Businesses respond differently to changing economic tides, which sometimes require them to adopt a business diversification strategy to remain competitive while serving their clients’ needs.
Although diversification is considered a good business approach, the tactics and strategies implemented determine the success or failure of a given approach.
With a diversified product base, enterprises benefit from the flexibility and risk mitigation that come with one product line’s failure, market share growth, and business survival.
What is a Business Diversification Strategy?
Identified by mathematician and businessman Igor Ansoff in the 1950s, diversification is one of the four business growth tactics alongside product development, market penetration, and market development. Ansoff defined business diversification as a strategy in which a business changes or expands its product base.
Although diversification has different reasons, the critical assumption is that it is meant for business growth or survival within a particular industry. In other cases, a company may find it necessary to diversify its product base in a bid to keep customers. For instance, a phone manufacturing company may find it necessary to manufacture the given battery charging system instead of having another manufacturer supply it to its customers.
In the next section, we will be discussing the dominant business diversification strategies:
Types of Business Diversification Strategies
Related Diversification Strategy: This is a type of diversification in which the enterprise uses its existing resources and customer knowledge to expand into a related product line. This strategy works well for companies that have an existing portfolio of products and that the new product is not necessarily a competition to the existing product but could provide variety for clients to choose from. A classic example of this type of diversification is Coca-Cola, which has a range of beverages with different names and flavors.
Unrelated Diversification Strategy: In this type of diversification, an enterprise chooses to expand into a newer market with nothing to do with its existing product. This strategy is particularly relevant to enterprises that seek to spread their risk by expanding into other areas considered more stable. A good example of this diversification is the Virgin Group, which has invested in telecommunication under Virgin Mobile and the airline industry under Virgin Atlantic Airlines.
Horizontal Diversification Strategy: In this type of diversification, the business chooses to enter a market that takes advantage of its current customer base. Although the products are unrelated, they may complement the company’s existing products. A good example could be a notebook manufacturing company venturing into manufacturing pens.
Vertical Diversification Strategy: With this diversification, the company focuses on expanding into new areas along the production line. In this case, the company seeks to streamline its processes to gain a competitive advantage against the existing players in the industry. A good example could be a company taking over the distribution process or acquiring new suppliers for a different product line under the same portfolio.
Concentric Diversification Strategy: In concentric diversification, the enterprise chooses to expand into a new product or service that is technologically or commercially related to the existing product. Businesses are sometimes forced to venture into a related industry based on the complementary aspects of the product. A classic example is the Nike company, famous for producing shoes, venturing into the clothes industry with a focus on making gear for footballers and athletes.
Conglomerate Diversification Strategy: This strategy involves a company that chooses to expand into new markets by adding a new product that is unrelated to the current business. This type of strategy is appropriate, especially when one needs to spread the risk, but it can also be the riskiest venture due to a lack of expertise in the new product line. An example and the most common type is a real estate company that ventures into road construction.
Benefits of Business Diversification Strategies
Risk Mitigation
With diversification, the company gets new streams of revenue that it can rely on whenever one product fails for reasons such as economic downturns. Diversification also becomes necessary, especially in cases where the business is engaging in seasonal products or products whose demand surges at a given time. In this case, it can turn to other products to sustain growth.
Increased Revenue Streams
Diversification allows companies to establish new income sources, significantly improving their financial stability. For example, Disney’s revenue from its theme parks, media networks, and movies helped balance its revenue streams during industry fluctuations.
Market Share Growth
Companies that diversify into industries that they did not previously trade in stand a chance of gaining a larger customer base by acquiring new customers and maintaining existing ones. This works well, especially for companies that diversify into complementary products.
Besides, it give a competitive advantage to the company when it comes to creating brand awareness throufh a creation of a line pf products that would dominate the industry.
Competitive Advantage
A company with more products on the market becomes a threat to new entrants into the existing market space.
Companies can apply their core competencies, resources, or technologies across different areas. For instance, Apple leveraged its expertise in consumer electronics to expand into new markets, such as wearables with the Apple Watch.
Innovation and Product Line Expansion
When companies focus on diversifying their product base, the first and most important step is the research process. This process is necessary to ensure the product has a customer base. The company will then be compelled to come up with creative solutions that meet the needs of its customers. This encourages innovation and creativity, which is absolutely necessary for diversifying into new product lines.
Key Steps in Planning a Business Diversification Strategy
- Conduct market research: Before choosing to diversifying, an enterprise should first seek to understand the needs of customers by focusing on trhe exisiting gaps with the existing product. This researvch would also involve understanding the market trends and dynamics which can dictate the right stratergy to use. To do this effectively, interviews and survey would be a good source of data collection.
- Develop the right diversification approach: Based on the gaps in the research phase, the business can choose to take a specific approach to fill the gap. The right approach takes into consideration the business objectives and goals and the existing resources and expertise to venture into a given industry.
- Develop a diversification implementation plan: In this phase, outline a step-by-step plan for integrating the new product, service, or market into the business. It involves seting clear goals, allocate resources, and establish timelines for each stage of diversification. Include key performance indicators (KPIs) to monitor progress.
- Allocate resources and manage risk: Once the plan has been crafted, the next approach is to allocate the necessary resources to push the product to the market. This involves assigning enough financial resources to the product production and marketing processes. Assess internal resources and determine if external funding, partnerships, or new hires are necessary. Conduct a risk analysis to plan for potential challenges.
- Conduct a Trial Run: This involves launching the product to a given group of customers to test how well the intended audience will accept it. In the testing phase, it’s recommended to collect feedback from the customers, and sometimes, observation becomes the best option, as some of the reactions can be useful in informing relevant changes that customers may need to implement.
- Monitor Progress: The last phase is to monitor the progress of the product after it has been launched to the customers. In this phase, it’s necessary to keep up with new trends and take the initiative to update your product so that it remains relevant to the customers.
Challenges and Risks in Diversification
- Overextension: The greatest challenge of diversification is managing the expansion. With new expansion comes the need for increased resource allocation and newer expertise in dealing with the specific product line. If not handled well, the product may fail, especially where there are not enough resources.
- Increased operational complexity: Diversification comes with many other adjustments that a business needs to understand in order to manage its diversification strategy. In some cases, it may require setting up new technologies to sustain the new product line. Also, it may involve hiring new employees, which will additionally increase operational costs.
- Potential for Dilution of Brand Identity: Expanding into unrelated markets may dilute a company’s brand identity, especially if new offerings are inconsistent with its established image. Maintaining brand cohesion across diversified products is essential.
Conclusion
A well-planned business diversification strategy can be a robust growth, resilience, and competitive advantage tool. By carefully selecting the type of diversification that aligns with their goals and implementing a structured plan, companies can successfully navigate the complexities of expansion. Diversification offers a pathway to sustainable success, whether you’re looking to spread risk, explore new markets, or boost market share.
What are your thoughts on business diversification? Have you seen it work in your industry or company? Share your insights in the comments below, and let’s keep the conversation going!
