Diversification (marketing strategy)
Encyclopedia
Diversification is a form of corporate strategy for a company. It seeks to increase profitability through greater sales volume obtained from new products and new markets. Diversification can occur either at the business unit level or at the corporate level. At the business unit level, it is most likely to expand into a new segment of an industry that the business is already in. At the corporate level, it is generally very interesting entering a promising business outside of the scope of the existing business unit.

Diversification is part of the four main growth strategies defined by the Product/Market Ansoff matrix:



Ansoff pointed out that a diversification strategy stands apart from the other three strategies. The first three strategies are usually pursued with the same technical, financial, and merchandising resources used for the original product line, whereas diversification usually requires a company to acquire new skills, new techniques and new facilities.

Note: The notion of diversification depends on the subjective interpretation of “new” market and “new” product, which should reflect the perceptions of customers rather than managers. Indeed, products tend to create or stimulate new markets; new markets promote product innovation
Product innovation
Product innovation is the creation and subsequent introduction of a good or service that is either new, or improved on previous goods or services of its kind...

.

The different types of diversification strategies

The strategies of diversification can include internal development of new products or markets, acquisition of a firm, alliance
Business alliance
A business alliance is an agreement between businesses, usually motivated by cost reduction and improved service for the customer. Alliances are often bounded by a single agreement with equitable risk and opportunity share for all parties involved and are typically managed by an integrated project...

 with a complementary company, licensing
License
The verb license or grant licence means to give permission. The noun license or licence refers to that permission as well as to the document recording that permission.A license may be granted by a party to another party as an element of an agreement...

 of new technologies, and distributing or importing a products line
Product lining
Product lining is the marketing strategy of offering for sale several related products. Unlike product bundling, where several products are combined into one, lining involves offering several related products individually. A line can comprise related products of various sizes, types, colors,...

 manufactured by another firm. Generally, the final strategy involves a combination of these options. This combination is determined in function of available opportunities and consistency with the objectives and the resources of the company.

There are three types of diversification: concentric, horizontal, and conglomerate.

Concentric diversification

This means that there is a technological similarity between the industries, which means that the firm is able to leverage its technical know-how to gain some advantage. For example, a company that manufactures industrial adhesives might decide to diversify into adhesives to be sold via retailers. The technology would be the same but the marketing effort would need to change.

It also seems to increase its market share to launch a new product that helps the particular company to earn profit. For instance, the addition of tomato ketchup and sauce to the existing "Maggi" brand processed items of Food Specialities Ltd. is an example of technological-related concentric diversification.

The company could seek new products that have technological or marketing synergies with existing product lines appealing to a new group of customers.This also helps the company to tap that part of the market which remains untapped, and which presents an opportunity to earn profits.

Horizontal diversification

The company adds new products or services that are often technologically or commercially unrelated to current products but that may appeal to current customers. In a competitive environment, this form of diversification is desirable if the present customers are loyal to the current products and if the new products have a good quality and are well promoted and priced. Moreover, the new products are marketed to the same economic environment as the existing products, which may lead to rigidity and instability. In other words, this strategy tends to increase the firm's dependence on certain market segments. For example, a company that was making notebooks earlier may also enter the pen market with its new product.

Another interpretation

Horizontal integration
Horizontal integration
In microeconomics and strategic management, the term horizontal integration describes a type of ownership and control. It is a strategy used by a business or corporation that seeks to sell a type of product in numerous markets...

 occurs when a firm enters a new business (either related or unrelated) at the same stage of production as its current operations. For example, Avon's move to market jewelry through its door-to-door sales force involved marketing new products through existing channels of distribution. An alternative form of that Avon has also undertaken is selling its products by mail order (e.g., clothing, plastic products) and through retail stores (e.g.,Tiffany's). In both cases, Avon is still at the retail stage of the production process.

Conglomerate diversification (or lateral diversification)

The company markets new products or services that have no technological or commercial synergies with current products but that may appeal to new groups of customers. The conglomerate diversification has very little relationship with the firm's current business. Therefore, the main reasons of adopting such a strategy are first to improve the profitability and the flexibility of the company, and second to get a better reception in capital markets as the company gets bigger. Even if this strategy is very risky, it could also, if successful, provide increased growth and profitability.

Rationale of diversification

According to Calori and Harvatopoulos (1988), there are two dimensions of rationale for diversification. The first one relates to the nature of the strategic objective: Diversification may be defensive or offensive.

Defensive reasons may be spreading the risk of market contraction, or being forced to diversify when current product or current market orientation seems to provide no further opportunities for growth. Offensive reasons may be conquering new positions, taking opportunities that promise greater profitability than expansion opportunities, or using retained cash that exceeds total expansion needs.

The second dimension involves the expected outcomes of diversification: Management may expect great economic value (growth, profitability) or first and foremost great coherence and complementary to their current activities (exploitation of know-how, more efficient use of available resources and capacities).
In addition, companies may also explore diversification just to get a valuable comparison between this strategy and expansion.

Risks

Diversification is the riskiest of the four strategies presented in the Ansoff matrix and requires the most careful investigation. Going into an unknown market with an unfamiliar product offering means a lack of experience in the new skills and techniques required. Therefore, the company puts itself in a great uncertainty. Moreover, diversification might necessitate significant expanding of human and financial resources, which may detract focus, commitment, and sustained investments in the core industries. Therefore, a firm should choose this option only when the current product or current market orientation does not offer further opportunities for growth.
In order to measure the chances of success, different tests can be done:
  • The attractiveness test: the industry that has been chosen has to be either attractive or capable of being made attractive.
  • The cost-of-entry test: the cost of entry must not capitalize all future profits.
  • The better-off test: the new unit must either gain competitive advantage from its link with the corporation or vice versa.


Because of the high risks explained above, many companies attempting to diversify have led to failure. However, there are a few good examples of successful diversification:
  • Virgin Group
    Virgin Group
    Virgin Group Limited is a British branded venture capital conglomerate organisation founded by business tycoon Richard Branson. The core business areas are travel, entertainment and lifestyle. Virgin Group's date of incorporation is listed as 1989 by Companies House, who class it as a holding...

     moved from music production to travel and mobile phones
  • Walt Disney
    The Walt Disney Company
    The Walt Disney Company is the largest media conglomerate in the world in terms of revenue. Founded on October 16, 1923, by Walt and Roy Disney as the Disney Brothers Cartoon Studio, Walt Disney Productions established itself as a leader in the American animation industry before diversifying into...

     moved from producing animated movies to theme parks and vacation properties
  • Canon diversified from a camera-making company into producing an entirely new range of office equipment.

See also

  • Market development
    Market development
    A market development strategy targets non-buying customers in currently targeted segments. It also targets new customers in new segments. A marketing manager has to think about the following questions before implementing a market development strategy: Is it profitable? Will it require the...

  • Market penetration
    Market penetration
    Market penetration is8th growth strategies of the Product-Market Growth Matrix defined by Ansoff. Market penetration occurs when a company enters/penetrates a market with current products. The best way to achieve this is by gaining competitors' customers...

  • Product development
  • Product proliferation
    Product proliferation
    Product proliferation occurs when organizations market many variations of the same products. This can be done through different colour combinations, product sizes and different product uses. This produces diversity for the firm as it is able to capture its sizable portion of the market...

  • Pure play
    Pure play
    In financial management, a pure play is a company whose shares are publicly traded and that either has, or is very close to having, a single business focus. Coca-Cola is an example of a pure play in this context because it retails only beverages...

    (ant.)
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