Diversification Strategy

The diversification strategy of a company is a corporate strategy intended to increase profits by increasing sales volume. This increase in sales volume is brought about by launching new products and identifying new market segments. It can be implemented at the business unit level as well as the corporate level. In case of business unit level, the strategy can be implemented for the expansion of the company by coming up with a new segment, related 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 most prominent examples include a company specializing in pencil production opting for production of erasers or a company specializing in alcoholic beverages entering the airlines sector.

Types of Diversification Strategies

Diversification strategy of a company may include several plans, ranging from development of a new product to licensing of new technologies, or a combination of one or more of these plans. Basically, there are three types of diversification strategies.

Concentric Diversification: In this case, the technology used in the industry remains the same, while the marketing plan changes to a significant extent. This strategy requires technological similarities between the two business ventures. Technical knowledge turns out to be an advantage when it comes of concentric diversification.

Horizontal Diversification: In this case, the technology used is not at all related to the existing business of the company. Though the existing products are not related to the new venture, the current customer base of the company is taken into consideration when coming up with these new products. This strategy proves to be advantageous in a competitive market scenario, wherein the company has a loyal customer base.

Lateral Diversification: As in the case of horizontal diversification, even lateral diversification stresses on products which are not related to the existing line of products. The only exception in this case, however, is that the company targets a new segment of customers, instead of catering to its existing loyal customers.

Pros and Cons

Pros of Diversification
There are several methods by which diversification strategy can be implemented, the most common among which are acquisitions and joint ventures. Diversification can help the companies to achieve their potential in a developing economy. In case of concentric diversification a strong brand name can help in leveraging the new products belong to that brand. It can help the company in spreading their customer base. It also helps in enhancing the product portfolio of the company by introducing complimenting products in the market.

Cons of Diversification
In case of diversification through acquisition, one needs to ensure that the people at the managerial level are well-versed with the process that needs to be followed for the company to be acquired. If you are not armed with people who can handle these things, starting from the grass root can turn out to be tedious task. One needs to take into consideration the efforts required to run the business, and if the efforts required are more than the profit you get, it is better off to stay away from the venture. Lack of knowledge about the current position of the market can really backfire on you from all sides. Going against the core values of the company, just for the sake of profit is also not advisable, which again limits your options.

Among the four strategies enlisted in the Ansoff Product-Market Growth Matrix, this strategy is by far the most risky, and hence requires proper research before implementation. Accuracy in determining the target segment is the key to a successful diversification strategy of a company at the end of the day.