Close this search box.

Should your Business diversify?

Share this:

If you own a business, you likely have thought of diversifying your company at one point or another. It is, after all, a strategy to increase your revenue and grow your company. But there are many questions about diversification that stops owners from taking that leap forward. There are many concerns and doubts that fill their minds before they dive deep into a new market. And rightfully so, it is always a risk. 

The uncertainties when it comes to diversification can be traced back to knowledge. When people do not fully understand what it is and what it entails it can cause anxiety and fear. 
Let’s go through what it is so, you can figure out if it is the right step for your business. Let’s start. 

What is diversification?
Diversification is a strategy that a business or a company implements to increase its sales volume and market share. This is done by branching out to new demographics and or markets that will allow your business to expand and occupy a new space. 

These are the 5 ways your business can diversify:

Horizontal Diversification

Horizontal diversification is when you create or develop new services or products to your current roster. Or it is when you add complementary products to your core business. It is a straightforward diversification strategy to expand your share of the market and product range. 
This type of diversification can reduce some of the risks while exploiting specific synergies either within your current market, operations, or supply chain. 

Think of a women’s shoe’s supplier or manufacturer, the added cost of adding a children’s shoe line would be a manageable effort since they already have all the equipment, tools, and skills to produce it. This would then provide them with a new demographic market without the cost being too high. 
Here is another example, a manufacturer of toothpaste will add toothbrushes to its product line. 
Horizontal diversification is best for companies that operate in a niche industry where the competition is high or steep. 

The benefit of this diversification strategy is that it can help your business overcome difficult competitive challenges. It will also allow your business to expand its reach. It also has the least amount of risk involved because your business would be expanding into a market that is already related to your core competencies, services, or products. So, your company would be operating in a familiar market. 

Vertical Diversification
In a nutshell, vertical diversification is when a business expands its product line forward or backward. It is also known as vertical integration. It is when you combine more than one of the stages of the production line that is usually operated by a different company.

 A perfect example of vertical diversification is Apple. Apple creates its own chips, touch id fingerprinting, and screen technologies for its iPhone and iPad. Plus, Apple, distributes its own products. Making it a forward and backward type of vertical diversification. 

Forward vertical diversification is when a company moves forward within the value chain. For example, A toy manufacturer could open its own toy shop, in that way it can control the distribution of its products. 
Backward vertical diversification on the other hand happens when a company moves backward within the supply chain. For example, Amazon expanding into hardware to produce its own Kindle tablets. 

Vertical diversification is best for companies that heavily rely on their own suppliers. Especially for businesses who’s supply chain can be unreliable. It can also be for businesses that want to increase their own market share. This is beneficial for them because it reduces and it can remove the reliance on their suppliers, they can control their economies of scale and it can be a competitive advantage when you control the value chain. 

Conglomerate Diversification
This type of diversification occurs when a business expands into a new market or industry that it currently does not operate in. Usually, bigger brands or well-established companies have a higher chance to succeed with this type of diversification because customers tend to trust brands that are well known or established. 

This strategy is basically when a business introduces a product or a service that has no relation to their current product roster or offering. For example, an airline could start developing a line of dishwashers. There is no relation to the core business, and it is an entirely new market. 

This type of strategy is best for businesses with strong brand equity. Or for companies that are in seasonal or dying industries. Because it provides a high return on your investment and high-profit growth rate due to the additional revenue stream from a different market. 

Businesses use this strategy to reduce their risk, build their corporate brand equity, use their surplus cash, exploit new opportunities, increase their customer base, utilizing their capital, access new markets, and build their shareholder’s wealth. 

Concentric Diversification
Concentric Diversification is where your business introduces new products or services that are closely related to your current product or service line. It allows you to leverage your existing resources, brand recognition, customer base, following, loyalty, and distribution avenues. This aims to generate additional revenue from your current customers while also attracting new customers who may be interested in your other offers but are more persuaded by your newer product line.

This type of diversification puts a lot of emphasis on adding services and products that are directly related to your main product.  This uses the same technological and production tools. 
This is the best option for businesses that have underutilized resources. Or for companies that are facing a downturn in industries. An example of concentric diversification would be Samsung phones adding smartwatches.

Why is it important?
Diversification allows a business to increase its revenue. It is used to help businesses expand into industries and markets that they have not operated on. This is attained by adding new services, features, and or products that will attract customers in their new markets. This strategy also allows your business to stay profitable when your industry is experiencing fluctuations. 

Diversification is just one way to create growth for your company. If it is planned and executed properly it can pay off substantially. It can put your company in a better position and further establish your business’ brand awareness and increase your competitiveness. 

However, it is also one of the most complex and riskiest strategies. Especially, if it is not planned thoroughly. This can lead to costly and disastrous mistakes for any business. So, make sure you evaluate your options thoroughly. Weigh and plan for potential risks and mistakes. Also, determine what type of diversification for your core business would be the most beneficial to you and your company. 

Shivendra helps construction companies and contractors win more projects and grow profitably. Regarded as a master of practical implementation, Shivendra has guided organizations such as Downer and Siemens as well as smaller contractors to achieve double-digit improvements to their bottom line. Underpinning his extensive industry experience are qualifications in engineering and a Ph.D. focused on rapid cost improvement techniques. He is the author of two books, The Competitive Contractor and From Paper to Profit, host of the Competetive Contractor podcast, and the founder of Shivendra & Co and The Constructors Network. You can find more about Shivendra & Co on