Diversification strategy

Diversification strategies can have different objectives. Advantages include higher revenue growth potential, market dominance, exploring fast growing markets, and increasing loyalty from existing customers.

How can companies approach diversification?

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.

Understanding the different forms of diversification

Understanding horizontal diversification

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.

Understanding vertical diversification

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.

Understanding concentric diversification

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.

Understanding lateral (or conglomerate) diversification

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.

What are the risks of diversification?

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.

How to create a successful diversification strategy

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.

Holistic diversification strategy framework

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:

Step-by-step: How to build a diversification strategy in practice

1. Define the strategic starting point

Objective: Establish a clear mandate for diversification and align on success criteria.

What to do:

• Align with senior stakeholders on the primary goal of diversification, such as revenue growth, resilience, market entry, or technology positioning, ensuring all parties share a consistent understanding of ambition and expected outcomes.
• Define key constraints including available investment, acceptable risk levels, organisational readiness, and the time horizon for impact, so that exploration remains grounded in practical boundaries.
• Identify and document core assets and strengths, such as customer access, proprietary technologies, operational capabilities, partnerships, or brand positioning, that can provide a competitive advantage in new areas.
• Agree on clear success metrics, including financial targets, strategic positioning, and capability development goals, to guide prioritisation and decision-making throughout the process.

How to execute:

• Run a focused internal workshop with strategy, innovation, and business unit leaders.
• Prepare a short pre-read summarising current performance, strategic priorities, and external pressures.
• Capture alignment in a concise document that can guide the rest of the process.

Output:

A one to two page diversification brief that defines scope, ambition, constraints, and success metrics.

Common mistake:

Starting with a list of ideas rather than a clearly defined strategic intent.

2. Identify and prioritise customer problems

Objective: Ensure diversification is grounded in real demand rather than internal assumptions.

What to do:

• Identify and segment priority customer groups, including end users, intermediaries, and ecosystem partners, ensuring that different perspectives across the value chain are considered.
• Conduct structured research to uncover key jobs, pain points, inefficiencies, and unmet needs, focusing on areas where customers experience friction or dissatisfaction with current solutions.
• Prioritise problems based on factors such as urgency, economic impact, frequency of occurrence, and alignment with broader market trends, ensuring focus on high-value opportunities.
• Validate findings through direct engagement with customers, industry experts, and partners, triangulating insights to ensure they reflect real-world demand rather than internal assumptions.

How to execute:

• Conduct targeted interviews with 5 to 10 stakeholders per segment.
• Use structured question guides to ensure consistency.
• Supplement with desk research and market analysis.

Output:

A prioritised list of 10 to 20 clearly defined customer problems.

What good looks like:

Problems are specific, evidence-based, and linked to measurable value pools.

Common mistake:

Relying only on internal perspectives without external validation.

3. Map the value chain and adjacent opportunity spaces

Objective: Identify where in the value chain you can expand with a credible right to play.

What to do:

• Develop a detailed view of the full industry value chain, from upstream suppliers through to downstream services, ensuring a comprehensive understanding of how value is created and captured.
• Analyse where value is concentrated today and how it is shifting due to factors such as regulation, technology change, and evolving customer expectations, identifying emerging hotspots.
• Identify adjacent spaces where your organisation could expand, based on existing capabilities, relationships, and assets, while maintaining a realistic assessment of competitive positioning.
• Evaluate each opportunity space in terms of attractiveness, competitive intensity, margin potential, and feasibility, creating a structured basis for comparison.

How to execute:

• Create a visual map of the value chain.
• Overlay trends and disruptions.
• Facilitate internal assessment workshops.

Output:

A mapped set of opportunity spaces with an initial attractiveness assessment.

Common mistake:

Exploring areas too far from core capabilities too early.

4. Identify relevant technologies and enablers

Objective: Understand which technologies enable new value creation and differentiation.

What to do:

• Conduct a structured scan of relevant technologies across your industry and adjacent sectors, ensuring coverage of both emerging innovations and more mature solutions that are reaching adoption.
• Link each technology to specific customer problems and value chain shifts, ensuring that technology exploration is always grounded in practical application and business relevance.
• Assess each technology in terms of maturity, scalability, cost implications, and integration requirements, building a realistic view of feasibility within your organisation.
• Validate insights through engagement with technical experts and practitioners, ensuring an accurate understanding of real-world capabilities and limitations.

How to execute:

• Combine desk research with expert interviews.
• Focus on technologies relevant to your time horizon.
• Document clear linkages to use cases.

Output:

A shortlist of 5 to 10 relevant technologies linked to opportunity areas.

What good looks like:

Technologies are clearly tied to use cases and business value.

Common mistake:

Exploring technologies without clear application.

5. Develop and structure use cases

Objective: Translate opportunities into concrete, actionable concepts.

