Concentric diversification is a strategy employed by companies to expand their businesses by adding new products or services that are related to their existing ones. The goal of concentric diversification is to leverage the company’s existing competencies and resources to enter new markets and grow its business. A common example can be a PC manufacturing company that diversifies into making laptop computers.
Concentric diversification can be a successful growth strategy for companies that have strong core businesses and are looking to expand into related areas. By leveraging their existing knowledge and resources, companies can enter new markets quickly and efficiently. Additionally, concentric diversification allows companies to reduce risk by diversifying their product offerings and customer base.
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What is Concentric Diversification?
Concentric diversification is a business growth technique that entails extending the company’s product lines to attract new clients. It is also known as convergent diversification, and it involves developing new goods within an existing brand.
It is advantageous for companies because it doesn’t require as many resources and effort as creating an entirely new business would. Concentric diversification is often the first step a company takes when growing its product lines. However, concentric diversification can also be a risky strategy if not managed properly. When entering new markets, there is always the potential for failure. Additionally, if a company does not have the necessary resources or expertise to successfully enter a new market, it could end up damaging its existing business.
Thus, it is important for companies to carefully consider whether concentric diversification is the right growth strategy for them. If done correctly, concentric diversification can be a powerful tool for expanding a company’s business. However, if not managed properly, it can also be a risky proposition.
Why do Companies Diversify?
There are several reasons why companies choose to diversify their businesses. Often, it is done in order to expand into new markets and grow the company’s overall business. Additionally, diversification can also be a way to reduce risk by spreading out the company’s product offerings and customer base. By diversifying, companies can also gain a competitive edge over their rivals.
When Should Concentric Diversification Strategy Be Used?
Concentric diversification should be used when a company has a strong core business and is looking to expand into related markets. Additionally, concentric diversification can be a good growth strategy for companies that have the necessary resources and expertise to successfully enter new markets.
Concentric diversification can also be a good way for companies to reduce risk by diversifying their product offerings and customer base. By expanding into new markets, companies can offset any potential losses from their existing business.
Advantages of Concentric Diversification Strategies
Concentric diversification has several advantages. Some of the most crucial advantages of concentric diversification are
1. Use of Existing Infrastructure
One of the main advantages of concentric diversification is that it allows companies to leverage their existing infrastructure. When expanding into new markets, companies can use their existing factories, distribution networks, and sales channels. This can help companies save on costs and enter new markets quickly.
2. Reduced Risk
Concentric diversification can also be a good way for companies to reduce risk. By diversifying their product offerings and customer base, companies can offset any potential losses from their existing business. Additionally, concentric diversification allows companies to hedge against market volatility.
3. Access to New Markets
Concentric diversification also gives companies access to new markets. When expanding their product lines, companies can enter new markets and tap into new customer segments. Additionally, concentric diversification can also help companies better compete against larger rivals.
Successful diversification helps businesses achieve synergy and ensure business success by offering existing customers new products and services and having a competitive advantage over other market players.
Disadvantages of Concentric Diversification
Concentric diversification also has a number of disadvantages. Some of the main disadvantages of concentric diversification are
1. High Risk
One of the main disadvantages of concentric diversification is that it can be a risky strategy. When adding new products, there is always the potential for failure. Additionally, if a company does not have the necessary resources or expertise to successfully enter a new market, it could end up damaging its existing business.
2. Limited Potential
Another disadvantage of concentric diversification is that it can have limited potential. While concentric diversification can help companies grow their business, it may not provide the same level of growth as other growth strategies, such as market expansion or acquisition.
3. Requires Expertise
Concentric diversification also requires a certain level of expertise. When expanding their product lines, companies need to have the necessary resources and expertise to successfully enter new markets. Without this expertise, concentric diversification can be a risky proposition.
Concentric Diversification Techniques
There are a number of different concentric diversification techniques that companies can use to expand their business. Some of the most common concentric diversification techniques are
1. Product Line Expansion
Product line expansion is a common concentric diversification technique. When expanding their product lines, companies add new products that are related to their existing product offerings. This allows companies to enter new markets and tap into new customer segments.
2. Product Differentiation
Product differentiation is another common concentric diversification technique. When differentiating their products, companies create products that are unique from their competitors. This can help companies better compete in their existing markets and attract new customers.
3. Different Forms, Same Content
Different forms, and the same content is another concentric diversification technique. This involves creating new versions of existing products. For example, Netflix has created different versions of its streaming service for different devices. This allows the company to reach new customer segments and better compete in its existing markets.
4. Broadening the Product Catalog
Broadening the product catalog is another concentric diversification technique. When expanding their product offerings, companies add new products that are related to their existing product lines. This allows companies to enter new markets and tap into new customer segments.
Concentric vs Horizontal vs Conglomerate Diversification Strategy
Concentric diversification is a growth strategy that involves adding new products or services that are related to the company’s existing business.
