What is a Diversification Strategy?
A diversification strategy is a business strategy that enlarges the business activities into different markets or industries. The key intention of Diversification is to spread risk and create multiple sources of revenue, thus reducing the necessity of a single marketplace or product.
There are two main categories of Diversification: Related Diversification and Unrelated Diversification.
- Related Diversification occurs when a company expands into linked industries or markets.
- Unrelated Diversification means entering sectors or markets linked to what the company already does.
6 Reasons for a Diversification Strategy
A company might implement a diversification strategy for several reasons, including the following:
- Beat competition: A company might feel that diversifying is the best way to gain a competitive advantage. By expanding the portfolio of products or services, companies can offer something their competitors cannot.
- Seek profit: If successful, a diversification effort can significantly increase business growth and, by extension, its bottom line. With the imperative to keep growing, sometimes the biggest, most successful companies find that the next logical step is through a diversification strategy.
- Avoid downturn: Diversification can be a proactive way to avoid the fallout of an economic downturn. By offering different products and services, a company can lessen the damage of a recession and even take advantage of other vulnerable companies.
- Polish brand image: A diversification strategy can be a way to boost the image of a brand. By leveraging positive associations with the newly acquired brand or a perceived change in direction, Diversification presents an altered face to the public.
- Navigate industry changes: Due to predictable or unpredictable shifts in circumstances, Diversification can help companies take advantage of new technologies, avert collapse, or find increased opportunities for synergy, cost-cutting, and profit maximization.
- Optimize resources: Diversification can be a way to optimize the resources of a company, whether putting excess cash flow to work, better use of existing infrastructure, or improving corporate-level decision-making.
What are the types of diversification strategies?
Here are the four types of diversification strategies that a company may use based on its goals and resources:
Horizontal Diversification
Horizontal Diversification refers to a company’s diversification practice when expanding existing products or services. A company may add new products that resemble or relate to current products while expanding the customer’s options. It can often mean adding more options and variety to an established product.
Vertical Diversification
Vertical Diversification, or vertical integration, refers to the diversification process that allows a company to expand into other areas of its manufacturing process. For example, a manufacturing company may grow to create one of its finished products’ key parts or materials. Like horizontal Diversification, this practice allows a business to stay in the same market it has already established.
Conglomerate Diversification
Conglomerate diversification allows a company to launch a service or product that’s entirely new for the company and has no relation to its current market. A company may often acquire a company in an unrelated market. This strategy can allow companies to expand across industries and appeal to a new consumer demographic.
Concentric Diversification
Concentric diversification strategies utilize a company’s existing resources to create a new, improved, or updated product related to current products. It is often a cost-effective way to expand a business and can help a company reach new customers while appealing to pre-established ones.
Conclusion
A company’s budget can be one of the most significant factors in deciding which diversification strategy to use. A company that wants to save money may consider horizontal or concentric diversification strategies. Both methods can use equipment and practices from the company’s existing operations.