Diversification is a corporate strategy to enter into a new market or industry which
the business is not currently in, whilst also creating a new product for that new market.
This is most risky section of the Ansoff Matrix, as the business has no experience in the new
market and does not know if the product is going to be successful.
Diversification is part of the four main growth strategies defined by Igor Ansoff's Product/Market
matrix:
Ansoff pointed out that a diversification strategy stands apart from the other three
strategies.
The first three strategies are usually pursued with the same technical, financial, and merchandising
resources used for the original product line, whereas diversification usually requires a
company to acquire new skills, new techniques and new facilities.
Note: The notion of diversification depends on the subjective interpretation of “new”
market and “new” product, which should reflect the perceptions of customers rather
than managers.
Indeed, products tend to create or stimulate new markets; new markets promote product innovation.
Product diversification involves addition of new products to existing products either
being manufactured or being marketed.
Expansion of the existing product line with related products is one such method adopted
by many businesses.
Adding tooth brushes to tooth paste or tooth powders or mouthwash under the same brand
or under different brands aimed at different segments is one way of diversification.
These are either brand extensions or product extensions to increase the volume of sales
and the number of customers.
The different types of diversification strategies The strategies of diversification can include
internal development of new products or markets, acquisition of a firm, alliance with a complementary
company, licensing of new technologies, and distributing or importing a products line
manufactured by another firm.
Generally, the final strategy involves a combination of these options.
This combination is determined in function of available opportunities and consistency
with the objectives and the resources of the company.
There are three types of diversification: concentric, horizontal, and conglomerate.
Concentric diversification This means that there is a technological similarity
between the industries, which means that the firm is able to leverage its technical know-how
to gain some advantage.
For example, a company that manufactures industrial adhesives might decide to diversify into adhesives
to be sold via retailers.
The technology would be the same but the marketing effort would need to change.
It also seems to increase its market share to launch a new product that helps the particular
company to earn profit.
For instance, the addition of tomato ketchup and sauce to the existing "Maggi" brand processed
items of Food Specialities Ltd. is an example of technological-related concentric diversification.
The company could seek new products that have technological or marketing synergies with
existing product lines appealing to a new group of customers.This also helps the company
to tap that part of the market which remains untapped, and which presents an opportunity
to earn profit..
Horizontal diversification The company adds new products or services
that are often technologically or commercially unrelated to current products but that may
appeal to current customers.
This strategy tends to increase the firm's dependence on certain market segments.
For example, a company that was making notebooks earlier may also enter the pen market with
its new product.
When is Horizontal diversification desirable?
Horizontal diversification is desirable if the present customers are loyal to the current
products and if the new products have a good quality and are well promoted and priced.
Moreover, the new products are marketed to the same economic environment as the existing
products, which may lead to rigidity or instability.
Another interpretation Horizontal integration occurs when a firm
enters a new business at the same stage of production as its current operations.
For example, Avon's move to market jewelry through its door-to-door sales force involved
marketing new products through existing channels of distribution.
An alternative form of that Avon has also undertaken is selling its products by mail
order and through retail stores.
In both cases, Avon is still at the retail stage of the production process.
Conglomerate diversification
The company markets new products or services that have no technological or commercial synergies
with current products but that may appeal to new groups of customers.
The conglomerate diversification has very little relationship with the firm's current
business.
Therefore, the main reasons for adopting such a strategy are first to improve the profitability
and the flexibility of the company, and second to get a better reception in capital markets
as the company gets bigger.
Though this strategy is very risky, it could also, if successful, provide increased growth
and profitability.
Goal of diversification According to Calori and Harvatopoulos, there
are two dimensions of rationale for diversification.
The first one relates to the nature of the strategic objective: Diversification may be
defensive or offensive.
Defensive reasons may be spreading the risk of market contraction, or being forced to
diversify when current product or current market orientation seems to provide no further
opportunities for growth.
Offensive reasons may be conquering new positions, taking opportunities that promise greater
profitability than expansion opportunities, or using retained cash that exceeds total
expansion needs.
The second dimension involves the expected outcomes of diversification: Management may
expect great economic value or first and foremost great coherence with their current activities.
In addition, companies may also explore diversification just to get a valuable comparison between
this strategy and expansion.
Risks Of the four strategies presented in the Ansoff
matrix, Diversification has the highest level of risk and requires the most careful investigation.
Going into an unknown market with an unfamiliar product offering means a lack of experience
in the new skills and techniques required.
Therefore, the company puts itself in a great uncertainty.
Moreover, diversification might necessitate significant expanding of human and financial
resources, which may detract focus, commitment, and sustained investments in the core industries.
Therefore, a firm should choose this option only when the current product or current market
orientation does not offer further opportunities for growth.
In order to measure the chances of success, different tests can be done:
The attractiveness test: the industry that has been chosen has to be either attractive
or capable of being made attractive.
The cost-of-entry test: the cost of entry must not capitalize all future profits.
The better-off test: the new unit must either gain competitive advantage from its link with
the corporation or vice versa.
Because of the high risks explained above, many companies attempting to diversify have
led to failure.
However, there are a few good examples of successful diversification:
Virgin Group moved from music production to travel and mobile phones
Walt Disney moved from producing animated movies to theme parks and vacation properties
Canon diversified from a camera-making company into producing an entirely new range of office
equipment.
See also Market development
Market penetration Product development
Product proliferation Pure play
References ^ Ansoff, I.: Strategies for Diversification,
Harvard Business Review, Vol. 35 Issue 5,Sep-Oct 1957, pp. 113-124
^ Porter, Michael.
"From Competitive Advantage to Corporate Strategy".
Harvard Business Review.
May–June: 43–59.
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