One strategy for accomplishing this is diversification.
Diversification is a growth strategy that involves adding products, services and markets to your company's core business. Putting your corporate eggs in many baskets is one way to minimize risk. Diversification in business can mean expansion through new product lines or services. You can use this strategy to take advantage of momentum in a new market, or to minimize the risk of your core market shrinking. Many businesses experience phenomenal growth in their early years then plateau. The most common reason for the slowdown is that leads stop coming in. Adding new product lines, or entering a new market is one way to reignite growth.
This strategy is known as market diversification. The aim is to open up new markets and new customer groups, thus improving your company's performance. Depending on your goals and resources a diversification strategy may be internal , external or a combination of both.
Launching a new product after research and development, market analysis and the production or purchase of goods, is called internal diversification.
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External diversification occurs when a company expands it activities through mergers, acquisitions, alliances with complementary companies or licensing new technologies. Motives for diversification can be complex but perhaps the most basic is survival. By definition, a company that focuses on a narrow range of products or services will only have access to a finite customer pool.
At some point, you're going to reach maximum penetration and the costs of running your company may outstrip its potential for growth.
Diversification Strategy – Definition, Types & Examples
Moreover, a one-trick pony business is extremely vulnerable to factors over which it has no or limited control. Rising raw materials prices, new competitors entering the market, changing customer tastes — these events can be catastrophic to your sales and revenue stream.
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Diversification places your eggs in many baskets. In the case of seasonal businesses, diversification can help stabilize your cash flow throughout the year. For example, an ice cream truck is likely to sell the bulk of its product in the summer.
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If the business remains committed to selling only ice cream, it would have to sell enough during the summer months to keep the books in balance during the off-season. An alternative would be to diversify into a selling a product that appeals during the fallow months; coffee for example. Diversification is not just about survival. It can also be a proactive growth strategy. Adding new products and services to your line can gain you entry to an attractive new industry full of new customers and high sales potential.
It can also kick start growth again, especially if you know how to take advantage of momentum in the market. The most straightforward way to diversify is to expand the product range you already offer. This is known as horizontal diversification.
What you need to know about diversification, a key growth strategy – Berley Chartered Accountants
Usually, the new products are closely related to the current core business, for example:. With horizontal diversification, a business can reduce some of its risk exposure while exploiting certain synergies. Using the example of the shoe manufacturer, the additional cost of producing children's shoes should be manageable since the tools, equipment and technical skills to manufacture shoes are already in place. Current customers with children and new customers would be your target market. Think about all the steps that are involved in getting a product to market.
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With vertical diversification, a company that's already operating in one of these areas expands to another. Companies must convince consumers to buy these products through marketing activities such as branding and advertising. Thus, on the surface, the acquisition of 7Up by Philip Morris seemed to offer the potential for Philip Morris to take its existing marketing skills and apply them within a new industry. Unfortunately, the possible benefits to 7Up never materialized. Why would a soft-drink company buy a movie studio?
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Lighter firm Zippo is currently trying to avoid this scenario. This brand has fueled eighty years of success for the firm. But the future of the lighter business is bleak. This downward trend is likely to continue as smoking becomes less and less attractive in many countries. To save their company, Zippo executives want to diversify. As of March , Zippo was examining a wide variety of markets where their brand could be leveraged, including watches, clothing, wallets, pens, liquor flasks, outdoor hand warmers, playing cards, gas grills, and cologne.
Most unrelated diversification efforts, however, do not have happy endings. Harley-Davidson, for example, once tried to sell Harley-branded bottled water. Starbucks tried to diversify into offering Starbucks-branded furniture. Both efforts were disasters. Although Harley-Davidson and Starbucks both enjoy iconic brands, these strategic resources simply did not transfer effectively to the bottled water and furniture businesses.
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.
Spotlight – Market Diversification
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.