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View Product Comparison or Apply Now. Diversification can present itself in a variety of different forms depending on the direction a business wishes to move in, and can either be related or unrelated to the current business offering. If your company decides to add products or services that are unrelated to what you offer currently, but may meet some more needs of your existing customers, this is known as horizontal diversification.
This is a different product altogether, but it has the potential to attract many of your existing customers. Concentric diversification occurs when a company enters a new market with a new product that is technologically similar to their current products and therefore are able to gain some advantage by leveraging things like industry experience, technical know-how, and sometimes even manufacturing processes already in place.
Concentric diversification can be beneficial if sales are declining for one product, as loss in revenue can be offset by a rise in sales from other products. An example of concentric diversification would be a computer manufacturer who diversified from clunky desktop PCs into laptop production.
This would allow them to immediately take advantage of the new wave of computer users who demanded more portable solutions. The term conglomerate refers to a single corporate group operating multiple business entities within entirely different industries. The parent company that owns all of the individual entities is known as a conglomerate, and it became one by successfully implementing a conglomerate diversification strategy.
An example of conglomerate diversification would be Tata Group , which was founded in and diversified from its humble beginnings as a hotel company into a global multinational encompassing individual companies. It now employs , people across a variety of sectors such as chemicals, steel, automotive, engineering, telecommunications, information systems, and consumables. Vertical diversification is also known as vertical integration, and occurs when a company moves up or down the supply chain by combining two or more stages of production normally operated by separate companies.
You also have to spread out your business investments and costs, which may prevent you from putting enough money in cash-cow sectors or products.
If you expand, you need experts to work for you or partner with you to achieve success in newer, unproven areas. Neil Kokemuller has been an active business, finance and education writer and content media website developer since He has been a college marketing professor since Kokemuller has additional professional experience in marketing, retail and small business.
By Neil Kokemuller. Avoiding Downturns A conservative reason to diversify is to avoid major repercussions when an industry or sector suffers a downturn. Thus, when managers consider whether or not to diversify, they should ask themselves the following questions:.
What can our company do better than any of its competitors in its current market? Just as it is important to take stock of the pantry before going shopping, so is it crucial for a company to identify its unique and unassailable competitive strengths before attempting to apply them elsewhere. The first step, then, is to determine the exact nature of those strengths—which I refer to in general terms as strategic assets.
How is such an assessment usually done? The problem is that most companies confuse identifying strategic assets with defining their business. A business is generally defined by using one of three frameworks: product, customer function, or core competencies.
When facing the decision to diversify, however, managers need to think not about what their company does but about what it does better than its competitors. In one sense, pinpointing strategic assets is a market-driven approach to business definition. It forces an organization to identify how it might add value to an acquired company or in a new market—be it with excellent distribution, creative employees, or superior knowledge about information transfer.
Before diversifying, managers must think not about what their company does but about what it does better than its competitors. In the s, Blue Circle decided to diversify on the basis of an unclear definition of its business. So Blue Circle expanded into real estate, bricks, waste management, gas stoves, bath-tubs—even lawn mowers.
At the time, Boddington was a vertically integrated beer producer that owned a brewery, wholesalers, and pubs throughout the country.
But consolidation was changing the beer industry, making it hard for small players like Boddington to make a profit. The company had survived up to that point because its main strategic asset was in retailing and hospitality: it excelled at managing pubs.
So Cassidy decided to diversify in that direction. Quickly, the company sold off the brewery and acquired resort hotels, restaurants, nursing homes, and health clubs while keeping its large portfolio of pubs. We decided to build on our excellent skills in retailing, hospitality, and property management to start a new game. It also illustrates what happens when a company moves beyond a business-definition approach and instead launches a diversification effort based on its strategic assets.
Once a company has identified its strategic assets, it can consider this second question. Although the question seems straightforward enough, my research suggests that many companies make a fatal error. They assume that having some of the necessary strategic assets is sufficient to move forward with diversification. In reality, a company usually must have all of them. The diversification misadventures of a number of oil companies in the late s highlight how dangerous it is to go up against a royal flush when all you have is a pair of jacks.
Companies such as British Petroleum and Exxon broke into the mineral business they could exploit their competencies in exploration, extraction, and management of large-scale projects. Ten years later, the companies had dropped out of the game. Consider as well the experience of the Coca-Cola Company, long heralded for its intimate knowledge of consumers, its marketing and branding expertise, and its superior distribution capabilities.
Based on those strategic assets, Coca-Cola decided in the early s to acquire its way into the wine business, in which such strengths were imperative. The company quickly learned, however, that it lacked a critical competence: knowledge of the wine business. As in poker, the lesson for companies considering diversification is the same: you have to know when to hold them and when to fold them.
What if Coke had known in advance that it lacked an important strategic asset in the wine-making business? Should it have summarily abandoned its diversification plans? Not necessarily. Companies considering diversification need to answer another pair of questions: If we are missing one or more critical factors for success in the new market, can we purchase them, develop them, or make them unnecessary by changing the competitive rules of the industry?
Can we do that at a reasonable cost? Consider the diversification history of Sharp Corporation. The strategy is loaded with hurdles because it requires a lot of investment and a lot of man power as well as focus of the top management.
But still, in the long run, diversification strategy is one of the best growth strategy in the long run. Here are seven reasons for the support of diversification strategy.
When diversifying your products , you are bound to do good research and development which results in introducing more variety and options of products in hand to capture the new market. With more product variety, you capture more customer attention and your brand receives a tremendous boost as well as the profitability of the company rises.
Thus having more products is good for your business. Your reach increases when you have more products and you need more markets to sell them. New products plus new markets is what defines the diversification strategy.
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