In a world of disruptors, innovators and alternative business models, there is little place for companies that remain in stasis. Change, or, better yet, evolution is essential for sustained growth and profitability and, while there is wisdom in the maxim that "if it isn't broke, don't fix it", such thinking can be lethal when applied to business.
With this in mind, successful entrepreneurs are increasingly engaging in market diversification, a strategy that multinational corporations (such as the Korean chaebols) have employed to significant effect. While these are extreme examples of diversification in business, they serve to highlight the benefits of such an approach, not just for large organisations, but for small and medium enterprises as well.
To illustrate this point further, we're taking a closer look at diversification marketing, including what exactly it entails, and why it could be a good thing for the growth and overall success of your business.
Diversification in Strategic Planning
Diversification itself is a critical concept in business management. Strategic management guru, Igor Ansoff, identified it as one of the four main pathways to business growth, with the Ansoff Matrix describing the four key paths as follows:
Igor Ansoff, 1960
Market Penetration - Growth using existing products and services, restricted to existing markets, usually involving aggressive sales tactics or acquisitions. Least risky.
Market Development - Expansion into new markets, using existing products and services. Involves moderate to significant risk.
Product Development - Expansion in existing markets using new products and services. Involves R&D or acquisition of other products. Also involves considerable risk.
Diversification - Aggressive growth strategy that involves both new markets and new products. Riskiest option.
Ansoff's interpretation is one of the more credible ways to analyse diversification as a business strategy, but it is far from the only one. In fact, excluding market penetration, all other segments of the Ansoff Matrix can be considered as a different form of diversification.
Therefore, at this point, you have three different forms available when pursuing a diversification strategy for your business:
- Product diversification
- Market diversification
- Products and Market diversification combined
The Need for Diversification in Business
There are several instances in which diversification becomes a beneficial (or even necessary) strategy for a business enterprise. Depending on the performance of your organisation, it can either be offensive or defensive.
Offensive Diversification
To maintain the momentum of your business, you can develop new products, or foray into new markets, as an aggressive strategy. Indeed, when used in this manner, diversification becomes an offensive tool aimed at pre-empting stagnation before it starts affecting your profit margins.
New business opportunities arise all the time in various markets and sectors; the exit of another enterprise, the rise of new technologies, new regulations - these are all potential triggers. To exploit these opportunities to the fullest, you may have to consider diversification.
These are all forms of proactive diversification, where you are taking the initiative to grow your business.
Defensive Diversification
In contrast, defensive diversification is a more reactive approach, often forced upon you by market conditions or internal compulsions.
Restricting your organisation to a single product or market can prove detrimental to your long term survival in business. Eventually, you will reach a point where stagnation, or worse, regression takes hold.
External threats can also arise, in the form of new competitors, rising production costs, and changes in your consumer preferences. Diversification can help counter all these threats by spreading your business risk across various markets and consumer segments.
Different Forms of Diversification and Their Advantages
Regardless of why you need to diversify, you also need to understand how. In practice, the two most common approaches are horizontal diversification and vertical diversification.
Horizontal Diversification
Horizontal diversification is traditionally the most straightforward route for businesses, regardless of their size. Here, your firm will expand its product range to include new products, which may or may not be related to your core market.
Diversifying into related products is more attractive than venturing into new markets, for obvious reasons. The cost of R&D and production should be less in this case, too, as your organisation already has capabilities in closely related fields.
You can also fall back on an already established and loyal client base to whom you can effectively market these new products. This form of diversification is called related horizontal diversification. Numerous examples come to mind for this type of approach, such as a restaurant chain expanding into bakeries and confectioneries, or a sports equipment manufacturer going into sports apparel.
A high-risk, high-expense alternative is unrelated horizontal diversification, which, as the name suggests, involves venturing into truly uncharted territories. Your new product or market has zero connections with your existing portfolios.
This form is often deployed by huge corporations and conglomerates, as they have the resources to cover the marketing, research, and production costs that it entails. A good example would be a tobacco or cigarette manufacturer like ITC venturing into FMCG segments like processed foods, retail apparel and other consumer goods.
Horizontal diversification has several advantages - by venturing into new markets, your growth potential gets amplified at minimal risk. It also reduces the risk posed by adverse market conditions in any single sector.
Vertical Diversification
In vertical diversification, meanwhile, you are venturing into different areas of your supply chain. It has several clear advantages, of which cost reduction is one of the most obvious, especially if you are moving into the space occupied by your vendors.
This move, called backward diversification, can also reduce your reliance on third parties for crucial activities like production. Large conglomerates, such as Samsung, regularly utilise this method due to its clear advantages.
It can also bring you closer to your final consumer, especially if your firm operates in the B2B space. For example, if you manufacture fabrics, venturing into retail apparel will allow your firm to tap into the consumer segment for added value.
If you deploy this form, it is called forward diversification. Staying in the tech sector, Apple is a clear example of a company which has successfully utilised forward diversification to great effect.
As a side note, Apple and Samsung also serve to highlight the importance of backward vertical diversification - both are direct, yet Samsung supplies components to Apple, which has resulted in a number of convoluted lawsuits).
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When executed with the proper levels of planning and preparation, diversification can be a huge driver for growth in your business. In the majority of cases, the benefits often far outweigh the risks, which is why it should be an integral part of the long term future of any enterprise.
What do you think? Is diversification marketing the way forward for business owners? Let us know your thoughts in the comments below.