Marketing Strategy - Market Diversification
 

Diversification is a form of growth marketing strategy for a company.

It seeks to increase profitability through greater sales volume obtained from new products and new markets.

Diversification can occur either at the business unit or at the corporate level.

At the business unit level, it is most likely to expand into a new segment of an industry in which the business is already in.

At the corporate level, it is generally and its also very interesting entering a promising business outside of the scope of the existing business unit.

Diversification is part of the four main marketing strategies
defined by the Product/Market Ansoff matrix:

PRODUCTS

Present
New
MARKETS

Present
Market Penetration
Product Development

New
Market Development
Diversification

The Ansoff Product-Market Growth Matrix is a marketing tool created by Igor Ansoff and first published in his article "Strategies for Diversification" in the Harvard Business Review (1957).

The matrix allows marketers to consider ways to grow the business via existing and/or new products, in existing and/or new markets &endash; there are four possible product/market combinations. This matrix helps companies decide what course of action should be taken given current performance. The matrix consists of four strategies:

  • Market Penetration (existing markets, existing products): Market penetration occurs when a company enters/penetrates a market with current products. The best way to achieve this is by gaining competitors' customers (part of their market share). Other ways include attracting non-users of your product or convincing current clients to use more of your product/service, with advertising or other promotions. Market penetration is the least risky way for a company to grow.

  • Product Development (existing markets, new products): A firm with a market for its current products might embark on a strategy of developing other products catering to the same market (although these new products need not be new to the market; the point is that the product is new to the company). For example, McDonald's is always within the fast-food industry, but frequently markets new burgers. Frequently, when a firm creates new products, it can gain new customers for these products. Hence, new product development can be a crucial business development strategy for firms to stay competitive.

  • Market Development (new markets, existing products): An established product in the marketplace can be tweaked or targeted to a different customer segment, as a strategy to earn more revenue for the firm. For example, Lucozade was first marketed for sick children and then rebranded to target athletes. This is a good example of developing a new market for an existing product. Again, the market need not be new in itself, the point is that the market is new to the company.

  • Diversification (new markets, new products): Virgin Cola, Virgin Megastores, Virgin Airlines, Virgin Telecommunications are examples of new products created by the Virgin Group of UK, to leverage the Virgin brand. This resulted in the company entering new markets where it had no presence before.

The matrix illustrates, in particular, that the element of risk increases the further the strategy moves away from known quantities - the existing product and the existing market.

Thus, Product Development (requiring, in effect, a new product) and Market Extension (a new market) typically involve a greater risk than "Penetration" (existing product and existing market); and Diversification (new product and new market) generally carries the greatest risk of all.

The 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.

Diversification usually requires a company to acquire new skills, new techniques, and new facilities. As a result it almost invariably leads to physical and organizational changes in the structure of the business which represent a distinct break with past business experience. For this reason, most traditional marketing activity revolves around increasing Market Penetration.

Therefore, Diversification is meant to be the riskiest of the four strategies to pursue for a firm.

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.

New products tend to create or stimulate new markets; new markets promote product innovation.

 

 

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.
  • Distributing or importing a products line manufactured by another firm.

Generally, the final strategy involves a combination of these options. This combination is determined as a 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 which helps the particular company to earn profit.

Horizontal Diversification
The company adds new products or services that are technologically or commercially unrelated (but not always) to current products, but which may appeal to current customers.

In a competitive environment, this form of 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 and instability. In other words, this strategy tends to increase the firm's dependence on certain market segments. For example company was making note books earlier now they are also entering into pen market through its new product.

Horizontal Diversification
Another Interpretation
Horizontal integration occurs when a firm enters a new business (either related or unrelated) 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 (e.g., clothing, plastic products) and through retail stores (e.g., Tiffany's). In both cases, Avon is still at the retail stage of the production process.

Conglomerate Diversification
(or Lateral Diversification)
The company markets new products or services that have no technological or commercial synergies with current products, but which may appeal to new groups of customers.

The Conglomerate Diversification has very little relationship with the firm's current business. Therefore, the main reasons of 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. Even if this strategy is very risky, it could also, if successful, provide increased growth and profitability.

 

 

Rationale of Diversification
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 (growth, profitability) or first and foremost great coherence and complementarities with their current activities (exploitation of know-how, more efficient use of available resources and capacities). In addition, companies may also explore diversification just to get a valuable comparison between this strategy and expansion.

 

 

There Are Risks To A Diversification Strategy
Diversification is the riskiest of the four strategies presented in the Ansoff matrix 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.

Diversification might necessitate significant expanding of human and financial resources, which may detracts focus, commitment and sustained investments in the core industries.

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 attempts of companies to diversify lead to failure. However, there are a few good examples of successful diversification:

Virgin Media moved from music producing to travels 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 whole new range of office equipment.

 

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