For any business to achieve glory, a brilliant and efficient strategy is required. Igor Ansoff, a brilliant mathematician and business manager developed a matrix that classified business strategies into four categories. One of these categories is diversification strategy.

What is a diversification strategy?

Diversification strategy is applied where new products are launched in new markets. In spite of a high risk factor, diversification strategy can show some potential impact on the business. There are some factors that, if kept in check, can create wonders for the business.

Why diversification?

A very important question that strikes the mind is why a company would take a high risk and diversify itself to settle in a new market with new products. To increase their returns, a company has to diversify.

Diversification is used by businesses to expand their reach. This is done by launching new products and services that can create an appealing effect amongst the customers. A company can strengthen its position in the market by applying this strategy.

Why is diversification risky?

Diversification strategy is a risky approach in business strategies. This business strategy is risky, not only because of the new product in new market strategy, but also because of the lack of experience in the new arena.

Diversification requires more manpower, resources and funds to set up a new line of product manufacturing and their market placement. So, these high risk factors are a reason as to why the experts recommend using this strategy only when required. If the company ceases to grow, then one can apply this strategy.

Types of diversification strategy :

Depending upon the growth structure, the right strategy is decided. Diversification strategy is also divided further to fit in all situations.

Horizontal diversification

If a company launches a new product that is an advanced version of the current product, it will satisfy the needs of fewer existing customers and also attract new customers, this is called horizontal diversification.

Horizontal diversification involves the lowest amount of risk as you are involved with the existing products. Say a company produces pens and now they start making papers as well. Here, pen and paper are interrelated which reduces the risk, as it will bind the existing customers as well.

Conglomerate diversification

When a company plans to enter a new market with a new product that has no relation to the previous ones, it is called conglomerate diversification strategy. A parent company, when it owns multiple companies with different services, is called the conglomerate.
The parent company works on all the companies by applying the conglomerate diversification strategy.

A very successful example of a conglomerate is Reliance Industries. It has different companies that run under its leadership and provide different services. It is a multinational company that has its feet in various sectors of business.

Concentric Diversification

Concentric diversification is when a company enters the new market with a new product that has technical similarities to the existing products. If a company faces loss in sales of a particular product/service, it can actually balance the business by gaining in other services.
For example, the desktop computers were replaced by laptops. So if a company launches its own laptop, it can gain the ROI that it lost in desktop computers.

Vertical diversification strategy :

Vertical diversification or vertical integration, when a company moves forward or backward in a supply chain by combining two or more stages of production. These stages are governed by different companies. This can be understood as if a company now strats manufacturing the raw material that it sells. This means it enters all the production and distribution core of the system.

There are plenty of companies that have adapted this approach and expanded their business. A few of them are listed below:

A conglomerate company, ITC is an international name in many industries. ITC has its roots in FMCG and cigarettes, hotel business, food industry and many other sectors. The brilliant implementation of diversification strategy is one of the reasons why the company has reached its glorious heights.

Alphabet Inc. :
The tech giant Alphabet has more than two hundred acquisitions. The conglomerate company Alphabet is responsible for many brilliant products in the market. One of the most known achievements being Google.

Samsung Electronics:
The company is known globally, for all kinds of electronic products started from a grocery business. It has products ranging from mobile phones to laptops and from microwave to war tanks. This electronics giant has followed a diversification strategy to expand the business.