Question

Identify and describe the three major types of diversification growth strategies.

Answer 1

Diversification is the process for enlarging the company's operations or varying the product's range. So the company makes strategic decision to enter into a new market or industry and is a risk management technique.

The advantages of diversification are: -

• Lowering the cost - When a business diversify in new markets and operate in multiple businesses they become more efficient and the cost of operation is reduced due to economies of scale, maximum utilization of core competencies, by sharing the activities among businesses, etc.
• Increasing revenue - When a business diversify in new markets and operate in multiple businesses they generate more revenue due to its power to negotiate effectively and through vertical integration.
• It helps in spreading risk and provide better risk control.
• Market share can be increased with the help of diversification as new products will be introduced in new market or new customers can be targeted which expand the customer base.

The three major types of diversification growth strategies are: -

• Horizontal diversification occur when new products or services are added to the company that is unrelated to current product however it will attract the existing market.
• Concentric diversification is nothing but business strategy where company focus on reaching more consumers by creating new products or services which are closely related to company's existing products or services.
• Conglomerate diversification is nothing but the strategy where the business add new products or service that is different from the company's existing products or service.