Diversification strategy is part of company’s growth strategy. It is about targeting new markets and/or developing new offerings driven by innovation strategy.
investment opportunities in our target sectors to 2030.
Sectors offering diversification opportunities
Diversification strategies can have different objectives. Advantages include higher revenue growth potential, market dominance, exploring fast growing markets, and increasing loyalty from existing customers.
Diversification occurs in three main directions when a company departs from its core capabilities in pursuit of growth: vertically, horizontally, and laterally. These constitute the three main diversification types. Another variation is concentric diversification, which can either be horizontal or vertical, and where the company stays within its core capabilities.
Most firms want to stay in familiar territories and diversify into adjacent areas, either catering to the same market segment or using existing capabilities to develop a new product. However, if the whole industry sector has reached saturation, diversifying into new market segments to achieve internal growth targets becomes a priority. In order to execute an effective diversification strategy, company requires an already existing Innovation Strategy, both of which have to be aligned to achieve the companies overall strategic goals.
Horizontal diversification means developing a new product that appeals to the same market segment supported by company’s Innovation Strategy. The product hinges on a new technology that requires different know-how and capabilities. Often this new product will be complementary to the existing one, since it targets the same market segment, increasing the likelihood of a successful launch and revenue growth. An example would be Tesla launching Powerwall, a rechargeable lithium-ion battery, Apple launching iTunes to complement its iPods, or Gatorade launching Gx Sweat Patch to detect hydration levels. When done well, horizontal diversification increases revenues and loyalty from a company’s existing customer base.
Vertical diversification is when a company decides to vertically integrate up or down the value chain. The purpose could be to achieve better quality control of the component manufacturing, or better control of the marketing messaging during product distribution. Examples of this include Lego opening Lego stores, Apple opening Apple stores, or car manufacturers acquiring Li-ion battery startups, for example. When successfully deployed, companies can maintain and expand their current market dominance.
Concentric diversification is diversification that happens in either a horizontal or vertical direction, but has to be built on the same or related technologies, or know-how. The core goal of concentric diversification is to complement your current products and enhance the experience of the current customers. In doing so, companies can solidify and increase their existing customer base. Examples of concentric diversification include Apple Watch and Cola Light.
Lateral (or conglomerate) diversification is when a company expands into a new industry and targets new customers with a brand-new offering. Often it is exploring rapidly growing markets. A special type of this diversification is when a company diversifies into an emerging area with no large players, as part of their White Space Strategy, also know as blue ocean. Examples of lateral diversification are BlackBerry offering security software or IBM moving into quantum computing. This diversification is very risky, but promises exponential growth.
Proportion of worldwide shipments of smartwatches made by Apple in Q1 2022
Compound annual growth rate in the quantum computing market between 2022 and 2030
2022 revenues generated by Tesla’s diversification into home battery storage
Diversification involves allocating resources across various investments. However, if spreading resources too thinly, it might dilute the focus, potentially leading to suboptimal results. It will also require acquiring new skills, technologies, or resources, which can be costly and time-consuming.
Diversification is also risky for companies operating outside their in-house capabilities and comfort zone. This risk can be reduced, however, by working with external innovation consulting firms who have deep knowledge of the new area. Such firms have access to subject experts and often can make the difference between success and failure, see CamIn’s Expert Consulting Model.
The goal of a diversification strategy is twofold. First, to analyse all possible diversification directions to pinpoint the best destination (answering the “where to”), see below, and then highlighting exactly how to get there (answering the “how”), which is covered by our Technology Scouting and Product Innovation Roadmap guides.
Before going through the diversification strategy framework, be clear what is the purpose of this process and which diversification type is the most suitable to meet your strategic goals. Then, follow the following process:
