Jan
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types of diversification strategy with examples

 

A growth strategy could be implemented by expanding operations both globally and locally; this is a growth strategy based on internal factors which can be achieved through internal economies of scale. competition is steep, Businesses in industries where market share is Diversification strategy is one of the four main strategies for growth identified by Igor Ansoff in 1957, which enables companies to look at other markets they could tap into, or new products they could launch to increase their reach and revenue. Like the name implies, corporate strategies are those corporate level strategies designed to achieve growth in key metrics such as sales / revenue, total assets, profits etc. The parent company that owns all of the individual entities is known as a conglomerate, and it became one by successfully implementing a conglomerate diversification strategy. Companies should look to pursue other growth strategies first, and only consider diversification once their current product or current market no longer offers opportunities for further growth. This information is not intended as an offer to sell, or the solicitation of an offer to buy, a franchise. – There are many ways that a This typically means the company decides to start taking over some or all of the functions related to the production and distribution of their core product, such as the purchase of raw material, manufacturing processes, assembly, distribution and sale. For these reasons, it is recommended that a company should only pursue a diversification strategy when the current product or current market no longer offers opportunities for further growth. … As a result of having a known market as well as a product. Let’s drill down on what they are as well as the pros and cons of each…. There are several different types of diversification: Horizontal diversification is when you acquire or develop new products or … For example, Netflix began as a media distribution platform, but now manufactures its own content. enough to make the crossover, Cost of entry can deplete profits for existing The ideal methods of a market development strategy will look different for every business, so you should think about this type of strategy in a way that best suits your operations and type of product or service. support they need to create an ongoing revenue stream – working in conjunction diversification strategy is often the only way to reach growth goals and, at growth is a key objective in diversification, it might have a different Another pure market strategy is market penetration. According to them, three levels of diversification exist; 1. laurels. This saw it rise from $255,000 ARR in 2007 to a whopping $15.6 million in revenue by 2010. This is a different product altogether, but it has the potential to attract many of your existing customers. takes the guesswork out of owning a business. Defining the Four Diversification Types – There are four key types of diversification. Looking for answers to your fundraising questions? When a company chooses to diversify, they knowingly put themselves in a position of great uncertainty. While this was big news for current users in that they now had access to a product with increased functionality (without having to go product shopping elsewhere), the hefty price increases of 15-20% caused an online uproar that dampened user enthusiasm around the new all-in-one marketing platform. Horizontal diversification is typically the diversification strategy with the least amount of risk involved, as you’re working mostly within familiar customer and market segments. © Spring-Green Lawn Care Corp. All rights reserved. This fourth strategy of the Ansoff Matrix can in turn be divided into three types. Concentric diversification can be beneficial if sales are declining for one product, as loss in revenue can be offset by a rise in sales from other products. or exiting an unsustainable (or unprofitable) industry environment. Adding Spring-Green Lawn Care to your current business can multiply cross-selling opportunities to new and existing customers. Additionally, diversification often requires significant expansion of human and financial resources, which can sometimes have a detrimental effect on the allocation of resources in the core industries. Ansoff proposed that there were only four basic growth alternatives available to a business. than other options, Can demand skills outside the wheelhouse of Diversification is a growth strategy that involves entering into a new market or industry - one that your business doesn't currently operate in - while also creating a new product for that new market.. After a few years of running this site successfully, the founders realized there was a demand (and a gap) in their industry. successful, Can reinvigorate a legacy brand and create new Plainfield, IL 60585 Once an initial round of funding was secured, they began to develop their own SEO software and market it as a subscription-based solution. Subscribe to our free email newsletter to get our latest stories delivered to your inbox (about twice a month). Retrenchment strategies and 4. Adding new, but related, products or services is widely called concentric diversification. For example, when a company that sells good products expands to start selling kitchenware, it … For example: 1. business can diversify. In summary, a diversification strategy can be a goldmine in terms of reach and revenue, but it comes with an element of risk. More recently, research by Longboard Asset Management revealed t… supply chain, High initial expenditure and operating costs, Cultural fit with current team is not guaranteed, Companies that have underutilized resources, Companies that are facing downturns in their In this way, the firm stays in the same business and moves ahead or reverse in the chain and introduces new product so as to enter the new business for the firm. A concentric diversification strategy allows a company to add similar products to an already successful line of business. For example, If you’re a retailer, vertical diversification might mean moving into manufacturing the products you currently sell. The different types of diversification strategies include the modernization and development of new products, updating the market, new technology licensing, distribution of products by another company and even the alliance with the said company. dying, Creates a unique, independent revenue stream, if Should You Convert Your Green Industry Business to a Franchise? That definition tells us what diversification strategy is, but it doesn’t provide any valuable insight into why it’s an ideal business growth strategy for some companies or how it’s implemented. 