Everything you need to know about funding, growing and scaling your startup. This is called the market related to concentric diversification. (Definition and Examples), What is Market Development Strategy? Diversification strategies are most often used by organizations that have become mature and have reached the limits of growth achievable through vertical and horizontal strategies. For example, building on the diversification example, the functional level strategies that support that business level strategy might be: R&D: Redesign product; Marketing: Implement new advertising plan This is achieved by adding new products, services, or features that will appeal to the customers in these new markets. support they need to create an ongoing revenue stream – working in conjunction Diversification strategy is one of the four main strategies for growth identified by Igor Ansoff in 1957, which enables companies to look at other markets they could tap into, or new products they could launch to increase their reach and revenue. Mailchimp: In early 2019, email software provider Mailchimp announced that they were diversifying their product and expanding into the lucrative CRM market. ©2020 Lighter Capital. It is for informational purposes only. Moderate to High Levels of Diversification. Vertical Diversification – Vertical diversification is when the business finds opportunity for expansion by moving forward or backward along the production cycle. If your company decides to add products or services that are unrelated to what you offer currently, but may meet some more ... Concentric diversification. Also, a type of horizontal diversification, a conglomerate diversification strategy, means to introduce brand new products or services that have no relation to your business’s current product offering, therefore entering a completely new market and appealing to customers that may have had zero interest in your business previously. For example, If you’re a retailer, vertical diversification might mean moving into manufacturing the products you currently sell. Market penetration has the lowest risk. Spring-Green Featured in 1851 Franchise Magazine. When a company reaches a certain point in its evolution, founders, investors, and executives often think about planning and implementing a growth strategy, such as diversification. The types are:- 1. Competitive Strategy: Firstly, competitive strategy is the first of the kinds of strategies in … finite, Helps businesses overcome tough competitive This is a different product altogether, but it has the potential to attract many of your existing customers. Backward vertical diversification is when the business at the end of the supply chain looks to find growth opportunities upstream. If you are a resident of one of these states, we will not offer you a franchise unless and until we have complied with applicable pre-sale registration and disclosure requirements in your jurisdiction. We'll take a … Or if you’re with Spring-Green Lawn Care, you might consider adding Pest Control Services to your already thriving Lawn and Tree Care Services you provide. enough to make the crossover, Cost of entry can deplete profits for existing For example, a computer manufacturer that produces personal computers using towers begins to produce laptop computers. the very least, stay afloat. – There are many ways that a In an investment portfolio, an array of investments types and companies reduces risk and increases chances for long-term gain. This wasn’t always the case. He claimed that as a corporate strategy, a business can grow through increased market penetration, market development, product development, or diversification. Conglomerate Diversification Strategy. Retrenchment strategies and 4. Low Levels of Diversification. Horizontal diversification is a very popular growth strategy in business. Here are two examples to consider: 1. Combination strategies. current staff, Too much, too soon can lead to insufficient An example of conglomerate diversification would be Tata Group, which was founded in 1868 and diversified from its humble beginnings as a hotel company into a global multinational encompassing 100 individual companies. Our franchise owners have the Concentric diversification occurs when a company enters a new market with a new product that is technologically similar to their current products and therefore are able to gain some advantage by leveraging things like industry experience, technical know-how, and sometimes even manufacturing processes already in place. Investors accept a certain level of risk , but they also need to have an exit strategy, if their investment does not generate the expected return. If your company decides to add products or services that are unrelated to what you offer currently, but may meet some more needs of your existing customers, this is known as horizontal diversification. dying, Creates a unique, independent revenue stream, if The ideal methods of a market development strategy will look different for every business, so you should think about this type of strategy in a way that best suits your operations and type of product or service. Another pure market strategy is market penetration. It allows a company to grow by expanding market share in an … This type of risk is not specific to a particular company or industry. market changes, Businesses in industries that are seasonal or 11909 Spaulding School Dr. Companies should look to pursue other growth strategies first, and only consider diversification once their current product or current market no longer offers opportunities for further growth. As a result of having a known market as well as a product. 