Question

Compare and contrast the two types of diversification strategies. Identify a firm that has recently engaged in each type of diversification. Search each firm’s website to identify executives’ rationale for diversifying. Do you find the reasoning to be convincing? Why or why not?

Answer 1

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Following are two types of diversification

Concentric Diversification: This kind of diversification involves the addition of similar products and services to the existing business which have similar marketing and distribution channels

Example is Coca cola acquiring and adding different kinds of beverages to its existing portfolio of soft drinks. The key rationale for this kind of diversification is to capture into the trend of changing consumer preferences. Consumers are increasingly shifting towards healthier fruit drinks. Coca Cola faces the threat of losing its consumers to these products. Hence it included these products in the portfolio which protects it from getting obsolete.

This is a good strategy and valid rationale. The target customer segments of soft drinks and fruit-based beverages are the same. Hence, Coca Cola may leverage its marketing and distribution strength to introduce these products without much effort and retain existing customers as well as capture new customers

Horizontal Diversification:   This involves adding new products and services catering to similar set of customers. For example Mariott acquired Starwood hotels to increase its foot print worldwide. This is a valid reason for diversifying since new revenues are generated and company grows through such an expansion