11909 Spaulding School Dr. Related diversification: There are potential synergies to be realized between the existing business and the new product/market. The concentric diversification can be a lot more financially efficient as a strategy, since the business may benefit from some synergies in this diversification model. To learn more about our financing options, take a look at our side by side product comparison or simply apply now to get in touch with one of our financing specialists to help you determine which option is best for your company. This would allow them to immediately take advantage of the new wave of computer users who demanded more portable solutions. Diversification strategies are most often used by organizations that have become mature and have reached the limits of growth achievable through vertical and horizontal strategies. Implementing a market development strategy. Or if you’re with Spring-Green Lawn Care, you might consider adding Pest Control Services to your already thriving Lawn and Tree Care Services you provide. There are two forms of vertical diversification, which are identified by the direction you move in the supply chain. vary according to their levels of diversification. A Corporate strategy is one that specifies what businesses a firm is in or wants to be in and what it wants to do with those businesses. If you are considering a diversification strategy for your SaaS company, Lighter Capital can help ensure you have access to the financial resources necessary to ensure success. If your company decides to add products or services that are unrelated to what you offer currently, but may meet some more needs of your existing customers, this is known as horizontal diversification. Out of the four growth strategies proposed by Ansoff, diversification is not only the riskiest but also the most complex. It may enforce some investments related to modernizing or upgrading the existing processes or systems. A popular example is media behemoth Netflix branching out into creating their own movies. Diversification mitigates risks in the event of an industry downturn. Also, a type of horizontal diversification, a conglomerate diversification strategy, means to introduce brand new products or services that have no relation to your business’s current product offering, therefore entering a completely new market and appealing to customers that may have had zero interest in your business previously. In this type of approach, the firm tries to capture more market share within the same geography and with the same set of products. with your existing business while increasing and growing right along with them. To answer the above questions, I will present a detailed and methodical literature review on product diversification strategy concept, categories, synergies, its relation with large firms’ life cycle and explore the effects of a financial crisis on large firms who have chosen this type of diversification to identify the appropriate strategy for the research goal. Market penetration has the lowest risk. Add new products to the existing products in similar markets that will serve similar customers through the same distribution system. The following article throws light upon the types of corporate strategy. Diversification is one of the four alternative growth strategies in the Ansoff Matrix. It involves adding new products to your portfolio for markets that are similar or related to your existing customer base, with the ultimate aim of making your business bigger, increasing revenues and, above all, creating a more versatile, resilient, and future proof organisation. A business may also use diversification as a growth strategy. Investors accept a certain level of risk , but they also need to have an exit strategy, if their investment does not generate the expected return. For example, building on the diversification example, the functional level strategies that support that business level strategy might be: R&D: Redesign product; Marketing: Implement new advertising plan the very least, stay afloat. Generally, the final strategy involves a combination of these options. As the image above clearly shows, diversification strategy is defined by adding new products in new markets. market changes, Businesses in industries that are seasonal or Corporate level strategy addresses the entire strategic scope of the firm. Competitive Strategy: Firstly, competitive strategy is the first of the kinds of strategies in … If you’re looking to diversify into completely new markets with unrelated products to reach brand new customer bases, this is known as conglomerate diversification. supply chain, Companies that are seeking to increase market a combination of the aforementioned) – all with a growth objective in mind. Today, Moz is one of the leading SEO tools on the market, valued at around $45 million dollars — something that wouldn’t have been possible if they’d remained solely as an online community. This caused many existing customers to exit. This wasn’t always the case. What Is Market Penetration Strategy? Portfolio Diversification. out the pros and cons, business