Diversification strategy probably takes place, when company or business organizations introduce a new product in the market. These strategies are known as diversification strategies. There are three types of diversification strategies.
Types of Diversification Strategy
- Concentric Diversification Strategies
- Horizontal Diversification Strategies
- Conglomerate Diversification Strategies
Diversification strategy actually minimizes the risk of loss in a business organization by splitting different categories of products in different markets geographically. In early 1960’s & 1970’s there is rapid growth in diversification of businesses. But with the passage of time it became difficult to manage much diversified activities of business organization. Even in recent years it is quite hard for any business organization to operate in diversification mode because there are a lot of different requirements that must be taken into account by the business organization.
- Concentric Diversification Strategy:
The introduction of new but related products in the new markets is considered as concentric diversification strategy. For example, the AT&T Company in America is involved in the application of concentric diversification strategy by adding cable lines for fast internet services across the country. The previous product of the company was telephone line but it spends $120 billion for the acquisition of cable television. In this way the AT&T jointly works with America Online (AOL) to provide cable internet access to the AOL customers.
Guidelines for Concentric Diversification:
There are certain conditions that are favorable for the application of concentric diversification strategy. For this purpose following are some of the guidelines that specify the effectiveness of the concentric diversification strategy.
- It is healthier for the business organization to competes in industry where there is no or slow growth
- The sale of current products is enhanced by adding new but related products in the pool of business organization
- When new & related products are introduced, these must be offered at competitively reasonable prices
- In certain conditions when the current products are passing through declining stage of the product development life cycle, it is quite feasible to add new but related products in new markets
- The management team of the organization should be strong enough
- Conglomerate Diversification Strategy:
Diversification strategies include conglomerate diversification in which new products are added in the pool of the business organization that are not related to the existing ones. There are certain organizations that are involved in the conglomerate diversification on the basis of expectation that they can earn profit by acquiring other firm and breaking & selling its parts in a piecemeal.
Guidelines for Conglomerate Diversification:
In certain situations the conglomerate diversification strategy becomes effective enough to be pursued by the organization. Following are some of the guidelines which are feasible for this strategy.
- When the sales & profits are declining on annual basis
- There is sufficient managerial & capital talent possessed by the organization to compete in the new industry successfully
- There is acquired as well as acquiring firms and both of them have financial synergy
- In situations when there is complete saturation for the present markets of the present products
- Horizontal Diversification Strategy:
Horizontal diversification occurs when new & unrelated products are provided to the existing customers. Horizontal diversification strategy is less risky than conglomerate diversification because of the fact that the current customers of the organization are already exposed.
Guidelines for Horizontal Diversification:
There are certain situations where the horizontal diversification strategy is much effective by the organization. Following are some of the guidelines in this regard.
- When new & unrelated products are added with the existing ones, the revenue of the existing products increase significantly
- The industry that contains low margins & returns and is highly competitive
- The new products are marketed to the current customers though current distribution channels
- There are sales patterns of counter cyclical nature of the new products compared to the current products.