What is Horizontal Diversification?
Horizontal diversification is one of several different types of diversification strategies that may be used by businesses as well as private investors to increase returns on their efforts. As it relates to a business, this type of diversification strategy involves the creation of products that may not be directly related to current products offered to consumers, but that are highly likely to still appeal to the company’s existing client base. This approach is somewhat different from other diversification methods, in that the focus is not on attracting new customers in different markets, but in offering a broader range of goods and services to a loyal customer base.
One example of horizontal diversification can be seen with a local retailer who has an established reputation for selling quality pieces of jewelry. As a means of increasing business, the retailer may decide to carry a line of scents in the shop. This approach creates opportunities to sell perfumes, cologne, and aftershave lotion to the patrons who already frequent the shop in search of quality jewelry for personal use or as gifts. When the strategy works, a customer who comes in to select a necklace as a birthday present may also notice the line of scents and choose to purchase a bottle of perfume along with the necklace, allowing the shop owner to earn a return from both product lines.
In many instances, a company that engages in horizontal diversification will conduct an in-depth evaluation of its current clientele, and determine what other types of products they may be willing to purchase while continuing to support the current product line. Often, factors such as location, gender, and income level will be taken into consideration when identifying new and different products to offer alongside the traditional product line. Typically, this approach is marketed to consumers as an additional benefit offered by a trusted business that allows those consumers to meet more than one need by buying a wider range of products from the business. Assuming that the new products meet the quality and price demands of the clientele, there is a very good chance that the approach will be successful and the company will enjoy greater profits.
While the concept of horizontal diversification offers a number of benefits to both the business and its clientele, there is also a potential drawback to consider. Since the focus is selling new products to the existing client base, this strategy does nothing to increase the scope of that base of customers. This means that any factors that adversely affect the buying power of those customers will also have an negative impact on the amount of sales generated. For this reason, many businesses will not rely on horizontal diversification alone, but will also seek to diversify in ways that attract consumers associated with different age, gender, and economic demographics.
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