Diversification strategies are used to extend the company’s product lines and operate in several different markets. The general strategies include concentric, horizontal and conglomerate diversification.
Each strategy focuses on a specific method of diversification. The concentric strategy is used when a firm wants to increase its products portfolio to include like products produced within the same company, the horizontal strategy is used when the company wants to produce new products in a similar market, and the conglomerate diversification strategy is used when a company starts operating in two or more unrelated industries.
Diversification strategies help to increase flexibility and maintain profit during sluggish economic periods.
Warren Buffet on Diversification
“Diversification is protection against ignorance, it makes little sense for those who know what they’re doing.”
A concentric diversification strategy lets a firm to add similar products to an already established business. For example, when a computer company producing personal computers using towers starts to produce laptops, it uses concentric strategies. The technical knowledge for new venture comes from its current field of skilled employees.
Concentric diversification strategies are rampant in the food production industry. For example, a ketchup manufacturer starts producing salsa, using its current production facilities.
Horizontal diversification allow a firm to start exploring other zones in terms of product manufacturing. Companies depend on current market share of loyal customers in this strategy. When a television manufacturer starts producing refrigerators, freezers and washers or dryers, it uses horizontal diversification.
A downside is the company’s dependence on one group of consumers. The company has to leverage on the brand loyalty associated with current products. This is dangerous since new products may not garner the same favor as the company’s other products.
In conglomerate diversification strategies, companies will look to enter a previously untapped market. This is often done using mergers and acquisitions.
Moving into a new industry is highly dangerous, due to unfamiliarity with the new industry. Brand loyalty may also be reduced when quality is not managed. However, this strategy offers increasing flexibility in reaching new economic markets.
For example, a company into automotive repair parts may enter the toy production industry. Each company allows for a broader base of customers. There is an opportunity of income when one industry’s sales falter.