Strategic Management Essay: Diversification, Benefits, and Risks

This essay provides a comprehensive analysis of diversification as a strategic management tool. It begins with an introduction to diversification, defining its concept and purpose in business expansion, and its place within the Ansoff Matrix. The essay then explores different types of diversification, including horizontal, vertical, concentric, and unrelated diversification, providing examples for each. It further details the benefits of diversification, such as increased revenue, market share, and reduced risk, while also addressing the dangers, including increased competition and potential for failure. The essay includes a critical examination of Whittington's statement on diversification, incorporating Strategy-as-Practice (SAP) to emphasize market research and strategic planning. The conclusion summarizes the importance of diversification for business growth and risk mitigation. The essay is a valuable resource for students studying strategic management, offering insights into how diversification can be effectively used to expand a business and navigate the complexities of the market.

Running Head: Strategic Management
Strategic Management

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Table of Contents
Introduction......................................................................................................................................2
Concept of diversification and types of diversification...................................................................2
Concept of Diversification...........................................................................................................2
Types of differentiation................................................................................................................3
Benefits and diversification.............................................................................................................4
Dangers of Diversification...............................................................................................................5
Critical comments on Whittington’s statement...............................................................................6
Conclusion.......................................................................................................................................8
References........................................................................................................................................9

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Introduction
Diversification is a strategy which is used for the purpose of expansion of business in the
existing marketplace or in the other fields of market. Primary aim of implementation of this
strategy is to enter into a new market with a new product or service or launching the existing
product by adding unique and attractive features for the purpose of re-launching in the existing
market. This strategy sometimes acts as the part of defensive and offensive set of strategies. It is
one of growth strategies described under Ansoff Matrix model. The statement “Diversification is
a perfectly logical development, ensuring the rationale and efficient use of resources” defines
that diversification is implemented in the workplace with the objective of ensuring success and
growth (Aspara, et. al., 2011). When a business enters into a new market, lot pf challenges and
opportunities comes which needs to be faced in an effective manner so that desired goals could
be acquired. For the same purpose, diversification strategy is implemented in the workplace. In
this essay, several aspects of the diversification, its correlation with the other aspects of Ansoff
Matrix framework will be covered. Along with this, strengths and weaknesses of diversification
strategy will be covered. Further, tools which describe relation between external business
environment and diversification will also be discussed.
Concept of diversification and types of diversification
Concept of Diversification
Diversification is a risky section of Ansoff Matrix as business organizations does not have much
experience in the new market, thus, the chances of product’s succession are very less. Ansoff
Matrix has defined four growth strategies i.e. market penetration, product development, market
development and diversification. As per Ansoff, diversification strategy is unique and distinct
from other three growth strategies because the risk level is pretty high in diversification. The first
three strategies are applied in the workplace with the help of existing technical, financial and
merchandising resources which company already using for its existing product line. But in case
of diversification, organization requires to adopt new set of strategies along with new
technological and facilities. Acquisition of new skills and knowledge is also required in

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adaptation of diversification strategy with the objective of successful expansion of business in
new markets with new products (Kumar, Gaur & Pattnaik, 2012).
Before implementing diversification strategy in the workplace, organization is required to
conduct market research and related strategies so that the target customer’s needs, market
environment, competitors involved in the industry, strategies used by them, etc. elements needs
to be considered. This helps the organization to introduce and promote new products in new
marketplaces with the objective to gain success and growth. Product diversification is a concept
under which new products and existing products are being manufactured and promoted in new
marketing conditions so that business could be expanded. Various companies have also adopted
the method of expansion of existing product line under which a new product is being launched
related to the existing product (Villarreal, Cusimano & Renner, 2015). For example, tooth paste
manufacturing firm launches tooth brushes and tooth powers under the same brand name.
Companies also use product extension and brand extension in order to uplift sale volumes and
the number of customers with the objective of increase market share in the target or in new
market (Whittington, 2014).
Types of diversification
In order to establish a sustainable competitive advantage in the target market along with
implementing the differentiation strategy, it is required to make a clear understanding regarding
differentiation strategy. The rationales on which differentiation strategy is implemented in the
workplace are customer needs, quality of product and services and competitors. Product
differentiation has various approaches and this is carried out at workplace with the core business
objective of gaining competitive advantage through adding unique features in their existing
products or by launching totally different product for making a separate image from its
competitors. There are various means through which product differentiation could be carried out
in a business such as product differentiation, image differences, service differentiation and many
more (Martin, et. al., 2012). Through adaptation and implementation of differentiation strategy
within workplace, organization could gain success and growth by using the existing brand value
which will help them to successfully launch the product in the new market along with avoiding
the direct confrontation with the competitors. Therefore, it could be said that differentiation is an

