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What is Diversification Strategy?
In previous lectures, we discussed various generic strategies to achieve growth in a given market or industry. Notably, in the Ansoff Matrix lecture, we introduced the concept of diversification as a growth strategy. Diversification is a strategy used to expand market share or enter new markets by launching or acquiring new products (perhaps through licensing, merger, or acquisition). It allows a company to grow by expanding market share in an existing market or by developing a market presence. In essence, diversification involves innovation and market disruption. Below are defined types of diversification.
Offensive and Defensive Diversification Strategies
Company A may introduce a new formula to expand its presence in the chemical wood cleaner market. This is expanding in its existing market with a newly created product. That same company may license the new formula to clean garden weeds. This is expanding into a new market with a new product with a product that it did not invent but is closely related to existing products. Lastly, the Company may begin selling home furniture. This is an example of expanding into a new market with newly created or acquired products. Expanding in an existing market is “defensive diversification”, while expanding into new markets is “offensive diversification”. Defensive diversification generally recognizes the existence of competition in any market. The company is defending its market share (and seeking to grow it) by introducing new products. Offensive diversification seeks to generate market share in a new market, either with related or unrelated products.
Concentric, Horizontal, and Conglomerate Diversification
Concentric diversity concerns a growth strategy where any new or acquired products are closely related to existing products or to the company’s core competencies. This approach allows the company to employ resources and take advantage of existing competencies in introducing the new product. The new products will generally relate closely to existing products or product lines with the purpose of leveraging brand awareness and customer loyalty. It generally involves targeting previously identified market segments that have not been fully addressed.
Horizontal diversification concerns the introduction of new products to a new market segment (generally forming a new business in the process). The new products and business, however, are designed to appeal to an existing customer base. As with concentric diversification, the new products will be closely related to existing products. This strategy depends heavily upon customer loyalty for existing products to transfer over to the new products and business. An example of horizontal diversification is the when company A, which makes laundry detergent, seeks to enter the market for selling washing machines. Brand recognition and customer loyalty for the detergent may carry over to the business of selling washing machines.
Conglomerate diversification involves launching a new product or product lines that are unrelated to existing products, resources, or core competencies. The company will generally attempt to leverage any brand recognition or customer loyalty in the new market. An example would be Company A, which sells electronics, venture into selling clothing apparel.