When you hear the word Disney, what comes to mind? This wide diversification is what has allowed Disney to be so successful recently; Disney owns some of the biggest names in the entertainment world: ESPN, ABC, Disney theme parks, Disney cruise lines, and Pixar, just to name a few.
Unlike many entertainment companies, Disney does not solely rely on films, TV, or parks; it is well diversified and relies on its wide reach to create one of the most recognized and popular brands in the world. Answer the question s below to see how well you understand the topics covered in this outcome. Current customers with children and new customers would be your target market. Think about all the steps that are involved in getting a product to market. With vertical diversification, a company that's already operating in one of these areas expands to another. It does this by assuming control over an additional production or distribution step.
Vertical diversification, also known as vertical integration, can be forward or backward:. Forward vertical diversification happens when a business moves forward in the supply chain, i. For example, our shoe manufacturer could start its own network of shops, allowing the business to control sales to the end consumer.
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Backward vertical diversification happens when the business moves backwards in the supply chain and becomes its own supplier. For example, the shoe manufacturer could acquire a tannery, thus reducing its reliance on leather suppliers. By diversifying vertically, a business can leverage its existing competencies. It can also reduce costs and remain true to its value chain — the activities a company performs to bring a product or service to the market. Perhaps the best-known example of a successful vertical diversification strategy is Apple.
Levels of Diversification
Apple manufactures its own custom chips, screen technologies and touch ID fingerprinting for iPhones and iPads. This is an example of backward vertical integration. At the same time, Apple has achieved forward vertical diversification by opening a chain of retail stores that exclusively sell Apple products. When a company expands into a new industry it does not currently operate in, it is pursuing a strategy of lateral diversification. For example, an airplane engine manufacturer could develop a range of vacuum cleaners for the consumer market. Or, our shoe manufacturer could open a driving school.
There is no connection between the new market and the core business. An example of this is the Virgin brand. What started out as a brick and mortar record retailer diversified into travel and leisure, entertainment, financial services and now space travel. This kind of extreme diversification worked because of the vision and extraordinary risk tolerance of its founder, Richard Branson. All businesses strive for growth.
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But the roads they take to get there vary and the vehicles they use can take many different forms. Developed by mathematician and business manager, Harry Igor Ansoff, the Ansoff matrix provides a framework for formulating growth strategies. According to its creator, when the goal is to generate growth, two levels of decision-making surface. Should your business penetrate new markets or should it stay in its existing markets?
And, would you like to extend your product portfolio or not? Market penetration is the strategy of increasing sales of current products to current markets. The objective is to increase the market share of current products. This can be achieved through competitive pricing strategies, discounts, sales promotions and customer loyalty schemes.
Market development is a growth strategy in which a company tries to sell its current products to new markets. For example, selling the product abroad, or offering it online in addition to brick and mortar sales. This strategy is riskier than market penetration because you have to develop traction in the new market. Product development brings new products into existing markets, such as the toothpaste manufacturer creating a line of toothbrushes.
See how to diversify your business. There are pros and cons to each of the different diversification strategies. A successful diversification can help you:.
Diversification strategy
On the other hand, diversification will incur development, sales and marketing costs. It will also require additional skills, management and operational resources. If these demands exceed the potential revenue and profit gains, diversification can put your business at risk.
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For example:. In general, diversifying with similar products or services and selling them to a familiar customer base is less risky than creating a product for a completely new market. It can be a great way to maintain business stability. It allows you to hedge your bets and, if one of your markets or products fails, you have another to back you up until you recover.
Remember, diversification is only one of four growth strategies in the Ansoff matrix.
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You should consider it alongside the other business growth strategies. Breadcrumb Home Guides Grow your business Planning business growth Business growth through diversification. Assess your options for business growth Business growth through diversification.