantages of related diversification – the benefits of synergy from increasing the scope of the firm.
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