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What is a Diversification Strategy? Definition, Types & Examples

07 December 2022 by Shweta Jhajharia

Diversification strategies may be a useful tactic for achieving growth and profit. A company could expand its supply chain in an effort to surpass competitors and seize the opportunity presented by the inevitable changes in the new markets.

These new products may represent a new subset of the market that your organisation already serves, a growth strategy known as business-level diversification. Instead, if you enter a new market, corporate-level diversification takes place.

Our guide to business diversification strategy will define the main sub strategies and explain a few examples of how and why it works for small businesses! Read on to grow your business now!

What is diversification in business?

One of the four growth techniques popularised by Igor Ansoff is diversification. As with all types of growth strategies, one of these is more likely to work for your firm than the others, depending on the sector, size, and ambition of your business. They are as follows:

The invention and market testing of new products in the same market is referred to as product development, market development means breaking into new markets outside of your present sector with the same products, and market penetration involves building on the value proposition of your current service in its current market. However, for this guide, let’s focus on diversification.

A diversification strategy involves creating new products or services with the aim of diversifying your audience and attracting new customers in different markets. 

4 types of diversification strategies

Concentric diversification

Concentric diversification happens when a business creates a brand-new, enhanced version of one of its current products. For instance, a company that produces wired headphones might expand to sell wireless headphones; the new product makes use of cutting-edge technology and provides the consumer with something novel.

Conglomerate diversification

Conglomerate diversification happens when a business expands its services into a sector that is unrelated to its core industry. This frequently happens as a result of a merger or acquisition of another company, but it can also happen if a corporation decides to develop new products unrelated to those it presently manufactures.

This corporate strategy typically benefits businesses since it increases their potential for profit and broadens their market reach. On the other hand, if management is not familiar with the new items or if the new company is overworked, a merged company may suffer.

Horizontal diversification

A technique for product diversification known as “horizontal diversification” involves adding new products to a business’s line-up that are designed to truly meet the needs of current clients. A business that chooses to adopt horizontal diversification may decide to add items to one of its existing product lines that have nothing to do with the other items in the line.

By providing new ways to address their wants, this can enable new items to appeal to customers who already make purchases from a business. The development of new product lines that offer goods that are distinct from those offered by earlier product lines is another method of horizontal diversification.

Vertical diversification

Although the phrase vertical diversification is derived from the same idea, it is used differently in business and investing. Choosing various financial asset classes as opposed to just various samples of the same class is referred to as diversification in the context of investing. In the context of business, it refers to one company acquiring a supplier or client rather than a rival for market development.

Diversification Strategy Examples You Should See

Apple

Midway through the 1990s, the corporation experienced a period of decline. Microsoft had been offering a less powerful but less expensive and simpler PC alternative. Their corporate strategy was failing and Apple was on the verge of filing for bankruptcy during the end of the 1990s.

Apple released the iPod and iTunes software in 2001. (2003). This was effective. A few years later, in 2007, with the release of the iPhone, Apple would strike the diversification jackpot.

It’s simple to forget that, prior to the invention of the smartphone, there were almost no consumer-facing parallels between computers and mobile phones.

Apple may exchange resources and talents between the two product groups thanks to operational synergies. Apple’s computers and the iPhone shared a lot of materials and design elements.

But Apple didn’t stop there. Since then, the company has expanded into products like tablets, watches, smart audio, and even electric cars.

Apple’s diversification and business growth approach prevented them from failing and assisted in their development into one of the largest firms in the world.

Volkswagen

The German automaker was established in 1937 with the intended goal of creating a “people’s automobile” for the Nazi regime. To better serve a variety of clients, the corporation has undertaken a number of automobile acquisitions throughout the years, purchasing additional car brands and marques.

For instance, they bought the premium automaker Audi in 1965, which catered to wealthy consumers and corporate executives. In addition to acquiring Bugatti and Lamborghini in 1998, the business also purchased the Bentley brand through a number of transactions in the 1990s and 2000s. This gave it a significant position in the premium automobile market.

This is a perfect example of horizontal diversification of how you can gain competitive advantage by acquiring multiple business entities.

Amazon

In 1998, Amazon started selling video games and other forms of media. Soon the business was selling toys, household goods, software, consumer electronics, and more.

Amazon has long wanted to expand beyond being just an e-commerce site and become a powerhouse in the tech industry.

Later, Amazon released AWS (Amazon Web Services). Cloud computing platforms and APIs are provided by AWS. They had long before moved beyond simply selling books.

With the release of the Kindle e-reader and the Amazon Echo smart speaker system, Amazon expanded its product line. This path is pretty similar to what Apple previously took. With Amazon Music, they also entered the digital music market.

Amazon’s expansion into new markets is both amazing and unsettling for rivals. It is the most well-known instance of strategic similarity in corporate diversification.

Does your small business need help with growth strategies or diversification?

You can get help from Growth Idea’s business strategy consultants in developing the best corporate and business strategies for your company.

Together, we’ll evaluate your company’s benefits and drawbacks to develop a plan that will help you accomplish your goals.

Book a free strategy review today to learn more about how we can help you grow your business.

Diversification strategies FAQs

What is a diversification strategy with an example?

A company can successfully cross-sell its products by diversifying. For instance, a vehicle firm known for its car discounts may cross-sell new items or introduce engine oil or other car parts to an existing market.

Why is diversification strategy important?

Businesses utilise diversification as a risk-reduction technique to expand into new markets and industries and boost profitability. This can be accomplished by expanding product and service offerings in new markets, attracting new clients, and improving profitability.

What is diversification in business strategy?

A corporation that uses diversification as a business strategy will create new goods and services or enter new markets. A faltering company’s diversification plan can give it new life. Additionally, it may help existing successful businesses continue to succeed.

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Shweta Jhajharia

Shweta Jhajharia is one of the leading authorities on Business Value Building and the creator of the unique 6M Model. Shweta is widely respected as an impactful, intelligent and results orientated professional who helps business leaders unleash their potential to reach meaningful, higher objectives. This realisation of potential and maximisation... Read more
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