Diversification-definition and types of diversification

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Ansoff growth matrix is a well-known strategic planning tool. The matrix identifies four potential growth strategies for businesses of any size, and these are market penetration, market development, product development, and diversification. This article focuses on diversification only. However, you will find our article ‘What is Ansoff growth matrix’ very useful to understand the matrix in detail.

Definition of diversification

Diversification ‘occurs when a company decides to make new products for new markets’ (BPP Learning Media, 2010, p.162). According to Johnson, Whittington & Scholes (2006) it is a strategy which takes the organisation into new markets and products or services and therefore increases the diversity that a corporate parent must oversee.

Companies use this strategy  usually for rapid growth. Many companies around the world have successfully implemented it e.g. Easy Jet, Virgin, ASDA, and Tesco to name but a few. However, it is worth noting that the degree of risk is very high in this strategy as both products and markets are new and have never been explored before. Companies which are comfortable in risk-taking often implement this type of strategy.

Types of diversification

There are two types i.e. related diversification and unrelated diversification. Related diversification is the development of strategy ‘beyond current products and markets, but within the capabilities or value network of the organisation’ (Johnson, Whittington & Scholes, 2006, p.285). Apple Inc introducing Apple Watch is an example of related diversification.

On the other hand, ‘unrelated diversification is the development of products or services beyond the current capabilities or value network’ (Johnson, Whittington & Scholes, 2006, p.288). Let us take a hypothetical example. Imagine a local private tutoring company has decided to open up a restaurant. Clearly, these two businesses are unrelated both in terms of products and markets. Yet, the owner of the tutoring company is implementing this strategy perhaps he always wanted to be in restaurant business.

To conclude, regardless of relatedness or un-relatedness, the decision to diversify opens up new possibilities for businesses. While it is a risky growth strategy, it helps businesses in a number of ways. You can diversify your product offerings and your target markets. This helps you reduce over-reliance on a particular product and market. This strategy reminds us of a famous proverb “Don’t put all your eggs in one basket”. Remember, dropping the basket may potentially break all the eggs!

The article publication date: 07 October 2017

Further reading/references

BPP Learning Media (2010) Business Strategy, London: BPP Learning Media

Johnson, G, Scholes, k, & Whittington, R. (2006) Exploring Corporate Strategy, 7th edition, Prentice Hall

Photo credit: www. accountlearning.com

Author: M Rahman

M Rahman writes extensively online with an emphasis on business management, marketing, and tourism. He is a lecturer in Management and Marketing. He holds an MSc in Tourism & Hospitality from the University of Sunderland. Also, graduated from Leeds Metropolitan University with a BA in Business & Management Studies and completed a DTLLS (Diploma in Teaching in the Life-Long Learning Sector) from London South Bank University.