What is Diversification?

❚ A collection of businesses under one

corporate umbrella
 Diversification
Diversification is a business development strategy allowing a company to enter
additional lines of business that are different from the current products, services
and markets.
Diversification strategy is when a business or a company proceed with the
growth and development and expand its business in different markets and product
areas. In other words, it means letting your business enter into the new markets
and creating a new product.
 Why do Firms Diversify?

• When they have excess resources, capabilities, and core

competencies that have multiple uses
• Diminishing growth prospects in present industry
• Cost saving opportunities
• Capture strategic fits
• Capture financial economies
• Spread business risk
• Leverage brand name
 Why do Firms Diversify?
Expand business growth
One of the primary reasons companies follow the diversification strategy is to
expand their business’s growth rate. The investors have made up their mind that
bigger is better. They want a high growth rate, whether in terms of productivity,
sales, or revenue. All of these growth factors act as performance measurement tools
for outsiders and investors.
Maximum Utilization of Resources
When it comes to launching something new into the market, businesses have to
utilize all the available resources. The equipment and material they haven’t used for
years will have to use all of these resources to develop something new.
To find Attractive Industries
When companies develop something new and launch it in the market, it’s also one
of their goals to attract the attention of other relevant businesses and customers. It
helps them to increase the chances of mergers and acquisitions.
 Types of Diversification
Horizontal Diversification:
It is a strategy in which a firms long term strategy is based on growth through
acquisition of one or more similar firms operating at the same stage of the
production-marketing chain.
Example : For instance, you’re running a paper sale company, and you launch a
new and different product, printers. It would attract the attention of potential
customers.
Vertical Diversification:
It is a process in which a firm's grand strategy is to acquire firms that supply it with
inputs (such as raw materials) or are customers for its outputs (such as warehouses
for finished products).
Example : You own a retail store, and you expand/diversify your business by buying
your products’ production facility that you’re selling. It helps you to decrease many
variable costs. The flaw of vertical integration is that your business loses the flexibility
of using horizontal integration.
 Concentric Diversification :

Concentric diversification is when a business introduces a new product into the

new market. The product is similar to its current offer. But the company manages
to get a competitive advantage by using the manufacturing process, technology
advantage, and industry experience.Concentric diversification is beneficial if your
business’s sale is decreasing, and you can cover the loss by increasing the sale
of other products.

Example : A computer manufacturing company has expanded from the production

of desktop computers to laptops. It would help the company to exploit the new
trending laptop user market.
 Conglomerate Diversification:

A conglomerate is a Corporation made up of several smaller, independently-run

companies which may operate across several sectors and industries.
Conglomerate diversification is when a company introduces an entirely new
product and enters into the new market by targeting new customers market. The
term conglomerate means a corporate group is managing various businesses in
different categories. The parent company of all the sub-brands is a
conglomerate. The conglomeration is a very successful diversification strategy.
Example
Tata Group started as hotel industry, and it diversified its business into a
conglomerate. Currently, the Tata Group conglomerate comprises more than
100 companies in various categories like consumer products, information
systems, telecommunication, engineering, automobiles, steel, and chemicals.
Internal Diversification
Internal diversification is when a business launches its current/existing product into
the new market. The goal is to increase the customer market by expanding the
geographic borders. Companies do it by locating the new users of their existing
products/services. Internal diversification is also about introducing a new
product to the current market. Businesses use their existing distribution
channel to launch a new product.
Examples
Johnson & Johnson launched toys for children to its existing infant market.
Fast-food companies have started offering the low calories and salt-free food items
to the current product line.
External Diversification
External diversification is when a business launches a new product/service by going
out of its current business operations. A merger is also a form of external
diversification when two companies integrate their business operations to create
something new. The merging companies usually comprise of a similar size.
STRATEGIES FOR ENTERING NEW BUSINESSES

Diversifying into
New Businesses

Internal new
Acquisition Joint venture
venture (start-up)
 Diversification and
Corporate Strategy
❚ is diversified when it is in two or more lines of business
A company
Strategy-making in a diversified company is a bigger picture exercise
❚a strategy for a single line-of-business
than crafting

A diversified company needs a multi-industry, multi- business strategy

❙
A strategic action plan must be developed for several different businesses
❙
competing in diverse industry environments
 Diversification and Corporate Strategy

❚ In addition to a business strategy which identifies and

maintains a sustainable competitive advantage in each of the
business units, a coherent corporate strategy is needed which
creates value and is internally consistent.
 When do we diversify?
❚ When a company runs out of growth opportunities in the core
business and not before!
❚ When diversification results in creation of value
 COMMENT: TREND IN
DIVERSIFICATION

The present trend toward narrower diversification has been

driven by a growing preference to gear diversification around
creating strong competitive positions in a few, well- selected
industries as opposed to scattering corporate investments
across many industries!
What are the benefits of using a diversification strategy?

Expands the target audience

Launching new products or services can help a company appeal to a new
demographic of consumers. For example, if a hair salon that usually only cuts
men's hair starts to serve all potential customers as well, it can greatly increase
its revenue. By expanding existing services or products with new or updated
options, companies can appeal to both new and current customers.
What are the benefits of using a diversification strategy?

Minimizes risk
Expanding a business can help ensure the company has more than one means of
earning revenue. This can help minimize financial risk if the core market a
company caters to slows down or becomes irrelevant. For example, if a clothing
company only sells clothes for cold weather and winter, it may not make as much
money in the summer months. Using a diversification strategy to expand the type
of clothing the company sells can ensure that it earns a profit throughout the
seasons.
What are the benefits of using a diversification strategy?
Maximizes profit

Diversification strategies can also help maximize a company's chance for profit.
When a company sells more products and services, it often can have a higher
earning potential than one that focuses on a single product or service. For
example, an auto repair shop that only fixes tire-related issues may not have the
potential to earn as much profit as a repair shop that can troubleshoot any issue
with a vehicle.
What are the benefits of using a diversification strategy?

Offers opportunity for growth

Diversification strategies can give companies an opportunity for growth. In

ambitious uses of diversification marketing, a company can even expand to reach
other industries. This allows companies to adjust their goals and focuses to
evolve as their consumers and their employees do the same.
Tips for using a diversification strategy

Consider the desired demographic

When planning on using a diversification strategy, it can be helpful for company leaders to
consider the customer demographic they would like to reach. This can help them decide what new
product or service to offer. For example, if the company's products are already popular among
young people, the company may want to design a product to appeal to senior people as well.

Research consumer needs

One great way to find an idea for a successful product or service can be to seek the advice of a
company's target audience. Consider forming a focus group, starting conversations with
customers or sending out a survey to gather the opinions of the company's audience. This can
help you develop a product or service idea based on customer interest.
Tips for using a diversification strategy
Plan thoroughly
An effective plan can help ensure the success of the diversification strategy. Be
sure to consider all aspects of the expansion, including consumer interest, the
cost of marketing and production. A successful product plan can also include
testing the product or service for quality and planning for an effective and popular
product launch.
Create a budget
A company's budget can be one of the biggest factors in deciding which
diversification strategy to use. A company that wants to save money may want to
consider horizontal or concentric diversification strategies. This is because both
methods can use equipment and practices from the company's existing
operations.
If a company is hoping for the most increase in profit, it may consider using
conglomerate or vertical diversification methods. Each of these strategies allows
the potential to expand into new industries and appeal to a new target audience.