Diversification strategies, including concentric, horizontal, and conglomerate, allow companies to expand their product lines and operate in different markets, increasing flexibility and maintaining profits during slow economic periods. Concentric diversification adds similar products to an already successful line, horizontal diversification targets unrelated products appealing to the same market, and conglomerate diversification enters previously untapped markets. Each strategy has advantages and disadvantages.
Diversification strategies allow a company to expand its product lines and operate in several different economic markets. The most common strategies include concentric, horizontal, and conglomerate diversification. Each strategy focuses on a specific method of diversification. The first strategy is used when a company wants to expand its product line to include similar products produced within the same company, the second is used when the company wants to produce unrelated products that appeal to a similar market, the latter is used when a company expands to operate in two or more unrelated industries. Diversification strategies help companies increase their flexibility and maintain profits during slow economic periods.
A concentric diversification strategy allows a company to add similar products to an already successful line of business. For example, a computer manufacturer that produces personal computers using towers begins to produce laptop computers. The technical knowledge needed to accomplish the new task comes from your current field of skilled employees. Concentric diversification strategies also exist in other industries, such as the food manufacturing industry. A tomato sauce manufacturer may decide to produce sauce, using its current production facilities and very similar to the task.
Horizontal strategies allow a company to start moving out of its comfort zone in terms of manufacturing products. Companies will take advantage of their current market share of loyal customers with products that have little or no relationship to the products currently sold. A television manufacturer may start producing household appliances, such as refrigerators, freezers, and washers or dryers. A disadvantage of horizontal diversification strategies can be the company’s dependence on one group of consumers. The company will tend to market products to current consumers by leveraging the brand loyalty associated with current products. This is dangerous if new products don’t get the same favor as the company’s older products.
When companies engage in conglomerate diversification strategies, they often seek to enter a previously untapped market. Companies can do this by buying or merging with another company in the desired industry. Moving into a totally unfamiliar industry is often very dangerous, as the company’s current management is unfamiliar with the new industry. Brand loyalty can also be reduced if the new management does not maintain the current quality of the product. The advantage of this diversification strategy comes from increasing flexibility and reaching new economic markets. For example, a company that makes auto repair parts may enter the toy production industry. Each company in these industries allows for a broader range of customers and the ability to diversify revenue opportunities when sales from one industry fail and the other does not.
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