What are the Types of Diversification Strategies?

Diversification strategies allow a firm to expand its product lines and operate in several different economic markets. The most common strategies include concentric, horizontal and conglomerate diversification. Each strategy focuses on a specific method of diversification. The first strategy is used when a company wants to expand its product line to include similar products produced within the same firm, the second is used when the company wants to produce unrelated products that appeal to a similar market, the last is used when a company expands to operate in two or more unrelated industries. Diversification strategies help companies increase their flexibility and maintain profit during sluggish economic periods.

A concentric diversification strategy allows a company to add similar products to an already successful line of business. For example, a computer manufacturer that produces personal computers using towers begins to produce laptop computers. The technical knowledge necessary to accomplish the new task comes from its current field of skilled employees. Concentric diversification strategies also exist in other industries, such as the food production industry. A ketchup manufacturer may decide to produce salsa, using its current — and very similar — production facilities for the task.

Horizontal strategies allow a firm to begin moving outside its comfort zone in terms of product manufacturing. Companies will tap into their current market share of loyal customers with products that have little or no relation to products currently sold. A television manufacturer may begin producing white goods, such as refrigerators, freezers and washers or dryers. A downside to horizontal diversification strategies can be the company’s dependence on one group of consumers. The company will tend to market products to current consumers by leveraging the brand loyalty associated with current products. This is dangerous if the new products do not garner the same favor as the company’s older products.

When companies engage in conglomerate diversification strategies, they are often looking to enter a previously untapped market. Companies can do this by purchasing or merging with another company in the desired industry. Moving into a totally unrelated industry is often highly dangerous, as the company’s current management is unfamiliar with the new industry. Brand loyalty may also be reduced if new management does not maintain current product quality. The upside to this diversification strategy comes from increasing flexibility and reaching new economic markets. For example, a company that manufactures automotive repair parts may enter the toy production industry. Each company in these industries allow for a wider range of customers and the ability to diversify income opportunities when one industry's sales falter and the other does not.