There are many reasons why businesses look to implement diversification strategies. Diversifying your business or brand into additional service or product lines is a credible and proven growth path that many firms take. Even most giant corporations have diversified to take advantage of their brand reputation.
Amazon is no longer exclusively an e-commerce company; it’s become an entertainment business through its Amazon Prime arm. Spreadex is no longer focused solely on financial and sports-based spread betting; its online casino has been recognised by oddschecker for the calibre of its promotions and general user experience, both of which are critical components for a successful iGaming operation.
Within this article, we’ll explore several of them, as well as the potential pitfalls of diversification for the purposes of balance.
The four common diversification paths that businesses take:
Horizontal Diversification
- Horizontal diversification strategies require a business to create new services or product lines in a market like the one they’re already operating in. Horizontal diversification is beneficial as brands can develop new revenue sources that can enhance the core business and offer something new and exciting for existing, loyal customers. This is probably the lowest-risk diversification option as a business is tapping into complementary markets it’s likely already aware of.
Vertical Diversification
- Vertical diversification strategies require a business to diversify its services at another point of the supply chain. For example, a company may take a forward or backward expansion, taking greater control over its acquisition of raw materials or the logistics of distributing its goods or services nationwide. Indeed has a great guide on this. For example, a business making bespoke jewellery may choose to develop and grow its logistics network to improve the cost and efficiency of distribution to partners and clients.
Concentric Diversification
- Concentric diversification strategies revolve around a business enhancing its existing range of services or products with new related offerings. The new offerings are usually in line with their core markets. A prime example of concentric diversification would be a watchmaker that brings out a new line of watches. The new line has a distinctly different unique selling point, which makes the diversification concentric.
Conglomerate Diversification
- Conglomerate diversification strategies are based around a company expanding its products or services into new markets to enhance its customer base. Different from horizontal diversification, which sees businesses invest in new assets to augment their core services, conglomerate diversifications see firms diverge from what they’ve done previously. Amazon’s diversification into Amazon Prime is a solid example of conglomerate diversification.
Below, we explore four of the primary benefits of a considered and measured diversification strategy.
Enhanced sales and revenue
There’s no doubt that one of the primary aims of diversification is to grow sales and improve a business’s bottom line. Doing so makes a company more investable and valuable, which could all be part of an entrepreneur’s exit strategy. Diversification allows you to take a business to the next level, serving the needs of an altogether different demographic.
Tap into new revenue streams and broaden market share
Diversification can also be used to cement market share. Horizontal and concentric diversification strategies can create further demand for products and services. Using the example of a watchmaker and its new line of watches, the new product line offers fresh brand exposure to its core products.
Secure bigger and better profit margins
Another big attraction of diversification is tapping into new markets that may yield bigger and more lucrative profit margins. A company’s existing product range may carry ultra-tight profit margins with very little room for improvement due to various reasons, such as the cost of raw materials. Conglomerate diversification into new markets with better margins can improve the long-term sustainability of a business.
Limit exposure to changes in existing markets
A company with all of its eggs in one basket is at the mercy of a changing business climate. Let’s stick with the earlier theme of an iGaming business. Imagine that an iGaming operator focused exclusively on one regulated market in a US state. Overnight, the legislature for that state decides to impose harsher regulations and licensing conditions that are likely to impact the operator’s bottom line. The smart operator looks to obtain licenses in multiple iGaming markets across the US, not to limit their exposure to one state legislature.
In simple terms, diversification can be a difference maker, allowing a business to ride out individual failures without breaking them.
The potential dangers of diversification
Diversification is not without its pitfalls. In fact, any business considering a diversification strategy should be wholly aware of the increased costs they will incur for everything from marketing and sales to development. Managing this diversification, which may involve the creation of an entirely new department or subsidiary, is also likely to require additional human resources in terms of management and day-to-day skills.
One of the biggest mistakes businesses make when diversifying is that they divert too much of their attention to the new line or operation. By redirecting money and resource into the diversification strategy, it has been known to cap the potential growth of a business’s core services. The business’ core market must be sustainable enough to merit diversification in the first place.
Some businesses have also dipped their toes into conglomerate diversification, branching out into new markets or industries without doing the necessary groundwork and research of the sector. All of these can lead to expensive errors and costly delays of new product launches, potentially damaging brand reputation.
Regarding brand reputation, diversification can have the opposite effect in decimating a customer base if poorly applied. Businesses that overstretch themselves and spread their resources too thinly are at risk of failing to provide the levels of customer service and product quality that loyal clients expect. All of which can lead to disillusionment and a dwindling of customers and sales to gleeful competitors.
Conclude
Diversification is a valuable growth strategy for businesses looking to expand their services or products. Still, it’s essential to have a well-thought-out plan to avoid potential pitfalls. Entrepreneurs undertaking a diversification strategy must ensure that their core business is sustainable enough to warrant diversification in the first place. The benefits of diversification include enhancing sales and revenue, tapping into new revenue streams, securing better profit margins, and limiting exposure to changes in existing markets. However, there are potential dangers, such as diverting too much attention and resources from the core business and not having the necessary research before branching out into new markets or industries.
There is no doubt that diversification can be a profitable strategy at the right time. When appropriately applied, diversification is one of the best ways to deliver simultaneous growth and stability for the long haul.
