Diversification (marketing strategy)
- Articles, Blog

Diversification (marketing strategy)

Diversification is a corporate strategy to
enter into a new market or industry which the business is not currently in, whilst also
creating a new product for that new market. This is most risky section of the Ansoff Matrix,
as the business has no experience in the new market and does not know if the product is
going to be successful. Diversification is part of the four main growth
strategies defined by Igor Ansoff’s Product/Market matrix: Ansoff pointed out that a diversification
strategy stands apart from the other three strategies. The first three strategies are usually pursued
with the same technical, financial, and merchandising resources used for the original product line,
whereas diversification usually requires a company to acquire new skills, new techniques
and new facilities. Note: The notion of diversification depends
on the subjective interpretation of “new” market and “new” product, which should
reflect the perceptions of customers rather than managers. Indeed, products tend to create or stimulate
new markets; new markets promote product innovation. Product diversification involves addition
of new products to existing products either being manufactured or being marketed. Expansion of the existing product line with
related products is one such method adopted by many businesses. Adding tooth brushes to tooth paste or tooth
powders or mouthwash under the same brand or under different brands aimed at different
segments is one way of diversification. These are either brand extensions or product
extensions to increase the volume of sales and the number of customers. The different types of diversification strategies
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. Generally, the final strategy involves a combination
of these options. This combination is determined in function
of available opportunities and consistency with the objectives and the resources of the
company. There are three types of diversification:
concentric, horizontal, and conglomerate. Concentric diversification
This means that there is a technological similarity between the industries, which means that the
firm is able to leverage its technical know-how to gain some advantage. For example, a company that manufactures industrial
adhesives might decide to diversify into adhesives to be sold via retailers. The technology would be the same but the marketing
effort would need to change. It also seems to increase its market share
to launch a new product that helps the particular company to earn profit. For instance, the addition of tomato ketchup
and sauce to the existing “Maggi” brand processed items of Food Specialities Ltd. is an example
of technological-related concentric diversification. The company could seek new products that have
technological or marketing synergies with existing product lines appealing to a new
group of customers.This also helps the company to tap that part of the market which remains
untapped, and which presents an opportunity to earn profit.. Horizontal diversification
The company adds new products or services that are often technologically or commercially
unrelated to current products but that may appeal to current customers. This strategy tends to increase the firm’s
dependence on certain market segments. For example, a company that was making notebooks
earlier may also enter the pen market with its new product. When is Horizontal diversification desirable? Horizontal diversification is desirable if
the present customers are loyal to the current products and if the new products have a good
quality and are well promoted and priced. Moreover, the new products are marketed to
the same economic environment as the existing products, which may lead to rigidity or instability. Another interpretation
Horizontal integration occurs when a firm enters a new business at the same stage of
production as its current operations. For example, Avon’s move to market jewelry
through its door-to-door sales force involved marketing new products through existing channels
of distribution. An alternative form of that Avon has also
undertaken is selling its products by mail order and through retail stores. In both cases, Avon is still at the retail
stage of the production process. Conglomerate diversification The company markets new products or services
that have no technological or commercial synergies with current products but that may appeal
to new groups of customers. The conglomerate diversification has very
little relationship with the firm’s current business. Therefore, the main reasons for adopting such
a strategy are first to improve the profitability and the flexibility of the company, and second
to get a better reception in capital markets as the company gets bigger. Though this strategy is very risky, it could
also, if successful, provide increased growth and profitability. Goal of diversification
According to Calori and Harvatopoulos, there are two dimensions of rationale for diversification. The first one relates to the nature of the
strategic objective: Diversification may be defensive or offensive. Defensive reasons may be spreading the risk
of market contraction, or being forced to diversify when current product or current
market orientation seems to provide no further opportunities for growth. Offensive reasons may be conquering new positions,
taking opportunities that promise greater profitability than expansion opportunities,
or using retained cash that exceeds total expansion needs. The second dimension involves the expected
outcomes of diversification: Management may expect great economic value or first and foremost
great coherence with their current activities. In addition, companies may also explore diversification
just to get a valuable comparison between this strategy and expansion. Risks
Of the four strategies presented in the Ansoff matrix, Diversification has the highest level
of risk and requires the most careful investigation. Going into an unknown market with an unfamiliar
product offering means a lack of experience in the new skills and techniques required. Therefore, the company puts itself in a great
uncertainty. Moreover, diversification might necessitate
significant expanding of human and financial resources, which may detract focus, commitment,
and sustained investments in the core industries. Therefore, a firm should choose this option
only when the current product or current market orientation does not offer further opportunities
for growth. In order to measure the chances of success,
different tests can be done: The attractiveness test: the industry that
has been chosen has to be either attractive or capable of being made attractive. The cost-of-entry test: the cost of entry
must not capitalize all future profits. The better-off test: the new unit must either
gain competitive advantage from its link with the corporation or vice versa. Because of the high risks explained above,
many companies attempting to diversify have led to failure. However, there are a few good examples of
successful diversification: Virgin Group moved from music production to
travel and mobile phones Walt Disney moved from producing animated
movies to theme parks and vacation properties Canon diversified from a camera-making company
into producing an entirely new range of office equipment. See also
Market development Market penetration
Product development Product proliferation
Pure play References
^ Ansoff, I.: Strategies for Diversification, Harvard Business Review, Vol. 35 Issue 5,Sep-Oct
1957, pp. 113-124 ^ Porter, Michael. “From Competitive Advantage to Corporate Strategy”. Harvard Business Review. May–June: 43–59.  Chisnall, Peter: Strategic Business Marketing,
1995 Day, Georges: Strategic Marketing Planning
Jain, Subhash C.:International Marketing Management, 1993
Jain, Subhash C.: Marketing Planning & Strategy, 1997
Lambin, Jean-Jacques: Strategic Marketing Management, 1996
Murray, Johan & O’Driscoll, Aidan: Strategy and Process in Marketing, 1996
Weitz, Barton A. & Wensley, Robin: Readings in Strategic Marketing
Wilson, Richard & Gilligan, Colin: Strategic Marketing Management, 1992

About Ralph Robinson

Read All Posts By Ralph Robinson

1 thought on “Diversification (marketing strategy)

Leave a Reply

Your email address will not be published. Required fields are marked *