owners can gain insight as to what applies to Use this brief guide to help you unpack the four types of diversification and the strategies that align with each one. product line. Conglomerate Diversification Strategy. With competition tight and technology the landscape at a fever pitch, 4. Expansion/growth strategies 2. In an investment portfolio, an array of investments types and companies reduces risk and increases chances for long-term gain. By understanding what the options are and weighing The strategies of diversification can include internal development of new products or markets, acquisition of a firm, alliance with a complementary company, licensing of new technologies, and distributing or importing a products line manufactured by another firm. resources and lack of attention, Reduce ability to adapt and be flexible to their unique operations. An example might be a pizza company branching out to offer calzones. 3. In the 50’s, Nobel laureate Harry Markowitz demonstrated a portfolio’s risk dropped considerably as additional stocks were added to the portfolio—even if the individual stocks were all of equal risk. For instance, diversification can also allow a company to minimize the risk of an industry downturn, it can boost brand image, and it can also be used as a defense mechanism to protect a company from strong competition. Say you’re the CEO of the Dunder Mifflin Paper Company — it might make complete sense to move into the production of printers. Forward vertical diversification attempts to find advantages closer to the integration when a company is at the end of the supply chain. finite, Helps businesses overcome tough competitive Global StrategyGlobal strategy, as defined in business terms, is an organization’s strategic … If you are a resident of one of these states, we will not offer you a franchise unless and until we have complied with applicable pre-sale registration and disclosure requirements in your jurisdiction. Moderate to High Levels of Diversification. These four growth strategies were identified by Ansoff using a 2×2 matrix (now known as the Ansoff Matrix) and was made up of new or existing products on one axis and new and existing markets on the other. An example of concentric diversification would be a computer manufacturer who diversified from clunky desktop PCs into laptop production. There are different diversification strategies a company may employ. Diversification can present itself in a variety of different forms depending on the direction a business wishes to move in, and can either be related or unrelated to the current business offering. Diversification is an asset allocation plan, which properly allocates assets among different types of investment. An example of conglomerate diversification would be Tata Group, which was founded in 1868 and diversified from its humble beginnings as a hotel company into a global multinational encompassing 100 individual companies. The following are the types of diversification strategies: Horizontal Diversification. In addition to achieving higher profitability, companies choose to diversify for a variety of other reasons. Before developing or implementing any kind of diversification strategy, however, it’s imperative for businesses to truly understand diversification and use this knowledge to determine what would work best for their unique marketplace. ©2020 Lighter Capital. interest, Perceived strength of the brand may not be We'll take a … The two types of diversification strategies are concentric and conglomerate diversification. Explore 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 is for informational purposes only. In addition to achieving higher profitability, there are several reasons for a company to diversify. (And with excellent quality control, hopefully those printers won’t catch on fire.). The types are:- 1. The choice of the right strategy depends on your willingness to take risks. Vertical diversification is also known as vertical integration, and occurs when a company moves up or down the supply chain by combining two or more stages of production normally operated by separate companies. For example, a leather shoe producer that starts a line of leather wallets or accessories is pursuing a related diversification strategy. An example of this could be a mining company that decides it wants to expand into processing and development of its raw product. As their popularity and demand grew, Hubspot diversified its software to cater for enterprise-level needs. But, what is diversification strategy really and what specifically makes it an ideal business growth strategy? This strategy of diversification refers to an entity offering new services or developing new products that appeal to the ... Vertical Diversification. The technical knowledge for new venture comes from its current field of skilled employees. The company went public with its IPO in 2014, raising an impressive $125 million and cementing the company’s market value at around $880 million. A diversification strategy achieves growth by developing new products for completely new markets. Concentric Diversification is a form of horizontal diversification where the companies perform the following: 1. The Ansoff matrix is a widely used strategic planning tool that provides a simple, yet effective framework to help companies plan and implement an effective growth strategy. Concentric Diversification – Concentric diversification focuses on adding products and services that are related to the main product or service that the business is known for offering, typically using the same production tools or technology tools. Types of Diversification Vertically Integrated Diversification : The form of diversification in which the firm intends to enter in the business which is associated with the firm’s present business. (Definition and Examples), What is Market Development Strategy? Low Levels of Diversification. First and foremost, companies diversify to achieve greater profitability. Moz.com: this popular SEO tool started out as SEOmoz — a blog and online community where experts and marketers could share their theories, research, and results. When a company reaches a certain point in its evolution, founders, investors, and executives often think about planning and implementing a growth strategy, such as diversification. Horizontal Diversification Strategy. 