A diversification strategy is a type of business strategy which refers to a business’s approach to expanding its operations or product offerings beyond its existing scope. This can involve introducing new products, entering new markets, or even acquiring different businesses. The primary goal is to reduce risk, increase profitability, and leverage existing resources to tap into new revenue streams.
Diversification helps companies spread their risk so that if one area of the business experiences a downturn or a shift in a market, other areas can compensate. It also opens up opportunities for growth in different sectors or industries.
Types of Diversification Strategy
There are several types of diversification strategies, each serving different objectives and risks. These can be broadly categorised into three types: related diversification, unrelated diversification, and concentric diversification.
Related Diversification
Related diversification occurs when a company expands into areas that are closely related to its existing business activities. This approach capitalises on synergies, meaning the new ventures benefit from the company’s current expertise, resources, and brand recognition.
Example: A car manufacturer expanding into electric vehicle (EV) production. The company already has experience in vehicle manufacturing, and expanding into EVs is a related field that builds on its existing expertise.
Unrelated Diversification
Unrelated diversification involves expanding into completely new areas that bear no direct connection to the company’s current operations. This type of diversification is often riskier but can lead to substantial rewards if the new venture is successful.
Example: A tech company entering the food and beverage industry. In this case, the two industries have little in common, but the company may see opportunities for growth in the new market.
Concentric Diversification
Concentric diversification is a middle ground where a business moves into a new product line or market that is somewhat related to its existing offerings but not identical. It builds on the core competencies of the business while tapping into new customer segments or needs.
Example: A cosmetics company starting a skincare line. Although the new product line is different, it still aligns with the company’s brand and customer base, allowing for smoother market entry.
Examples of Diversification Strategy in Action
Many well-known companies have successfully implemented diversification strategies to grow and stabilise their businesses.
- Amazon: Originally an online book retailer, Amazon diversified into multiple areas, including cloud computing (Amazon Web Services), entertainment (Prime Video), and grocery (Whole Foods). Each of these expansions allowed Amazon to establish itself in new industries while leveraging its existing technology and customer base.
- Disney: Disney began as an animation studio but has diversified into multiple industries, including theme parks, media networks (ABC, ESPN), and streaming services (Disney+). By diversifying, Disney has spread its brand across various markets, mitigating risk and increasing revenue streams.
Benefits of a Diversification Strategy
Diversification offers several advantages to businesses:
- Risk reduction: By spreading operations across different industries or product lines, a business can protect itself from the risks associated with depending on a single market.
- Revenue growth: New products or services can lead to increased sales, which may compensate for stagnating or declining areas of the business.
- Utilisation of resources: Diversifying allows companies to make better use of their existing resources, such as expertise, facilities, and customer relationships.
- Increased market power: A business that has diversified successfully can gain a competitive edge by dominating multiple markets.
Challenges of Diversification Strategy
While diversification can offer growth opportunities, it also comes with challenges:
- Increased complexity: Managing different business lines or industries requires more resources, specialised knowledge, and coordination.
- Higher risk in unrelated diversification: Entering a completely new market can be risky, as the company may lack the experience and knowledge to compete effectively.
- Potential for brand dilution: If a business stretches its brand too far across unrelated markets, it can confuse customers and weaken brand identity.
Final Thoughts
A diversification strategy can be a powerful tool for business growth and risk management by carefully considering the type of diversification—whether related, unrelated, or concentric— they can expand their operations while leveraging existing strengths.
