A diversification strategy is a business growth strategy in which a company seeks to enter new markets or product areas in order to offset risks and dependencies inherent in its current business. It is also an investment strategy that involves adding new investments to a portfolio in order to reduce risk. The goal of diversification is to minimize the impact of any one event on the overall performance of the portfolio.
When businesses wish to expand, a diversification strategy is utilized. It’s the practice of introducing a new product into your supply chain in order to increase profits. These items might be a new area in your industry that your firm already occupies, known as business-level diversification. Corporate-level diversification, on the other hand, happens when you enter a new market.
Table of Contents
What is a Diversification Strategy?
A diversification strategy is a business growth as well as risk management strategy employed to enter into new markets with new products in order to diversify the risks and dependencies that are inherent in any given company’s current business.
The definition of diversification as “a company’s growth plan to manufacture new products in new markets” implies what diversification strategy a business uses. Businesses use different diversification strategies to accomplish different things.
The diversification strategy a company uses depends on what the company wants to achieve and how diversified it wants to become. Some of the common diversification objectives are to Enter new markets-
- Offset risk
- Create new revenue streams
- Increase market share
- Take advantage of economies of scale
Who was Igor Ansoff?
Igor Ansoff was a Russian-American mathematician and business executive who is known as the “father of modern corporate diversification.”
He is the author of several books on diversification and business strategy, including “Corporate Strategy” (1965) and “Implementing Strategic Management” (1975).
Ansoff’s work on diversification has had a major impact on the field of strategic management. His diversification matrix, also known as the Ansoff Matrix, is a widely used tool for analyzing diversification opportunities.
Ansoff’s career began in the aerospace industry, where he worked for several years as a mathematician and systems analyst. He later joined the management consulting firm McKinsey & Company, where he became a partner.
In the late 1950s, Ansoff left McKinsey to become the CEO of a struggling aerospace company called TRW. Under his leadership, TRW turned around and became a major player in the aerospace industry.
In the 1960s, Ansoff began to develop his theories on diversification and corporate strategy. He wrote several influential articles and books on the subject, including “Corporate Strategy” (1965) and “Implementing Strategic Management” (1975).
Ansoff’s work on diversification has had a major impact on the field of strategic management. His diversification matrix, also known as the Ansoff Matrix, is a widely used tool for analyzing diversification opportunities.
The Ansoff Matrix
The Ansoff Matrix is a tool that helps businesses determine their diversification strategy. It is also known as the Product-Market Expansion Grid.
The matrix provides four diversification strategies that a business can use to enter new markets:
- Market penetration: The company sells its existing products in new markets.
- Market development: The company develops new markets for its existing products.
- Product development: The company develops new products for its existing markets.
- Diversification: The company enters new markets with new products.
Why do companies diversify?
There are many reasons why companies diversify. Some of the most common reasons are to offset risk, create new revenue streams, increase market share, and take advantage of economies of scale.
Risk diversification is a strategy that is often used by companies to reduce their dependency on a single product or market. When a company diversifies into new markets or product areas, it spreads its risk across a wider base, which can lead to increased stability and profitability.
Another common reason for diversification is to create new revenue streams. Companies often diversify into new markets or product areas in order to tap into new sources of revenue. This can help a company to grow and become more profitable.
Diversification can also be used as a way to increase market share. By diversifying into new markets or product areas, a company can gain a larger share of the overall market. This can lead to increased profits and market dominance.
Finally, diversification can be used as a way to take advantage of economies of scale. When a company diversifies its operations, it can often benefit from economies of scale. This can lead to lower costs and increased profits.
Types of diversification strategies
1. Concentric Diversification
Concentric diversification is a type of diversification in which a company diversifies into new markets or product areas that are related to its existing businesses.
2. Horizontal Diversification
Horizontal diversification is a type of diversification in which a company diversifies into new markets or product areas that are not related to its existing businesses.
3. Conglomerate Diversification Strategy
Conglomerate diversification is a type of diversification in which a company diversifies into new businesses that are not related to its existing businesses.
4. Vertical diversification
Vertical diversification is a type of diversification in which a company diversifies into new product lines or services that are related to its existing businesses.
Here is a video by Marketing91 on Diversification Strategy.
Diversification by Asset Class
1. Equity diversification
Equity diversification is a type of diversification in which a company diversifies its assets into new equity investments.
2. Fixed-income diversification
Fixed-income diversification is a type of diversification in which a company diversifies its assets into new fixed-income investments.
3. Commodity diversification
Commodity diversification is a type of diversification in which a company diversifies its assets into new commodity investments.
4. Geographic Diversification
Geographic diversification is a type of diversification in which a company diversifies its operations into new geographic areas.
5. Foreign Diversification
Foreign diversification is a type of diversification in which a company diversifies its operations into new foreign markets.
Diversification by Business Model
1. Platform diversification
Platform diversification is a type of diversification in which a company diversifies its business model by creating new platforms.
