Introduction
You can utilise a diversification plan as a tool to grow your firm. By expanding the company's provision of products and services, this strategy aids in promoting business growth. The company can now pursue commercial prospects outside of its typical markets and processes thanks to these new products. In order to establish themselves in new markets or to target a new demographic, businesses frequently employ a diversification strategy.
Whether your company is doing well or poorly, if you run a business, you probably want to expand. While there are many ways to expand your company, diversification is one that many businesses use and one that you might want to take into account.
Diversification is a growth strategy that involves entering a new market niche, which enables your company to increase its footprint and take over entirely new territory. This is accomplished by broadening (or diversifying) the scope of your product or service offerings in order to attract new clients and boost revenue.
There are numerous ways to diversify and expand your business; there isn't just one kind of diversification. I'll outline many forms of diversification tactics and highlight their benefits and drawbacks for you below.
Types of diversification strategy
1.Constricted diversification
Concentric diversification entails expanding the company's current product or service offering. An example of a concentric diversification strategy in action is when a computer company that primarily manufactures desktop computers begins making laptops.
2.Wide-ranging diversification
Giving current customers brand-new, unrelated goods or services is known as horizontal diversification. An example of a company using a horizontal diversification approach is a notebook manufacturer that enters the pen market.
3.Diversification of conglomerates
Conglomerate diversification entails introducing brand-new goods or services that are vastly unlike in nature and share neither a technological nor a commercial affinity. A computer manufacturer might choose to make notebooks as an example of a conglomerate diversification strategy.
Conglomerate diversification is the riskiest tactic among the three different types of diversification approaches. Conglomerate diversification necessitates the corporation entering a new market and catering to a new clientele.
A corporation pays more for advertising and research & development. A conglomerate diversification strategy also carries a far higher risk of failure.
Offensive and Defensive Diversification Strategies
To increase its market share in the chemical wood cleaner industry, Company A might release a new formula. This is using a newly developed product to grow in its current market. The innovative method to remove garden weeds may be licensed by that same business. This is entering a new market with a new product that isn't its own invention but is closely linked to ones that already exist. Finally, the business might start selling furnishings for homes. This is an illustration of entering a new market with recently acquired or manufactured products.
Defensive diversification refers to growing in one's current market, whereas offensive diversification refers to growing in new areas. In general, defensive diversification acknowledges that there is competition in every market. By releasing new items, the corporation is attempting to increase its market share and defend its current stake. With related or unrelated items, offensive diversification aims to gain market share in a new market.
Which businesses implement a diversification strategy?
For three key reasons, businesses will utilise a diversification strategy. As a result, the businesses that employ diversification strategy are those that:
1. The need to reduce market risk
2. They must shield their enterprise from rivals
3. They must boost their earnings and variety of
supplied goods.
The types of businesses that use diversification strategies are hence frequently under pressure. For instance, you might want to buy the firm that a new rival is taking from you.
The decision to diversify, on the other hand, necessitates extensive research and must often be made under severely pressured circumstances. Let's look at some examples of businesses who opt to employ a diversification strategy and discuss why they did so.
Mitigate Risk
Businesses will seek to expand their product line when the market is unstable or in a slump. As a result, their investment is distributed throughout a variety of channels, allowing one product to afford to lose sales while causing less overall harm to the business as a whole.
A general riskiness index can be used to determine how successful the launch of a new product might be. Three key requirements must be met by this:
1.The attractiveness test by Porter
2.Entry barriers are lower than expected future earnings.
3.The better-off test asks whether there is a synergy or competitive edge between these new items.
Unsystematic risk is the reason why businesses diversify to reduce risk. This pertains to market risk and could be brought on, for instance, by a competitor growing more powerful or going out of business.
Competition
Businesses often compare their strategic assets to get a competitive advantage when the competition is fierce. Strategic assets are particular firm resources or competencies that are hard to duplicate or are in short supply.
The kinds of businesses that diversify to shield themselves from rivals may combine with those rivals. In this instance, they eliminate the rivals and start splitting the revenue. Additionally, since there are fewer options for consumers, pricing is less competitive. Businesses may be able to increase their prices thanks to this form of diversity.
Matching or outperforming your competitors with new products is a distinct strategy for diversification for competitive reasons. To outperform your rivals in this situation, you can decide to combine diversification with a penetration price plan. The goal is to develop devoted, repeat clients who will eventually make more expensive purchases.
Profit
In order to increase earnings, businesses may decide to diversify. In this situation, concentric diversification is a well-known and effective tactic.
For instance, coffee businesses will expand their menu to include food additions like sandwiches and pastries. This might be sold as an upsell at the register to boost profits. The products are identical to those that have already been demonstrated to sell, thus the risk of diversification remains low.
Similar to this, gyms may decide to expand their facilities by adding a sauna area or physio room. This wouldn't need any extra room, but it might be rented out to bring in another source of money, diversifying the business.
Important diversification strategy
1.increases the target market
A business can reach a new consumer demography by introducing new products or services. For instance, a hair shop that typically exclusively cuts the hair of men could significantly improve its earnings if it began to service all possible clients. Companies can attract both new and existing clients by adding new or updated options to their existing services or goods.
2.reduces risk
A company's ability to diversify its sources of income can be ensured by expanding. This can reduce financial risk in the event that a company's primary market slows down or is rendered obsolete. For instance, a clothing business that primarily sells winter and cold-weather clothing might not do as well in the summer. It is possible to guarantee that the business will turn a profit throughout the seasons by using a diversification strategy to increase the types of clothing it sells.
3.increases profit
Strategies for diversification can also increase a business's chances of success. A company's profit potential is frequently better when it sells several goods and services than when it concentrates on just one. For instance, a repair business that exclusively deals with tire-related problems might not have the same potential for profit as one that can diagnose any problem with a car.
4.provides room for growth
Diversification tactics might provide businesses with a chance for expansion. In ambitious applications of diversification marketing, a business can even grow to include additional sectors. This enables businesses to modify their objectives and focus when their clients and personnel change.
Conclusion
One of the strategies for fostering business growth is diversification. If properly planned and executed, it can significantly benefit a business and solidify a place as a participant in a cutthroat industry.
A poorly thought-out diversification strategy, however, can be a fatal and expensive oversight for a company. Therefore, before you think about implementing this strategy, make sure you evaluate the potential risks and rewards as well as which type of diversification would be appropriate for your firm.