Owning a small business involves multiple challenges, including the fact that your company won’t thrive, if you don’t find ways to expand and grow. One of the most effective ways a business can grow and expand is by implementing concentric diversification, which focuses on adding products and services that are related to the main product or service that you offer. One example would be a pizza restaurant that adds calzones and pasta to its menu. Concentric diversification allows businesses to achieve large goals with smaller working parts and less of a financial cost. A business owner that employs a concentric diversification strategy seeks to broaden his distribution network without going too far afield in what he offers his target audience. This concentric strategy can provide several key benefits to a growing business, including the ability to reach a wider audience.
Taps Into Existing Infrastructure
One of the important benefits of concentric integration is that it allows you to utilize your existing competencies and abilities to launch your new product or service. Rather than having to start from scratch, the framework you’ve already established in your business can be directed toward the new product or service. Using the same example of the pizza restaurant, it wouldn’t take much of an investment in raw materials for that restaurant owner to begin serving pasta and calzones, since the basic ingredients for making pizza are similar to those for making calzones and pasta dishes. When you diversify with a concentric strategy, you can rely on your past experience selling your main product or service to help you develop and market the new product or service. One thing to consider, however, is that the new product or service must have the same quality as your existing product or service. Diversification will not prove successful if your new product or service doesn’t fulfill your customers’ wants and needs.
Enables Business Synergy
Concentric integration also helps to achieve synergy, which is the ability of smaller departments or division to achieve larger goals than would be possible as separate entities. A concentric strategy creates a strategic fit as a result of developing complementary products or services. In the example of the pizza restaurant, the owner could decide that her concentric strategy involves buying other local pizza restaurants as a means of increasing product distribution and expanding into new market areas. After acquiring those new restaurants, the owner could employ a differentiation strategy in which some of the restaurants offer entertainment such as video games and live music. This strategy can attract new customers while making existing customers more likely to remain enthusiastic about frequenting these restaurants.
Increases Market Share
Another benefit of concentric integration is that it often leads to a greater market share, which is defined as the percentage of total consumers a company has captured with its product and services. It’s no secret that market share is a prime determinant of business success, and the greater a company’s presence, the higher the market share. When you implement concentric diversification, you necessarily boost your product presence, which can result in higher sales because consumers see this product more often and in more interesting ways. So instead of just selling pizzas, for example, the fact that your company now sells other menu items can increase the frequency of your existing customers via a phenomenon known as cross-selling. This occurs when your captive audience is introduced to something similar or that's related to a product it already buys and enjoys. That familiarity makes it much easier for you to develop products and services that are aligned with the business vision, but that offer enough diversity to make your customers feel as if they’re getting something new and exciting.
Diversification strategies are used to extend the company’s product lines and operate in several different markets. The general strategies include concentric, horizontal and conglomerate diversification.
Each strategy focuses on a specific method of diversification. The concentric strategy is used when a firm wants to increase its products portfolio to include like products produced within the same company, the horizontal strategy is used when the company wants to produce new products in a similar market, and the conglomerate diversification strategy is used when a company starts operating in two or more unrelated industries.
Diversification strategies help to increase flexibility and maintain profit during sluggish economic periods.
Warren Buffet on Diversification
“Diversification is protection against ignorance, it makes little sense for those who know what they’re doing.”
Concentric Diversification
A concentric diversification strategy lets a firm to add similar products to an already established business. For example, when a computer company producing personal computers using towers starts to produce laptops, it uses concentric strategies. The technical knowledge for new venture comes from its current field of skilled employees.
Concentric diversification strategies are rampant in the food production industry. For example, a ketchup manufacturer starts producing salsa, using its current production facilities.
Horizontal Diversification
Horizontal diversification allow a firm to start exploring other zones in terms of product manufacturing. Companies depend on current market share of loyal customers in this strategy. When a television manufacturer starts producing refrigerators, freezers and washers or dryers, it uses horizontal diversification.
A downside is the company’s dependence on one group of consumers. The company has to leverage on the brand loyalty associated with current products. This is dangerous since new products may not garner the same favor as the company’s other products.
Conglomerate Diversification
In conglomerate diversification strategies, companies will look to enter a previously untapped market. This is often done using mergers and acquisitions.
Moving into a new industry is highly dangerous, due to unfamiliarity with the new industry. Brand loyalty may also be reduced when quality is not managed. However, this strategy offers increasing flexibility in reaching new economic markets.
For example, a company into automotive repair parts may enter the toy production industry. Each company allows for a broader base of customers. There is an opportunity of income when one industry's sales falter.