Diversification Strategy

Diversification is a corporate strategy meant to increase profits by improving sales volume.  Increase in sales volume is brought about by launching new products and identifying new markets.

Diversification is done either at the business unit level or corporate level.   At business unit level, the strategy is implemented by expansion of the company by entering new segment related to the existing business; at the corporate level the target area is new business which is not related to the existing business unit.

Types of Diversification Strategy:  These could be developing new products, or licensing of new technologies or a combination of one or more of these plans.  There are three different types of diversification:-

• Concentric Diversification:  Here the technology used in the industry remains the same, while the marketing plan changes to a significant extent.  The technology remains same between two business ventures.  Hence, technical knowledge remains a major advantage.
• Horizontal Diversification:  Technology is not a factor to consider in this.  The products are related but the existing customer base is taken into account while coming up with new products.  This strategy is advantageous if the company has a loyal customer base.
• Lateral Diversification: Products may not be related; the exception is the company targets a new segment of customers instead of catering to the existing loyal customers.

Diversification Strategy:

 Advantages of Diversification:

There are various ways in which diversification can be achieved.  The commonest routes are acquisition and joint ventures.  Companies can achieve their potential in a developing country.  In the case of concentric diversification, a strong brand can help in leveraging the new product.  Diversification strategy also helps in the company spreading their customer base.  Diversification further helps in enhancing the company’s product portfolio by the introduction of complementing products in the market.

Disadvantages of Diversification:

In the acquisition phase, the management connected with it must be well versed with the process of acquisition and related matters.  Otherwise things can turn soar for the company.  If the efforts required are more and costly than the profits the company gets, it is better to keep away from the venture.  Lack of knowledge of the current position of the market can really back-fire on the company from all cylinders.

Among the product-market strategies, diversification is the most risky strategy and needs intense scrutiny and research before the launch of diversification route.  An accurate target segment is the key to a successful diversification strategy for an organization.

 Questions:

• Discuss the different types of diversification.
• Discuss the advantages and disadvantages of diversification.