Question

Discuss Two Types of Diversification

Answer 1

Diversification is a strategy for growth through branching out into a new market segment, allowing your business to expand its presence and occupy a totally new space. This is achieved through expanding (or diversifying) your product or service offering to target new customers and grow profits.

Types of diversification strategies

There are six established types of diversification strategies:

1. Horizontal diversification
2. Vertical diversification
3. Concentric diversification
4. Conglomerate diversification
5. Defensive diversification
6. Offensive diversification

We will disscus first two strategies

1) Horizontal Diversification

To diversify your company horizontally means introducing brand new products or services to your current offering in order to expand market share, either in a new market segment or your company’s existing market.

This can be done through: –

• innovating or licensing new products,
• a merger, or acquisition of another company.

There are two types of horizontal diversification – concentric and conglomerate – which we’ll dive into later on.

The new business venture formed through horizontal diversification is designed to appeal to the company’s existing customer base, while also attracting new customers to the brand.

Some well-known examples of horizontal diversification include:

• Disney acquiring Pixar
• Facebook acquiring Instagram

2. Vertical Diversification

Vertical diversification also referred to as vertical integration, entails a growth strategy where the company expands its product line through a forward or backward integration of products within its existing supply chain.

For instance,

• a company that manufactures and sells cars could diversify its business by selling tires.
• A painting company that provides painting services could begin selling paint. As seen in both of these examples, vertical integration converts the company’s inputs into outputs.

Both of the above examples illustrate backward integration.

An example of forward integration would be a toy manufacturer acquiring or opening a toy store. With forward integration, companies capitalize on the later stages of the supply chain than the company’s current business, while backward integration utilizes earlier stages.

Vertical diversification has a number of benefits, including:

• strengthening and enhancing your business’s supply chain,
• capturing upstream or downstream profits,
• cutting production costs,
• accessing new distribution channels and
• gaining more revenue.

Some high-profile examples of vertical diversification are:

• Ikea purchasing forests in order to supply its own raw materials
• Amazon integrating into hardware to produce its own Kindle Fire tablets

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From Mona.....