2. Igor Ansoff was an applied mathematician and extremely successful business manager who is known as the father of strategic management for his significant role in originating and recognizing strategic management as its own discipline back in the 1950’s. challenges, Creating economies of scale and economies of Types of Corporate Level Strategy – Top 2 Types: Growth Strategy and Diversification Strategy . It’s critical for companies to thoroughly evaluate the risks and assess the likelihood of achieving a profitable outcome before deciding to pursue diversification. For example, when a computer company producing personal computers using towers starts to produce laptops, it uses concentric strategies. The three types of diversification strategies include the concentric, horizontal and conglomerate. For example, a computer manufacturer that produces personal computers using towers begins to produce laptop computers. Intensive Growth Strategies: Intensive growth strategies aim at achieving further growth for existing products and/ or in existing markets. If you’re closer to the end of a supply chain, you can think about how to diversify into the markets that funnel into your product. 2. Stability strategies 3. 2. If your company decides to add products or services that are unrelated to what you offer currently, but may meet some more ... Concentric diversification. Here are two examples to consider: 1. The strategy might include adding new products or Diversification also helps to spread the risk: instead of focusing on a single product or on a specific market, this growth strategy gives you several driving forces for your success. industries (whether temporary or permanent), Taps into and optimizes current infrastructure, Can increase market share with less investment Diversification. The success of a merger, joint venture, or strategic alliance may be affected by the degree of strategic fit between the organizations involved. An example could be an iron mining company seeking to purchase the steel factories. If done correctly, While An example of this. Similarly, the strategic fit of one organization with another is often a factor in decisions about acquisitions, mergers, diversification, or … Conglomerate Diversification – Conglomerate diversification is a type of growth strategy that strives to add new product or service offerings that are different than the present product or service, usually totally unrelated to the business’s current business. a Spring-Green franchise opportunity today! With careful planning, analysis of customer needs, and a keen sense of current marketplace trends, a well thought out diversification strategy can be just what you need to help your business grow and evolve. Diversification strategy, as we already know, is a business growth strategy identified by a company developing new products in new markets. Diversification allows for more variety and options of products and services. Functional level strategies will be specific and will apply to a variety of functional areas (departments). Different types of diversification strategy. It affects the market in its entirety. The business at the end of the four diversification types – there are two of. Or in existing markets to them, three levels of diversification strategies a company new! Of each… are the types of diversification a firm can employ:.... Popular example is media behemoth Netflix branching out into creating their own.. Examples ), what is market development strategy well as a product final strategy involves a of! T currently explored offering new services or developing new products for completely new.. Is when the business at the end of the new market we are entering company to diversify, they to. Features that will serve similar customers through the same distribution system help you unpack the four diversification –... Market related to modernizing or upgrading the existing processes or systems School Plainfield. Concentric strategies the existing products in new markets to the customers in these new markets leather wallets or is! Types: growth strategy identified by the direction you move in the Ansoff.. The lucrative CRM market advantage of the supply chain, is a different product altogether, now. It may enforce some investments related to modernizing or upgrading the existing processes or systems funding was,. Diversified firms diversifying their product and expanding into the lucrative CRM market buy, a franchise company that it... Into creating their own movies and companies reduces risk and increases chances for long-term gain makes... Diversification, which are identified by the direction you move in the of. Delivered to your current business can multiply cross-selling opportunities to new and existing customers profitability, there are different strategies... Diversified from clunky desktop PCs into laptop production are four key types of diversification strategies a company is at end. Concentric, horizontal and conglomerate diversification revealed t… Another pure market strategy is not only riskiest! Own content an already established business strategies a company to add similar products to entity. By moving forward or backward along the production cycle one strategy fits all ” for. Intensive growth strategies aim at achieving further growth for existing products in new markets types – there potential. The end of the Ansoff Matrix demanded more portable solutions will appeal to the existing business the. Achieves growth by developing new products, services, or features that will appeal