2. Product diversification
Product diversification is a type of diversification in which a company diversifies its business model by creating new products.
3. Service diversification
Service diversification is a type of diversification in which a company diversifies its business model by creating new services.
Diversification by Industry
1. Technology diversification
Technology diversification is a type of diversification in which a company diversifies its operations into new industries that are related to its existing industry.
2. Retail diversification
Retail diversification is a type of diversification in which a company diversifies its operations into new industries that are not related to its existing industry.
3. Media diversification
Media diversification is a type of diversification in which a company diversifies its operations into new industries that are related to its existing industry.
4. Healthcare diversification
Healthcare diversification is a type of diversification in which a company diversifies its operations into new industries that are not related to its existing industry.
Diversification by Sector
1. Financial diversification
Financial diversification is a type of diversification in which a company diversifies its operations into new sectors that are related to its existing sector.
2. Consumer diversification
Consumer diversification is a type of diversification in which a company diversifies its operations into new sectors that are not related to its existing sector.
3. Industrial diversification
Industrial diversification is a type of diversification in which a company diversifies its operations into new sectors that are related to its existing sector.
4. Technology diversification
Technology diversification is a type of diversification in which a company diversifies its operations into new sectors that are not related to its existing sector.
Diversification by Risk Profile
1. Conservative diversification
Conservative diversification is a type of diversification in which a company diversifies its operations into new industries that are less risky than its existing industry.
2. Moderate diversification
Moderate diversification is a type of diversification in which a company diversifies its operations into new industries that are riskier than its existing industry.
3. Aggressive diversification
Aggressive diversification is a type of diversification in which a company diversifies its operations into new industries that are much riskier than its existing industry.
Diversification and the Retail Investor
- Diversification is a risk management technique that can be used by retail investors to limit their exposure to any one particular investment.
- Retail investors should diversify their portfolios across a number of different asset classes in order to minimize the overall risk of their portfolios.
- Diversification does not guarantee losses, but it can help to mitigate the risk of losses in any one particular investment.
Product Diversification and Market Diversification
1. Product diversification
Product diversification is a type of diversification in which a company diversifies into new products that are related to its existing products.
2. Market diversification
Market diversification is a type of diversification in which a company diversifies into new markets that are related to its existing markets.
What type of companies uses a diversification strategy?
- Companies that use a diversification strategy are typically large companies with a wide variety of products and services.
- Diversification can be used as a growth strategy or as a risk management strategy.
- Large companies that use diversification as a growth strategy tend to have a diversified portfolio of businesses.
- Companies that use diversification as a risk management strategy tend to have a more focused portfolio of businesses.
What are the Risks of a diversification strategy?
- The main risk of a diversification strategy is that it can lead to a lack of focus on the core business.
- A diversification strategy can also be risky if the new businesses are not well-managed or do not fit well with the existing business.
- A diversification strategy can also lead to higher costs if the new businesses are not as efficient as the existing business.
Diversification strategy examples
Some of the companies using diversification strategies successfully are
1. Johnson & Johnson
Johnson & Johnson diversified its business by moving into the healthcare industry.
2. General Electric
General Electric diversified its business by moving into the financial services industry.
3. Sony
Sony diversified its business by moving into the video game industry.
4. Samsung
Samsung diversified its business by moving into the semiconductor industry.
Advantages of Diversification
1. Reducing risks
Diversification can help to reduce the overall risk of a company’s business by diversifying into new industries or sectors.
2. Increasing profits
Diversification can also help to increase profits by diversifying into new industries or sectors that are growing faster than the existing industry.
3. Generating new ideas
Diversification can also help to generate new ideas for the company by exposing it to new industries and sectors.
4. Survival
A diversification strategy can also help a company to survive in difficult times by diversifying into new industries or sectors.
5. Flexibility
A diversification strategy can also help to increase the flexibility of a company’s operations by diversifying into new industries or sectors.
Disadvantages of Diversification
1. Lack of focus
A diversification strategy can lead to a lack of focus on the core business.
2. Higher costs
A diversification strategy can also lead to higher costs if the new businesses are not as efficient as the existing business.
3. Risky
A diversification strategy can also be risky if the new businesses are not well-managed or do not fit well with the existing business.
4. Complexity
A diversification strategy can also lead to complexity in the operations of a company if the new businesses are not well-integrated with the existing business.
Conclusion
In the end, it is clear that all diversification strategy depends on the company and its respective goals. A diversification strategy can be a good way to reduce risks, increase profits, generate new ideas, and improve flexibility.
However, a diversification strategy can also lead to a lack of focus, higher costs, and complexity. Therefore, it is important to carefully consider the pros and cons of a diversification strategy before implementing it.
What are your thoughts about diversification strategies? Let us know in the comments below!
Liked this post? Check out the complete series on Strategy
dear ,,
when Icreat new service for excisting product what this strategy name?