Types of Diversification
The different types of diversification strategies include the modernization and development of new products, updating the market, new technology licensing, distribution of products by another company and even the alliance with the said company.
The three types of diversification strategies include the concentric, horizontal and conglomerate.
Diversification is a method of risk management that involves the change and implementation of different investments stated in a specific portfolio. This is practices because of the rationale that a portfolio containing a variety of investments can yield higher profits and serve as a lower risk to the independent investments in the same portfolio. It is only through investing more securely that the benefits of diversification may be fully reaped. Investment through foreign securities may also reap benefits because of the decreased correlation between local investments.
The concentric diversifications specify that there exists similarities between the industries in terms of the technological standpoint. It is through this that the firm may compare and apply its technological know how to an advantage. This is through a careful change or alteration in the marketing strategy performed by the business. This strategy aims to increase the market value of a particular product and therefore gain a higher profit.
The horizontal diversification tackles products or services that are in a sense, not related technologically to certain products but still pique the interest of current customers. This strategy is more effective is the current clientele is loyal to the existing products or services, and if the new additions are well priced and adequately promoted. The newest additions are marketed in the same way that the previous ones were which may cause instability. This is because the strategy increases the new products’ dependence on an existing one. This integration normally occurs when a new business is introduced, however unrelated to the existing.
Conglomerate or lateral diversification is where the company or business promotes products or services with no relation commercially or technologically to the existing products or services, however still interest a number of customers. This type of diversification is unique to the current business and may prove quite risky. However, it may also prove very successful since it independently aims to improve on the profit the company accumulates with regards to the new product or service.
At times there are certain defensive actions that may promote to the risk of contraction within the market, or that the current product market seems to have no more growth opportunities. This must also be considered before initiating a certain type of diversification strategy. Another factor is the outcome of the chosen diversification strategy. The expected result is expected to generate a profitability growth that will complement the ongoing activities within the company.