What to do:

• Combine insights from customer problems, value chain analysis, and technology scanning to generate a broad set of potential use cases, ensuring diversity in ideas while maintaining relevance.
• Define each use case in a structured way, clearly articulating the target customer, the problem being solved, the proposed solution, and the expected value delivered.
• Ensure that each use case includes a clear view of how value will be created and captured, including potential revenue streams and strategic benefits.
• Refine and challenge use cases through internal discussion and expert input to ensure clarity, feasibility, and differentiation.

How to execute:

• Run cross-functional workshops.
• Use a consistent template.
• Iterate and refine ideas.

Output:

A longlist of 10 to 20 structured use cases.

Recommended structure:

Target customer, problem, solution, value proposition, revenue model, assumptions.

Common mistake:

Keeping ideas too vague to evaluate.

6. Prioritise use cases

Objective: Focus on the opportunities with the highest potential and feasibility.

What to do:

• Define a clear set of evaluation criteria, including market attractiveness, strategic alignment, feasibility, capability requirements, and expected time to impact, ensuring a balanced assessment.
• Score each use case against these criteria using a consistent scale, enabling objective comparison across different types of opportunities.
• Facilitate structured discussions with stakeholders to challenge assumptions, align perspectives, and ensure that prioritisation reflects both data and strategic judgement.
• Identify a focused shortlist of the most promising use cases, ensuring that resources are concentrated on opportunities with the highest potential impact.

How to execute:

• Use a scoring model or matrix.
• Run a structured evaluation workshop.
• Document rationale for decisions.

Output:

A shortlist of 3 to 5 prioritised use cases.

What good looks like:

Clear trade-offs and transparent decision-making.

Common mistake:

Pursuing too many opportunities in parallel.

7. Build initial business cases

Objective: Assess whether prioritised use cases are commercially viable.

What to do:

• Estimate market size and growth potential, including total addressable market and realistic share assumptions, ensuring a grounded view of opportunity scale.
• Define pricing logic, revenue streams, and monetisation models, considering different scenarios and potential variations in customer adoption.
• Develop a high-level cost structure, including development, operations, partnerships, and scaling requirements, to understand investment needs.
• Identify key risks, uncertainties, and assumptions, documenting areas that require further validation before committing significant resources.

How to execute:

• Build simple financial models.
• Validate assumptions with experts.
• Focus on directional accuracy.

Output:

High-level business cases for each prioritised use case.

What good looks like:

Transparent assumptions and clear uncertainties.

Common mistake:

Overestimating precision in early-stage forecasts.

8. Validate with external expertise

Objective: Reduce uncertainty and strengthen decision-making with real-world insight.

What to do:

• Identify and engage relevant domain experts, industry practitioners, and potential partners who have direct experience in the areas being explored, ensuring high-quality and relevant input.
• Test critical assumptions related to customer demand, technology feasibility, regulatory constraints, and execution challenges, focusing on the factors that most influence success or failure.
• Gather multiple perspectives to identify consistent insights and challenge outliers, ensuring a balanced and robust understanding of the opportunity.
• Refine use cases, prioritisation, and business cases based on expert feedback, updating assumptions and improving the overall quality of decision-making.

How to execute:

• Conduct structured expert interviews.
• Focus on key uncertainties.
• Integrate insights into analysis.

Output:

A validated and refined opportunity set.

Why this matters:

Lack of real-world experience in new domains is a major source of risk.

9. Define the execution roadmap

Objective: Translate strategy into clear next steps and actions.

What to do:

• Define the execution approach for each prioritised use case, including whether to build internally, partner, acquire, or pilot, ensuring alignment with capabilities and strategic intent.
• Identify required capabilities, resources, and organisational changes needed to deliver each initiative, highlighting gaps that must be addressed.
• Establish clear ownership, governance structures, and decision-making processes to ensure accountability and progress.
• Develop a phased roadmap with milestones, timelines, and success criteria, enabling structured execution and tracking.

How to execute:

• Develop a 6 to 18 month roadmap.
• Align with business units.
• Assign clear ownership.

Output:

A detailed execution roadmap with timelines and responsibilities.

Common mistake:

Stopping at strategy without defining execution.

From strategy to confident execution

Diversification is inherently uncertain. By definition, it requires organisations to move beyond their existing capabilities, markets, and experience. While a structured approach significantly improves decision quality, the greatest risks remain in the assumptions made throughout the process.

Across each step, teams rely on hypotheses about customer demand, technology feasibility, competitive dynamics, and execution requirements. These assumptions are difficult to validate internally, particularly when entering unfamiliar domains.

External expert validation is therefore critical. By engaging practitioners with direct, real-world experience, organisations can challenge assumptions, identify blind spots, and distinguish between theoretical potential and practical viability. This leads to faster, more confident decision-making.

CamIn enables this by identifying and engaging the most relevant experts on a per-project basis from a global pool of over 100,000 subject matter experts. This ensures that each strategic question is informed by highly targeted, real-world insight rather than generic perspectives.

As a result, organisations can prioritise more effectively, de-risk investments, reduce time to market, and build diversification strategies that are both ambitious and executable.

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