Diversification is a growth strategy that involves entering into a new market or industry - one that your business doesn't currently operate in - while also creating a new product for that new market.
Different types of diversification strategies
There are several different types of diversification:
Horizontal diversification
Horizontal diversification is when you acquire or develop new products or services that are complementary to your core business and appeal to your current customers. For example, an ice cream business adds a new type of confectionary into its product line. You may require new technology, skills or marketing approach to diversify in this way.
Concentric diversification
Concentric diversification involves adding new products that have technological or marketing synergies with existing product lines or industries, but appeal to new customers. For example, a PC manufacturer starts producing laptops. You may be able to leverage your existing technologies, equipment and marketing to diversify in this way.
Conglomerate diversification
Conglomerate diversification occurs when you add new products or services that are entirely different from and unrelated to your core business. For example, a film studio opening up an entertainment park. The risks are high, as this approach requires you not only to enter a new market, but also to sell to a new consumer base.
Vertical diversification
Vertical diversification or integration is when you expand in a backward or forward direction along the production chain of your product. In this approach, you may control more than one stage of the supply chain. For example, a film distributor produces its own content, or a technology manufacturer opens its own retail store.
Deciding how and when to diversify will require:
- detailed market research for the new product or service
- a fullassessment of customer needs
- a clear product development strategy and market testing
- sales, marketing and supply chain operations able to cope with the added demands
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Advantages and disadvantages of diversification
There are pros and cons to each of the different diversification strategies. A successful diversification can help you:
- increase sales and revenue
- grow market share
- find new revenue streams
- achieve higher margins compared to existing products
- limit the impact of changes in the market
On the other hand, diversification will incur development, sales and marketing costs. It will also require additional skills, management and operational resources. If these demands exceed the potential revenue and profit gains, diversification can put your business at risk. For example:
- diverting funds and resources into diversification may limit potential growth in core areas of your business
- lack of knowledge or expertise in the new industry or market may lead to costly delays or mistakes
- diversifying too quickly may cause you to lose track of or dilute your core products or services
- if you stretch your resources too widely, you may struggle to provide a consistent level of service, which can lead to dissatisfaction and customer losses
In general, diversifying with similar products or services and selling them to a familiar customer base is less risky than some other business growth strategies, such as creating a product for acompletely new market.
Diversificationcan be a great way to maintain business stability. It allows you to hedge your bets and, if one of your markets or products fails, you have another to back you up until you recover.
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