4. An example could be an iron mining company seeking to purchase the steel factories. But, what is diversification strategy really and what specifically makes it an ideal business growth strategy? Unlike market penetration strategy, diversification strategy is considered high risk not only because of the inherent risks associated with developing new products, but also because of the business’s lack of experience working within the new market. Diversification is an asset allocation plan, which properly allocates assets among different types of investment. Different types of diversification strategy. A famous example of this is Virgin, which started in the music industry, then diversified into transportation, and later into cellular services among other areas. After a few years of running this site successfully, the founders realized there was a demand (and a gap) in their industry. As the image above clearly shows, diversification strategy is defined by adding new products in new markets. In this way, the firm stays in the same business and moves ahead or reverse in the chain and introduces new product so as to enter the new business for the firm. This fourth strategy of the Ansoff Matrix can in turn be divided into three types. Diversification can present itself in a variety of different forms depending on the direction a business wishes to move in, and can either be related or unrelated to the current business offering. services, venturing into an untapped market, or seeking new customer groups (or For example, a leather shoe producer that starts a line of leather wallets or accessories is pursuing a related diversification strategy. scope, Increased scrutiny from regulatory bodies, Risk of failure (when projected benefits don’t materialize), Too much growth too fast can deplete resources, Companies that are heavily reliant on suppliers, Companies who are at risk due to unreliable The success of a merger, joint venture, or strategic alliance may be affected by the degree of strategic fit between the organizations involved. than other options, Can demand skills outside the wheelhouse of (And with excellent quality control, hopefully those printers won’t catch on fire.). An example of this. Expansion/growth strategies 2. (Definition and Examples), What is Total Addressable Market (TAM) and How to Calculate It, How to Develop an Effective Product Positioning Strategy, Price Localization Strategy: What Global SaaS Startups Need to Know. 2. The strategy for diversification requires balancing various investments that have only a slight positive correlation with each other – or better yet, actual negative correlation. Types of Diversification Vertically Integrated Diversification : The form of diversification in which the firm intends to enter in the business which is associated with the firm’s present business. For these reasons, it is recommended that a company should only pursue a diversification strategy when the current product or current market no longer offers opportunities for further growth. Diversification also helps to spread the risk: instead of focusing on a single product or on a specific market, this growth strategy gives you several driving forces for your success. Diversification strategy, as we already know, is a business growth strategy identified by a company developing new products in new markets. Horizontal Diversification Strategy. With competition tight and technology the landscape at a fever pitch, It’s critical for companies to thoroughly evaluate the risks and assess the likelihood of achieving a profitable outcome before deciding to pursue diversification. Functional level strategies will be specific and will apply to a variety of functional areas (departments). Adding Spring-Green Lawn Care to your current business can multiply cross-selling opportunities to new and existing customers. We take a look at the different examples of this particular strategy, identify when and why it may be an ideal growth strategy to implement, and show the potential impact it can have on a business. A concentric diversification strategy lets a firm to add similar products to an already established business. The following are the types of diversification strategies: Horizontal Diversification. Additionally, diversification often requires significant expansion of human and financial resources, which can sometimes have a detrimental effect on the allocation of resources in the core industries. Forward vertical diversification attempts to find advantages closer to the integration when a company is at the end of the supply chain. competition is steep, Businesses in industries where market share is If you are considering a diversification strategy for your SaaS company, Lighter Capital can help ensure you have access to the financial resources necessary to ensure success. business can diversify. 3. Diversification is a growth strategy that involves entering into a new market or industry - one that your business doesn't currently operate in - while also creating a new product for that new market.. The following article throws light upon the types of corporate strategy. Diversification mitigates risks in the event of an industry downturn. Diversification allows for more variety and options of products and services. Want more marketing strategy and insights to scale your startup? While this was big news for current users in that they now had access to a product with increased functionality (without having to go product shopping elsewhere), the hefty price increases of 15-20% caused an online uproar that dampened user enthusiasm around the new all-in-one marketing platform. Implementing a market development strategy. Concentric Diversification – Concentric diversification focuses on adding products and services that are related to the main product or service that the business is known for offering, typically using the same production tools or technology tools. product line. For example: 1. There are several different types of diversification: Horizontal diversification is when you acquire or develop new products or … Economic Growth Means the Time Is Right for Diversification, Businesses operating in a specific industry where The parent company that owns all of the individual entities is known as a conglomerate, and it became one by successfully implementing a conglomerate diversification strategy. out the pros and cons, business owners can gain insight as to what applies to What Is Market Penetration Strategy? 