The diversification strategy of a company is a corporate strategy intended to increase profits by increasing sales volume, which, in turn, is done by launching new products and identifying new market segments. It can be implemented at both, the business unit level and corporate level.
In the case of business unit level, the strategy can be implemented for the company's expansion by coming up with a new segment related to the existing business. An apt example of this will be when a company specializing in pencil production opts for the production of erasers.
At the corporate level though, the target area is a new business, which is not related to the existing business unit. An apt example of this would be a company specializing in alcoholic beverages entering the airlines sector.
There are several methods by which diversification strategy can be implemented; the most common among which are acquisitions and joint ventures.
Types of Diversification Strategies
The diversification strategy of a company can include several plans, ranging from the development of a new product to licensing of new technologies, or a combination of these plans. Basically, there are three types of diversification strategies: concentric, horizontal, and lateral.
In this case, the technology used in the industry remains the same, but the marketing plan is changed to a significant extent. This strategy requires technological similarities between the two business ventures. Also, technical knowledge turns out to be an advantage when it comes to concentric diversification.
In this case, the technology used is in no way related to the existing business of the company, and yet, they take its current customer base into consideration when coming up with new products. This strategy is advantageous in a competitive market scenario, wherein the company has a loyal customer base.
As in the case of horizontal diversification, even lateral diversification stresses on products which are not related to the existing line of products. The exception, however, is that the company targets a new segment of customers, instead of catering to its existing loyal customers.
Pros and Cons
Pros of Diversification
Diversification can help the companies to achieve their potential in a developing economy. In the case of concentric diversification, a strong brand name can help in leveraging the new products belonging to that brand. It can help the company in spreading its customer base. It also helps in enhancing the product portfolio of the company by introducing complimenting products in the market.
Cons of Diversification
When it comes to diversification through acquisition, one needs to ensure that the people at the managerial level are well-versed with the process that needs to be followed for the company to be acquired. If you are not armed with people who can handle these things, starting from the grass root can turn out to be tedious task. One also needs to take into consideration the efforts required to run the business. If the efforts required are more than the profit, it is better off to stay away from the venture.
Lack of knowledge about the current situation of the market can really backfire on you from all sides. Going against the core values of the company, just for the sake of profit is also not advisable, which again limits your options.
Of the four strategies enlisted in the Ansoff Product-Market Growth Matrix, diversification strategy is by far the most risky, and hence, requires proper research before implementation. At the end of the day, accuracy in determining the target segment is the key to successful diversification.