A diversification strategy is that kind of strategy which is adopted by an organization for its business development. The strategy in which an organization plans as to how to enter into a new market which the organization is not in, while at the same time creating a new product for the new market.
Types of Diversification Strategies
There are mainly three types of diversifications strategies:
- Concentric diversification strategy
- Conglomerate diversification strategy
- Horizontal diversification strategy
One of the most important aspects of this strategy is that it reduces the chances of loss in business since it equally distributes different categories of products among all markets present in the region. In earlier times, there was rapid growth in the diversification of business.
But it became difficult to manage expanded activities of any organization. Nowadays, it has become extremely difficult for an organization to perform in diversification mode because the scenario and market conditions have changed a lot.
Concentric Diversification Strategy
This strategy guides us as to how we can introduce new and correlated products in the new market we are entering. For example, a company named XYZ adopted a concentric diversification strategy and introduced cable lines for fast internet across the country.
XYZ Company had been dealing in telephone lines for years. Later they spent huge amounts and acquired cable television. This is how they jointly work with ABC Company to provide cable internet access to the customers of ABC.
Guidelines for Concentric Diversification
The application of concentric diversification requires certain favorable conditions. Some of the guidelines are mentioned below.
- The best situation for a company is to compete in an industry where the growth is nil or very slow.
- Once we introduce new but related products in the market, the sale will be enhanced automatically.
- Moreover, once you offer new but related products, the price must be reasonable as compared to competitive products in the market.
- Sometimes when you observe that current products are declining, it would be the best option to introduce new but related products in the market.
- One of the most important aspects of this strategy that the management team of the company must be strong enough to bear the loss if any.
Conglomerate Diversification Strategy
This strategy allows the organizations to add a new product(s) that are not associated with the existing ones. The organizations use this strategy in order to earn more profit in a way that they procure other business or firm and earn profit by breaking and selling it infractions.
Guidelines for Conglomerate Diversification
A conglomerate diversification strategy can be effective to be followed by any organization in some situations, such as:
- When an organization finds a decline in its annual sales and profits.
- When an organization has ample administrative staff and capital endowment in order to strive in the new industry or business efficaciously.
- When a firm finds a complete saturation in the market for the existing product.
- Some firms have acquired and some are trying to acquire financial collaborations.
Horizontal Diversification Strategy
This strategy takes place when an organization introduces a new and distinct product to the existing customers. The percentage of risk in horizontal diversification strategy is less as compared to the conglomerate diversification strategy because the organization already knows about its existing customers.
Guidelines for Horizontal Diversification
Horizontal diversification can be very effective for a company in some situations. Such as;
- When a company introduces a new product in the market then the revenue of the existing products upsurges considerably.
- The company is considered to be more viable which has low limits and revenues.
- The company markets the products through the same supply channels to the existing clients.
- There are certain sales patterns designed to encounter the production processes of the new products as well as the current products already available in the market.
Hello everyone! This is Richard Daniels, a full-time passionate researcher & blogger. He holds a Ph.D. degree in Economics. He loves to write about economics, e-commerce, and business-related topics for students to assist them in their studies. That's the sole purpose of Business Study Notes.
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