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- Concentric Diversification!
- Diversification Strategies.
You may want to consider a diversification strategy. Diversification is a business development strategy that sees a company enter new markets and offer products and services that are different from its existing ones. That is technically what is meant by diversification, but in reality, there are different degrees that could, arguably, be considered diversification to some extent as we'll see in this guide.
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Diversification can be an important component of any company strategy. There are many examples throughout history of successful businesses moving into new areas, such as the iPhone Apple , Gmail Google or Echo Amazon. There are different motivations for building and executing a diversification strategy for your business. It is useful to understand which of the following reasons most closely applies to your circumstances. Growth: One of the main reasons a business might be looking to diversify is growth. Perhaps your current industry is stagnating or perhaps you are no longer performing well in the market.
When you're considering this as a motive, keep in mind profitability too. Risk Reduction: If you put your eggs in different baskets your business will be more resilient. Having a diverse portfolio reduces economic risk by lessening your exposure to market conditions, such as those seen in Five Forces , or external events such as those listed in a PESTLE Analysis. Whilst one business unit may be under strain, others could be performing better than ever.
Survival: For some companies diversification is about survival. In these situations, the diversification is against a challenging backdrop, and ideally, you would recognize the need for diversifying before it becomes impossible to find the investment to do so. Exploitation of Potential Synergies: Finally, companies may spot synergies in their processes, operations and assets, and wish to exploit them in other markets.
Business growth through diversification
Internal development: This is developing the business unit, product, or service entirely in-house with your existing team or hiring new members of the team. Partnership with other companies: It may not be possible to invest in building a new product or service in-house, so look for partnerships with other companies to enter new markets and create opportunity for both sides. Acquisition of another company: You could acquire a company already operating in the market you wish to enter with the capabilities you want to develop.
Each approach has different considerations to balance. For example, partnerships can be high risk but low cost, whereas acquisition can be high cost but be quick to complete. That might be Operational Relatedness, which would stem from synergies in manufacturing, marketing, distribution activities and result in cost savings, or it could be Strategic Relatedness stemming from synergies deriving from the ability to apply common management capabilities to different businesses e.
Unrelated Diversification: Unrelated refers to diversification where the company is entering a completely new market with new products. In these cases success largely depends on the expertise of the people in the business and their approach to strategic planning.
To Diversify or Not To Diversify
Companies that perform Related Diversification tend to perform better than those who go for Unrelated Diversification. You could argue that the Unrelated approach may produce higher revenues, as it stems from the idea any company can move into any market, but it is significantly more risky than Related.
It allows a company to grow by expanding market share in an existing market or by developing a market presence. In essence, diversification involves innovation and market disruption.
Company A may introduce a new formula to expand its presence in the chemical wood cleaner market. This is expanding in its existing market with a newly created product. That same company may license the new formula to clean garden weeds. This is expanding into a new market with a new product with a product that it did not invent but is closely related to existing products. Lastly, the Company may begin selling home furniture.
Diversification (marketing strategy)
This is an example of expanding into a new market with newly created or acquired products. Expanding in an existing market is defensive diversification, while expanding into new markets is offensive diversification. Defensive diversification generally recognizes the existence of competition in any market. The company is defending its market share and seeking to grow it by introducing new products.
Offensive diversification seeks to generate market share in a new market, either with related or unrelated products.
Breadcrumb
Concentric diversity concerns a growth strategy where any new or acquired products are closely related to existing products or to the companys core competencies. This approach allows the company to employ resources and take advantage of existing competencies in introducing the new product. The new products will generally relate closely to existing products or product lines with the purpose of leveraging brand awareness and customer loyalty. It generally involves targeting previously identified market segments that have not been fully addressed.
Horizontal diversification concerns the introduction of new products to a new market segment generally forming a new business in the process. The new products and business, however, are designed to appeal to an existing customer base.