Why Market Diversification Is Important in Manufacturing

Quick Links:

• Why Is There a Need for Diversification in Manufacturing?
• Reasons for Diversification in Manufacturing
• How to Implement Market Diversification
• Successful Diversification Examples

Diversification is a risk-reduction strategy used by businesses to help expand into new markets and industries and achieve greater profitability. This can be attained by diversifying new products and services in new markets, targeting new customers and increasing profitability.

The diversification strategy enables companies to find potential markets they can tap into or new products they could launch to increase their sales and revenue.

Why Is There a Need for Diversification in Manufacturing?

There are many reasons for businesses to diversify. It minimizes the chances of a downturn in the sector, increases ROI and provides for a wider variety of alternatives in terms of products and service offerings. Let’s further look to explore diversification and its importance in the manufacturing industry.

What Is Diversification in Business?

Igor Ansoff outlined four major development techniques — one being diversification. As a corporate strategy, he claimed a business could grow through an increase of these main techniques, also known as the Ansoff Matrix:

1. Market penetration
2. Product development
3. Market development
4. Diversification

Ansoff used a matrix grid to identify these four growth strategies, consisting of new or existing techniques on both axes. This model provides a useful foundation for businesses to develop and implement effective growth plans.

Reasons for Diversification in Manufacturing

As a result of uncertainty in the production processes in recent times, manufacturing has evolved to discover innovative solutions to maintain operations.

In terms of the business ecosystem, diversification is a means of probing into other industries, marketplaces or product categories. Being a diversified manufacturer is providing a wide range of new services, features or products to customers in a new market. By expanding their reach, businesses are able to explore new avenues for sales—and potentially increase their profits and return on investment.

In addition to increasing profitability, businesses opt to diversify for several reasons. Some advantages of product diversification include:

• Diversification can help to reduce the likelihood of an industry collapse.
• It can improve a company’s image and profitability.
• It has the potential to put you ahead of the competition.
• Businesses can pivot during economic uncertainty.
• Diversification enables the organization to utilize excess cash flows.

There are two levels of strategy in a diverse company — a business or corporate level:

1. Business level: Business level product diversification refers to a company’s expansion into a new market niche that the company is already operating in.
2. Corporate level: Corporate level product diversification expands into a new industry beyond the company’s current business scope.

How to Implement Market Diversification

Businesses using diversification strategies enter into new industries and markets. While many can accomplish this through acquisition or a merger, others tend to expand into new industries independently. Before diversifying, managers need to consider what their company does and what it could do to be ahead of their competitors.

There are four different types of diversification methods firms may employ:

1. Horizontal Diversification

This entails the addition of a product or service not available in the company’s current market. The acquired or developed new products or services would be at the same or comparable stage of development as existing activities.  Furthermore, the new products or services complement your core business and appeal to your present customers.

2. Concentric Diversification

Concentric diversification is when a company adds additional products or services to the existing business, similar to what the business already has. This may provide leverage to a company’s existing products or services.

For example, a laptop manufacturing technology company starts producing PCs.

3. Conglomerate Diversification

This approach entails introducing a new product that has nothing to do with the present business. A product diversification example for conglomerates would be the Tata Group. The diversified company moved from being a small trading company to a global business across various sectors, including consumables, automation, chemicals and more.

Another example of conglomerate diversification is the Walt Disney Company. It first established itself in the animation industry in 1923 and then diversified itself into theme parks, action films, television and much more.

4. Vertical Diversification

Vertical diversification, or vertical integration, is when a company moves up or down the supply chain by combining additional stages of production. This typically involves taking on functions related to production and distribution, such as assembly or purchasing raw materials.

Successful Diversification Examples

Diversification strategies frequently lead to the expansion of new or comparable sectors. Many companies do this by merging or acquiring another company, while others extend into new areas independently.

Take a look at some business diversification examples and their strategies below:

Related Diversification

Related diversification strategy is attaining a new industry or market similar to the company’s present demand. Related diversification gives companies the advantage of working in a familiar industry, minimizing risk compared to unrelated diversification.

For example, Honda Motor Company is well known for its automation manufacturing services. Before becoming a multinational conglomerate, the business was first established as a bicycle auxiliary engine manufacturer. The company successfully diversified into the automobile industry, and its unique engine-building skills leveraged into the all-terrain motor industry.

Unrelated Diversification

Unrelated diversification occurs when a company penetrates an entirely new industry. For example, soft drink conglomerate Coca-Cola paid $750 million for Columbia Pictures — which was then sold years later at a profit. Unrelated diversification allows companies to invest in ventures outside their familiar industry, often protecting their capital in case of any industry-wide plummets.

Explore MANTEC’s Services for Your Manufacturing Needs

Diversification has become a necessity for company survival and growth. Especially as a result of the impact in manufacturing and the COVID-19 pandemic, businesses have had to find innovative ways to mitigate risk and increase revenue. While diversification provides leverage into new markets and opens a path to fast growth, it often requires changes within the business and its strategy. To open up profitable opportunities, businesses need to take careful consideration when planning a diversification strategy.

Contact a MANTEC specialty advisor and receive more information on the best business strategy going forward.