2. This typically means the company decides to start taking over some or all of the functions related to the production and distribution of their core product, such as the purchase of raw material, manufacturing processes, assembly, distribution and sale. Before developing or implementing any kind of diversification strategy, however, it’s imperative for businesses to truly understand diversification and use this knowledge to determine what would work best for their unique marketplace. share, Competitive advantage (possibly) of controlling By expanding their reach and appeal, businesses are able to explore new avenues for sales, and in turn, have the potential to vastly increase their profits. Similarly, the strategic fit of one organization with another is often a factor in decisions about acquisitions, mergers, diversification, or … Horizontal Diversification – Horizontal diversification happens when a business adds a product or service offering outside of its current line that has an affinity that would likely appeal to its customer base. Different types of diversification strategies. A Corporate strategy is one that specifies what businesses a firm is in or wants to be in and what it wants to do with those businesses. With careful planning, analysis of customer needs, and a keen sense of current marketplace trends, a well thought out diversification strategy can be just what you need to help your business grow and evolve. Add new products to the existing products in similar markets that will serve similar customers through the same distribution system. Your journey to a successful startup begins here. This information is not intended as an offer to sell, or the solicitation of an offer to buy, a franchise. It is a “big picture” view of the organisation and includes deciding in which, product or service markets to compete and in which, geographic regions to operate. It’s easier now than ever before to get a diversified allocation to stocks through a bevy of different index funds. As business leaders, we’re never allowed to rest on our An example might be a pizza company branching out to offer calzones. A growth strategy could be implemented by expanding operations both globally and locally; this is a growth strategy based on internal factors which can be achieved through internal economies of scale. The three types of diversification strategies include the concentric, horizontal and conglomerate. There are different diversification strategies a company may employ. Conglomerate Diversification – Conglomerate diversification is a type of growth strategy that strives to add new product or service offerings that are different than the present product or service, usually totally unrelated to the business’s current business. Vertical diversification is also known as vertical integration, and occurs when a company moves up or down the supply chain by combining two or more stages of production normally operated by separate companies. Types of Growth Strategies – 3 Important Types: Intensive Growth Strategies, Integrative Growth Strategies and Diversification Growth Strategies (With Examples) Type # 1. resources and lack of attention, Reduce ability to adapt and be flexible to It involves adding new products to your portfolio for markets that are similar or related to your existing customer base, with the ultimate aim of making your business bigger, increasing revenues and, above all, creating a more versatile, resilient, and future proof organisation. In summary, a diversification strategy can be a goldmine in terms of reach and revenue, but it comes with an element of risk. Diversification is one of the four alternative growth strategies in the Ansoff Matrix. Moz.com: this popular SEO tool started out as SEOmoz — a blog and online community where experts and marketers could share their theories, research, and results. For example, Netflix began as a media distribution platform, but now manufactures its own content. Horizontal diversification is typically the diversification strategy with the least amount of risk involved, as you’re working mostly within familiar customer and market segments. Horizontal diversification. Lighter Capital’s guides have the answers you need. Conglomerate diversification. Stability strategies 3. Concentric Diversification is a form of horizontal diversification where the companies perform the following: 1. supply chain, High initial expenditure and operating costs, Cultural fit with current team is not guaranteed, Companies that have underutilized resources, Companies that are facing downturns in their The strategy might include adding new products or That definition tells us what diversification strategy is, but it doesn’t provide any valuable insight into why it’s an ideal business growth strategy for some companies or how it’s implemented. It may enforce some investments related to modernizing or upgrading the existing processes or systems. First and foremost, companies diversify to achieve greater profitability. A business may also use diversification as a growth strategy. The good news is Spring-Green The two types of diversification strategies are concentric and conglomerate diversification. It now employs 706,000 people across a variety of sectors such as chemicals, steel, automotive, engineering, telecommunications, information systems, and consumables. with your existing business while increasing and growing right along with them. Igor Ansoff was an applied mathematician and extremely successful business manager who is known as the father of strategic management for his significant role in originating and recognizing strategic management as its own discipline back in the 1950’s. Explore As their popularity and demand grew, Hubspot diversified its software to cater for enterprise-level needs. This saw it rise from $255,000 ARR in 2007 to a whopping $15.6 million in revenue by 2010. Out of the four growth strategies proposed by Ansoff, diversification is not only the riskiest but also the most complex. If you’re looking to diversify into completely new markets with unrelated products to reach brand new customer bases, this is known as conglomerate diversification. For instance, diversification can also allow a company to minimize the risk of an industry downturn, it can boost brand image, and it can also be used as a defense mechanism to protect a company from strong competition. Adding new, but related, products or services is widely called concentric diversification. The term conglomerate refers to a single corporate group operating multiple business entities within entirely different industries. … These four growth strategies were identified by Ansoff using a 2×2 matrix (now known as the Ansoff Matrix) and was made up of new or existing products on one axis and new and existing markets on the other. According to them, three levels of diversification exist; 1. When a company chooses to diversify, they knowingly put themselves in a position of great uncertainty. In the 50’s, Nobel laureate Harry Markowitz demonstrated a portfolio’s risk dropped considerably as additional stocks were added to the portfolio—even if the individual stocks were all of equal risk. In early 2019, email software provider mailchimp announced that they were diversifying their and! Is achieved by adding new, but it has the potential to attract many of your existing customers software mailchimp... 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