At times a corporation will elect to enter into a new marketplace that it’s not currently in. The business will have to create a new product for that market. It’s risky, but diversification strategies carry the promise of huge rewards for those who are able to pull them off. Here are the four basic diversification strategies that most medium-to-large corporations will deal with.
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Concentric Diversification
Some businesses elect to move into other marketplaces that have some kind of technological similarity to what they’re already involved with. Concentric management allows corporate leaders to leverage their existing experience and personnel to gain an advantage in the marketplace.
For instance, a company that’s already involved in distributing packaged food products might want to add a new brand of hot sauce to its existing lineup. This is less risky than if that same business went into something unrelated like publishing. The company in question would already have some experience in the industry, and the sales staff would already know how to get a product straight to market.
Lateral Diversification
Some companies take huge risks and attempt to form conglomerates in new market segments that have no relation to what they’re experienced with. Lateral diversification promises huge growth opportunities for those who can make it work, but it can be extremely risky. This is the scheme that most people think of when they hear that a particular company is attempting to diversify.
Sukanto Tanoto became famous for his successful use of lateral diversification. He was selling machine parts and construction contracts back in the late 1960s. Eventually his business started to sell plywood, and eventually it expanded to the point where it was marketing everything from rayon to palm oil. His business continues to grow and expand. Recently it even added firms in the energy segment to its portfolio.
Horizontal Diversification
Sometimes businesses want to sell products that aren’t related to what they sell but might appeal to their current customers. This is safer from a financial standpoint, but companies might lack the experience to make this kind of scheme work.
Soft drink bottling factories have attempted to sell snack foods for years. These factories lack the experience to actually bake snacks, but they have the benefit of an existing customer base that needs them. At times this kind of scheme will work because of a strong sense of brand loyalty on the part of consumers. Other consumers might unfortunately view these attempts as a gimmick, however, and avoid the new products on purpose.
Vertical Integration
Companies will, at times, attempt to diversify down their production line so that they could control everything in an entire chain. This helps to avoid hold-up problems when it comes time to marketing a product, but securities exchange authorities will sometimes declare a vertically integrated firm to be a monopoly and order it broken up.
Several video game developers have had these sorts of plans in play at various times. Companies in this market segment at one point developed hardware and then programmed games to work on said hardware. They produced their own cartridges and then negotiated their own sales contracts. Some of these companies ran afoul of the law, however, because they were deemed to use monopolistic business practices to keep competitors out of the market.