Diversification business strategy
Forward vertical diversification happens when a business moves forward in the supply chain, i. For example, our shoe manufacturer could start its own network of shops, allowing the business to control sales to the end consumer.
Backward vertical diversification happens when the business moves backwards in the supply chain and becomes its own supplier. For example, the shoe manufacturer could acquire a tannery, thus reducing its reliance on leather suppliers. By diversifying vertically, a business can leverage its existing competencies. It can also reduce costs and remain true to its value chain — the activities a company performs to bring a product or service to the market.
Perhaps the best-known example of a successful vertical diversification strategy is Apple. Apple manufactures its own custom chips, screen technologies and touch ID fingerprinting for iPhones and iPads. This is an example of backward vertical integration. At the same time, Apple has achieved forward vertical diversification by opening a chain of retail stores that exclusively sell Apple products. When a company expands into a new industry it does not currently operate in, it is pursuing a strategy of lateral diversification.
For example, an airplane engine manufacturer could develop a range of vacuum cleaners for the consumer market. Or, our shoe manufacturer could open a driving school. There is no connection between the new market and the core business.
Diversification Vs Focused Business Strategy
An example of this is the Virgin brand. What started out as a brick and mortar record retailer diversified into travel and leisure, entertainment, financial services and now space travel. This kind of extreme diversification worked because of the vision and extraordinary risk tolerance of its founder, Richard Branson. All businesses strive for growth. But the roads they take to get there vary and the vehicles they use can take many different forms.
Developed by mathematician and business manager, Harry Igor Ansoff, the Ansoff matrix provides a framework for formulating growth strategies.
What is Diversification Strategy? (Definition and Examples)
According to its creator, when the goal is to generate growth, two levels of decision-making surface. Should your business penetrate new markets or should it stay in its existing markets? And, would you like to extend your product portfolio or not? Market penetration is the strategy of increasing sales of current products to current markets. The objective is to increase the market share of current products. This can be achieved through competitive pricing strategies, discounts, sales promotions and customer loyalty schemes.
Market development is a growth strategy in which a company tries to sell its current products to new markets. For example, selling the product abroad, or offering it online in addition to brick and mortar sales. This strategy is riskier than market penetration because you have to develop traction in the new market.
Product development brings new products into existing markets, such as the toothpaste manufacturer creating a line of toothbrushes. This strategy works well for a business that has a solid customer base in which the existing product line is reaching saturation. There's an emphasis on market research — to pursue a product development strategy, you must be attuned to your customers' needs.
Diversification is the strategy of bringing completely new products or services to market. Ansoff pointed out that diversification is fundamentally different from the other three strategies. The other strategies can be pursued with the same technical, financial and other resources that you already use for your existing product line. Acquisitions usually occur when a larger firm purchases a smaller company. Acquisitions are called friendly if the firm being purchased is receptive to the acquisition.
Mergers are usually "friendly. Diversification strategies can also be classified by the direction of the diversification. Vertical integration occurs when firms undertake operations at different stages of production.
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Involvement in the different stages of production can be developed inside the company internal diversification or by acquiring another firm external diversification. Horizontal integration or diversification involves the firm moving into operations at the same stage of production. Vertical integration is usually related to existing operations and would be considered concentric diversification.
Horizontal integration can be either a concentric or a conglomerate form of diversification. The steps that a product goes through in being transformed from raw materials to a finished product in the possession of the customer constitute the various stages of production. When a firm diversifies closer to the sources of raw materials in the stages of production, it is following a backward vertical integration strategy.
Avon's primary line of business has been the selling of cosmetics door-to-door. Avon pursued a backward form of vertical integration by entering into the production of some of its cosmetics. Forward diversification occurs when firms move closer to the consumer in terms of the production stages. Backward integration allows the diversifying firm to exercise more control over the quality of the supplies being purchased. Backward integration also may be undertaken to provide a more dependable source of needed raw materials. Forward integration allows a manufacturing company to assure itself of an outlet for its products.
Forward integration also allows a firm more control over how its products are sold and serviced. Furthermore, a company may be better able to differentiate its products from those of its competitors by forward integration. By opening its own retail outlets, a firm is often better able to control and train the personnel selling and servicing its equipment. Since servicing is an important part of many products, having an excellent service department may provide an integrated firm a competitive advantage over firms that are strictly manufacturers.
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Some firms employ vertical integration strategies to eliminate the "profits of the middleman. However, middlemen receive their income by being competent at providing a service. Unless a firm is equally efficient in providing that service, the firm will have a smaller profit margin than the middleman. If a firm is too inefficient, customers may refuse to work with the firm, resulting in lost sales. Vertical integration strategies have one major disadvantage. A vertically integrated firm places "all of its eggs in one basket.
Horizontal integration occurs when a firm enters a new business either related or unrelated at the same stage of production as its current operations. For example, Avon's move to market jewelry through its door-to-door sales force involved marketing new products through existing channels of distribution.
An alternative form of horizontal integration that Avon has also undertaken is selling its products by mail order e. In both cases, Avon is still at the retail stage of the production process. As documented in a study by Marlin, Lamont, and Geiger, ensuring a firm's diversification strategy is well matched to the strengths of its top management team members factored into the success of that strategy.
For example, the success of a merger may depend not only on how integrated the joining firms become, but also on how well suited top executives are to manage that effort. The study also suggests that different diversification strategies concentric vs. There are many reasons for pursuing a diversification strategy, but most pertain to management's desire for the organization to grow. Companies must decide whether they want to diversify by going into related or unrelated businesses. They must then decide whether they want to expand by developing the new business or by buying an ongoing business.
Finally, management must decide at what stage in the production process they wish to diversify.
Types of diversification strategies
Joe G. Revised by Wendy H. Amit, R. Homburg, C. Krohmer, and J. Luxenber, Stan. Lyon, D. Marlin, Dan, Bruce T. Lamont, and Scott W. Munk, N. John, C. Toggle navigation. Despite a huge brand following, neither companies could keep up with the times, and eventually lost out. It is at this point that diversifying looks like an appealing strategy. However, diversifying takes time and most start-ups, during transition, do not have the resources to fight on many fronts at the same time. Moreover, if you bite-off more than what you can chew, it can bring your entire business down. Diversification remains an unpredictable, high-stakes game, especially for startups.
Nevertheless, if the right strategies are in place, each one can balance the other and increase the benefits they bring to an organization. It pays to think beyond the either-or scenario and look at a combination of the two. Here are some points to consider before you decide on a combined strategy. Focus does not necessarily have to be about how broad or narrow your business is; it has to do more with how every one of your diverse capabilities tie together to create value to your company.
Bring focus into the way to diversify, and ensure they complement the core business. Google has achieved this spectacularly. Every one of their businesses are very tightly integrated with their core business of search and ads. So, despite having seemingly diversified into so many things including self-driving cars and solar power plants, their core business in the centre of all diversification and all their strategies are focused around it.
So when we, at BankBazaar. Our foray into B2C complemented our B2B business. The world-class seamless and secured technology profited both our partners financial institutions with cost advantage and our customers with smart savings. Any business is dependent on the repeat customers.