Horizontal diversification is a growth strategy that involves expanding the company’s business into new markets.
Conglomerate diversification is a growth strategy that involves adding new products or services that are not related to the company’s existing business.
Examples of Concentric Diversification around the World
1. Coca Cola
Coca-Cola is a prime example of a company that has used concentric diversification to expand its business. The company started out as a producer of soda syrup and eventually diversified into the production of soft drinks.
Today, the company manufactures a wide range of beverages, including juices, sports drinks, and bottled water. Coca-Cola has also diversified into other businesses, such as bottling and distribution.
2. Pepsi
Pepsi is again a very good example of a company using concentric diversification successfully. The company started out as a producer of soda syrup and eventually diversified into the production of soft drinks.
Today, the company manufactures a wide range of beverages, including juices, sports drinks, and bottled water. Pepsi has also diversified into other businesses, such as bottling and distribution.
3. Nestle
Nestle is also known as one of the best examples of a company that has used concentric diversification and concentric integration. The company started out as a producer of baby food and eventually diversified into the production of a wide range of food and beverage products.
Today, Nestle manufactures a wide range of food and beverage products, including coffee, tea, cereal, and pet food. Nestle has also diversified into other businesses, such as bottled water and health care.
4. Unilever
Unilever has also used concentric diversification to expand its business and optimize market share. The company started out as a producer of soap and eventually diversified into the production of a wide variety of products and services.
Such diversification lets Unilever manufacture a wide range of consumer goods, including food, beverages, personal care products, and home care products. Unilever has also diversified into other businesses, such as advertising and financial services.
5. Procter & Gamble
Procter & Gamble is a good example of a firm that has taken concentric diversification to new heights. The company started out as a producer of soap and eventually diversified into the production of a wide range of consumer goods.
Procter & Gamble now manufactures a wide range of consumer goods, including food, beverages, personal care products, and home care products which are a strategic fit for its product diversification plan. Procter & Gamble has also diversified into other businesses, such as advertising and financial services.
6. Johnson & Johnson
Another example of a business that has used concentric diversification to grow is Johnson & Johnson. The company started out as a producer of medical devices and eventually diversified into the production of a variety of consumer goods.
Johnson & Johnson manufactures a wide range of consumer goods, including baby products, personal care products, and over-the-counter medications. Johnson & Johnson has also diversified into other businesses, such as biotechnology and pharmaceuticals.
7. General Electric
A good example of a firm that has enhanced its operations through concentric diversification is General Electric. The company started out as a producer of electrical equipment and eventually diversified into the production of a wide range of consumer and industrial products.
Today, General Electric manufactures a wide range of consumer and industrial products, including appliances, lighting, and power generation equipment. General Electric has also diversified into other businesses, such as financial services and media.
8. Philips
Another example of a firm that has benefitted from concentric diversification is Philips. The company started out as a producer of electrical equipment and eventually diversified into the production of a wide range of consumer and industrial products.
Philips manufactures a wide range of consumer and industrial products, including lighting, healthcare equipment, and consumer electronics. Philips has also diversified into other businesses, such as software and services.
9. Siemens
Siemens is a good illustration of a firm that has utilized concentric diversification to grow its operations. The company started out as a producer of electrical equipment and eventually diversified into the production of a wide range of consumer and industrial products.
Siemens manufactures a wide range of consumer and industrial products, including lighting, healthcare equipment, and security systems. Siemens has also diversified into other businesses, such as software and services.
10. Hitachi
In the last spot, Hitachi is another example of a company that has used concentric diversification to expand its business. The company started out as a producer of electrical equipment and eventually diversified into the production of a wide range of consumer and industrial products.
It manufactures a wide range of consumer and industrial products, including appliances, automotive components, and construction equipment. Hitachi has also diversified into other businesses, such as information technology and financial services.
Conclusion!
On the concluding note, it can be said that different businesses use concentric diversification for a variety of reasons. Some companies use it to enter new markets, while others use it to expand their product lines in the current market.
Still, others use concentric diversification to hedge against market fluctuations. Good managerial skills help businesses executive diversification successfully.
Whatever the reason, concentric diversification has proven to be a successful strategy for many companies. What do you think? Is concentric diversification a good strategy for companies? Let us know in the comments section below.
How Popular is Concentric Diversification?
Quick Statistics: A 2023 study by Deloitte found that 42% of Fortune 500 companies have implemented concentric diversification strategies in the past five years, resulting in an average revenue growth of 12% annually. This trend highlights the significant role concentric diversification plays in corporate growth and stability. Source: Deloitte Insights, 2023
Updated Industry Insights: In 2023, the integration of digital technologies into concentric diversification strategies has surged, enabling companies to seamlessly expand their product lines and enter new markets. For example, technology firms are leveraging artificial intelligence and data analytics to identify complementary products and optimize market entry strategies, enhancing both efficiency and success rates. Source: McKinsey & Company, 2023
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