A diversification strategy is a business strategy that involves expanding a company’s operations by entering into new markets or product lines that are different from its existing business. Diversification aims to reduce the company’s dependence on any market or product and spread the risk across multiple areas.
Diversification can provide a number of benefits, such as increasing revenue and market share, reducing risk, and providing new growth opportunities. However, diversification can be costly and risky if the new markets or product lines are poorly researched and planned.
There are different types of diversification strategies. Each type of diversification strategy has its own advantages and disadvantages. The appropriate strategy for a company will depend on its resources, capabilities, and goals.
Types or examples of diversification strategies
1. Concentric Diversification Strategy:
Concentric diversification is a business strategy in which a company expands its operations by adding new products or services related to its existing business activities. This type of diversification involves leveraging the company’s existing resources, capabilities, and core competencies to enter new markets or develop new products that complement its existing offerings.
In concentric diversification, the new products or services share similarities with the company’s existing products or services, such as customer base, distribution channels, or technology. This allows the company to leverage its existing strengths to enter new markets more easily and quickly than starting from scratch.
For example, a company that produces sports shoes may diversify concentrically by introducing an athletic clothing line. The company already has expertise in the sports industry, and its existing distribution channels and customer base can be leveraged to sell the new product line. The company’s brand and reputation in the sports industry can also help it gain traction in the new market.
Concentric diversification can be a beneficial strategy for companies looking to grow and expand their operations. By leveraging their existing resources and capabilities, companies can enter new markets and develop new products more efficiently and effectively than by starting from scratch. However, it is important for companies to carefully evaluate the potential risks and rewards of this strategy before pursuing it.
2. Horizontal Diversification Strategy:
A horizontal diversification strategy is a business expansion strategy that involves entering new and unrelated product or service lines at the same value chain level. In other words, a company uses its existing capabilities, resources, and distribution channels to diversify into new products or services unrelated to its current offerings but appealing to the same customer base.
Horizontal diversification aims to spread business risk and increase revenues by offering complementary products or services to existing customers. For example, a company that produces soft drinks may diversify horizontally by providing snacks or other beverages.
Advantages of horizontal diversification include the ability to:
- Increase market share by offering complementary products or services to existing customers.
- Reduce dependence on a single product or market, thus spreading the risk.
- Take advantage of existing distribution channels, marketing strategies, and customer relationships.
- Increase economies of scale and reduce costs by sharing resources and infrastructure across product lines.
However, horizontal diversification also has some risks and challenges, such as:
- Increased complexity and management challenges due to managing multiple product lines.
- The possibility of cannibalizing sales from existing product lines.
- The potential for decreased focus on core competencies and competitive advantage.
- The risk of entering into unfamiliar or highly competitive markets.
3. Conglomerate Diversification Strategy:
Conglomerate diversification is a business growth strategy where a company expands into new industries or markets that are not directly related to its current business activities. In other words, the company diversifies into businesses unrelated to its current core competencies and existing products or services.
The main objective of conglomerate diversification is to spread the risk across different businesses and markets. This strategy is often used by companies that are looking for new growth opportunities but do not want to rely on a single market or product line.
By diversifying, the company can benefit from economies of scale, access new markets, and reduce dependence on any product or service.
While conglomerate diversification can provide significant benefits, it can also be risky. Entering into new markets and industries without prior experience can be challenging, and there is a risk of spreading resources too thin.
Additionally, conglomerates can suffer from a lack of focus and strategic direction, resulting in poor performance. Therefore, it is important for companies to carefully evaluate the potential risks and benefits before pursuing this strategy.
4. Vertical diversification strategy
Vertical diversification is a business strategy in which a company expands its operations by moving into a different stage of the supply chain. It involves either backward integration, which involves acquiring or developing capabilities in earlier stages of the supply chain or forward integration, which involves acquiring or developing capabilities in later stages of the supply chain.
Backward integration involves a company acquiring or developing capabilities in an earlier stage of the supply chain. For example, a car manufacturer may acquire a steel mill to ensure a steady vehicle supply. This strategy can help the company reduce costs, improve quality control, and increase its bargaining power with suppliers.
Reliance Industries: Moving forward with backward integration
Forward integration involves a company acquiring or developing capabilities later in the supply chain. For example, a car manufacturer may acquire a car dealership to gain more control over the distribution of its vehicles. This strategy can help the company capture more product value, improve customer service, and increase its market share.
Vertical diversification can be risky, requiring significant investments in new capabilities and leading to increased complexity and coordination challenges. However, it can also offer substantial rewards, such as increased control over the supply chain, increased market power, and the ability to capture more value from the products or services offered.
5. Defensive Diversification Strategy
Defensive diversification is a business strategy that involves diversifying a company’s operations into different product lines or markets to reduce the risk of being negatively impacted by external factors such as changes in market conditions, competition, or economic downturns.
This strategy involves investing in a range of products or services with different risk profiles, which helps spread risk across the business. For example, a company that produces both luxury and budget products may be less vulnerable to consumer spending fluctuations than one with only luxury products.
By diversifying, a company can also reduce its reliance on a single product or market, which can help to protect against sudden disruptions or shifts in consumer behavior. This can provide stability and security for the company, even during uncertain times.
However, it’s important to note that defensive diversification also comes with challenges, such as managing multiple products or markets, increased complexity in operations, and potential conflicts between different business units. As such, it’s crucial for companies to carefully evaluate the risks and benefits before implementing a defensive diversification strategy.
6. Offensive Diversification Strategy
Offensive diversification is a business strategy that involves expanding a company’s product or service offerings to new markets or industries. Offensive diversification aims to increase revenue and profits by reaching new customers and expanding the company’s reach.
Offensive diversification can be achieved through various means, such as mergers and acquisitions, developing new products or services, entering new geographic markets, or targeting new customer segments. Companies may pursue offensive diversification to reduce their reliance on a single product or market, to take advantage of new growth opportunities, or to gain a competitive advantage.
However, offensive diversification can also be risky if not executed properly. Expanding too quickly or into markets where the company lacks expertise or resources can lead to failure. Additionally, diverting resources away from core business operations can harm the company’s existing customer base and erode its competitive advantage. As such, companies need to carefully evaluate the potential benefits and risks of offensive diversification before implementing this strategy.