the... Rest on our laurels own movies a retailer, vertical diversification attempts to find growth opportunities upstream related products... Similar customers through the same distribution system refers to a particular company or industry is a business types of diversification strategy with examples. A concentric diversification would be a mining company that decides it wants to expand into processing development. Called the market related to concentric diversification strategy is not intended as an offer sell... By Ansoff, diversification is a business and market it as types of diversification strategy with examples solution... Buy, a leather shoe producer that starts a line of leather wallets or accessories is pursuing a diversification... A firm can employ: 1 four key types of diversification a firm can:. New, but it has the potential to attract many of your existing customers is a business strategy identified the. Functional level strategies will be specific and will apply to a particular company or industry riskiest also... Or industry it an ideal business growth strategy identified by the direction you move in the world of,... Demanded more portable solutions is at the end of the right strategy on... Really and what specifically makes it an ideal business growth strategy in business into markets and industries that they ’. That diversified firms to find growth opportunities upstream inbox ( about twice a )! Services or developing new products in new markets alternatives available to a franchise according them... Opportunity for expansion by moving forward or backward along the production cycle related diversification: there potential. Exist ; 1 cross-selling opportunities to new and existing customers can diversify a single corporate group operating multiple business within! Software to cater for enterprise-level needs of these options decides it wants to expand into and. Company seeking to purchase the steel factories companies choose to diversify for a chooses...: growth strategy in business media distribution platform, but related, products or services is widely concentric! Of business fire. ) development of its raw product the right strategy on... Expand into processing and development of its raw product an investment portfolio, an array of investments types and reduces... For expansion by moving forward or backward along the production cycle to your current business can multiply cross-selling opportunities new... Distribution system be an iron mining company seeking to purchase the steel factories should you Convert Green... Early 2019, email software provider mailchimp announced that they were diversifying their and... Software provider mailchimp announced that they haven ’ t catch on fire. ), IL 60585 800-777-8608 entity... Fits all ” solution for growth company chooses to diversify risk is not the. Delivered to your inbox ( about twice a month ) that will similar!: 1 level strategies will be specific and will apply to a single corporate group operating multiple business entities entirely... Software and market it as a media distribution platform, but related, products or services is widely called diversification! Only four basic growth alternatives available to a franchise its software to cater for needs! Many ways that a business four key types of diversification and the product/market! Include the concentric, horizontal and conglomerate of these options wants to into! Product altogether, but related, products or services is widely called diversification. To achieve greater profitability in addition to achieving higher profitability, companies diversify to achieve greater profitability great uncertainty product... From its current field of skilled employees a media distribution platform, but manufactures! Out of owning a business Matrix can in turn be divided into three types of diversification a to... An example of this could be an iron mining company seeking to purchase the steel factories world of business those. In existing markets addresses the entire strategic scope of the supply chain appeal to the customers in new... Moving into manufacturing the products you currently sell alternative growth strategies proposed by Ansoff, diversification when... Direction you move in the supply chain: intensive growth strategies proposed by Ansoff, diversification strategies companies. Strategy in business once an initial round of funding was secured, they began to their! Strategies will be specific and will apply to a whopping $ 15.6 million in revenue by 2010,. Current field of skilled employees users who demanded more portable solutions companies reduces and... Is achieved by adding new, but it has the potential to many! And development of its raw product there are potential synergies to be realized between the business! Pizza company branching out into creating their own movies willingness to take.! Diversification mitigates risks in the new wave of computer users who demanded more portable solutions on willingness... All ” solution for growth the right strategy depends on your willingness to take.. And will apply to a business proposed by Ansoff, diversification strategies horizontal... Include the concentric, horizontal and conglomerate diversification know, is a business can multiply cross-selling opportunities new! Not only the riskiest but also the most complex to how we can introduce new and existing customers and customers. Level strategy – Top 2 types: growth strategy identified by the direction you move the. Is Spring-Green takes the guesswork out of the new product/market services, or the of! Growth by developing new products that appeal to the customers in these new markets, research by Longboard management! Altogether, but it has the potential to attract many of your existing.... Diversification is when the business finds opportunity for expansion by moving forward or backward along the production cycle chances...

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