Diversification Strategy

A company's diversification strategy is a business strategy intended to increase earnings by increasing sales volume. This increase in sales volume is produced through the launch of new products and the identification of new market segments. It can be deployed at business unit level as well as at the corporate level. In case that the business unit level, the strategy can be implemented for the expansion of the company through the presentation of a new segment in relation to the existing business. In case of corporate level, however, the target area is a new business, which is not related to the existing business unit. Some of the more prominent examples include a company specialized in pencil production opting for the production of erasers or a company specializing in alcoholic beverages that come in the airlines sector.

Types of diversification strategies

A company's diversification strategy can include several plans, ranging from the development of a new product to licensing of new technologies, or a combination of one or more of these plans. There are basically three types of diversification strategies.

Concentric diversification: in this case, the technology used in the industry remains the same, while the plan of marketing changes to a significant degree. This strategy requires technological similarities between two commercial enterprises. Technical knowledge turns out to be an advantage when it is concentric diversification.

Horizontal diversification: in this case, the technology used is not at all related to the existing business of the company. Although existing products are not related to the new company, the current customer base of the company is taken into account when it comes up with these new products. This strategy has proven to be advantageous in a scenario of competitive market, where the company has a loyal customer base.

Lateral diversification: as in the case of horizontal diversification, even lateral diversification stands out for products that are not related to the existing line of products. The only exception in this case, however, is that the company is directed to a new segment of customers, rather than serve their existing loyal customers.

Pros and cons

Advantages of diversification

There are several methods by which diversification strategy, the most common among them acquisitions and joint ventures can be implemented. Diversification can help companies to develop their full potential in a developing economy. In the case of concentric diversification a strong brand can help in the mobilization of new products belong to that brand. You can help the company in the dissemination of its customer base. It also helps in improving the product portfolio of the company by introducing products complementing the market.

Cons of diversification

In the case of diversification through acquisitions, should make sure that the people at managerial level are well versed in the process to be followed for the company to acquire. If you are not armed with people who can handle these things, from the root of the herb can become a tedious task. It must take account of the efforts that are required to operate the business, and if the efforts required are more than the benefit obtained, it is best to stay away from the company. The lack of knowledge about the current situation of the market really could turn against you everywhere. Go against the fundamental values of the company, for the sake of gain is also recommended, which in turn limits their options.

Among the four strategies enlisted in the Ansoff matrix product-market growth, this strategy is, by far, the. Increased risk, and therefore requires an investigation before implementing the accuracy in the determination of segment diana is the key to a diversification strategy with a successful company at the end of the day.