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effective strategy through which companies could earn sufficient amount of profits by utilising
the available industrial resources (Zhou, 2011). Following are certain types of diversification:
Horizontal Diversification: Approaching to the different target market through launching
unique products and services which are unrelated with the existing product line of the
organization is known as horizontal diversification (Park & Jang, 2013). For instance, PepsiCo
diversify its products through launching an energy drink. This type of diversification is also
known as related diversification because companies diversify their offerings related to their
existing product lines.
Vertical Diversification: Under this type of diversification, company starts from the initial stage
of its existing product line in order to make improvise existing products and services (Chioda, et.
al., 2011). For example, a reconstruction company starts selling paints.
Concentric Diversification: Available technologies and marketing system of an organization
are fully utilised with the motive of enlarging the production portfolio (Liu, et. al., 2014). For
instance, cosmetic products manufacturing company starts producing shampoo.
Unrelated diversification: When a company diversify its offerings unrelated to its existing
product lines is known as unrelated diversification. For example: Coca-Cola starts rendering
consultancy services.
For example: In last 80 years, Volvo Group which is a Swedish multinational company engaged
in production of trucks, cars, buses, etc. Its technical team is constantly working on exploring
security technologies for improving the credibility of their products in the international market.
In this regard, three-point belt invention is their landmark invention. Company granted this
invention free to all other companies of the same field which has now become a basic
configuration for all automotive. Although, there is not much complications in this invention and
it is too simple but it has saved many lives and it has also helped the Volvo to gain effective
image in terms of safety technology in the global automotive market (Althoff, Segraves &
Johnson, 2014).

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Benefits and diversification
 Diversification generates various ways for an organization to grow, prosper and expand
in the target market. With the help of diversification, organization could gain several
financial advantages. For instance, when a company acquires another enterprise or comes
into a joint venture with other business enterprise, it leads to increase in the revenues of
the organization which also impacts organizational profitability (Kim & Reinschmidt,
2014). For instance, before launching of a new drink in the target market, PepsiCo
executes market research strategy with the objective of ascertaining the risk and
opportunities factors.
 Successful implementation of diversification strategy will lead the organization to
increase its market share in marketplace. Introduction of new and effective products and
approaching to the appropriate group of customers is an essential aspect of
diversification which helps organization to increase its customer base. For instance, if
product launched by the company will meet customer’s requirements, chances for
success increase while if the product fail to meet customer’s requirements, chances of
success decreases for the organization as well as for the newly launched product.
 Diversification strategy increases growth opportunities for an organization because it
helps the organization to enters into a new market with a new product without any
experience.
 Risk factor plays crucial role in the success and growth of an organization.
Diversification strategy leads to introduction of new product in the new market, thus,
high level of risk is involved. With the help of diversification, it decreases the impact of
risk over business because there is various range of product and if one of them will fail,
it will not much affect enterprises’ performance (Vik & McElwee, 2011).
Dangers of Diversification
 In order to gain financial advantage, various companies enter into a joint venture or
acquire other enterprises and miscalculate the profitability from that venture against the
cost incurred to form that venture. For example, PepsiCo enters into a joint venture with
a construction company but PepsiCo does not have sufficient information related to
construction business, thus, it may originate negative outcomes.

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 Increasing market share by introducing new products in new markets leads to increase in
the competition level. For example, PepsiCo is planning to launch an energy bar
chocolate with the view to diversify its product ranges to other fields. But due to
aggressive competition in the chocolate industry and due to lack of experience of that
particular field, desired goals and objectives may not acquire.
 On one side, diversification increase growth opportunities for an organization while on
the other hand, it also generates various chances of failures due to non-acceptance of
product by target customers, etc. (Wan, et. al., 2011).
Critical comments on Whittington’s statement
According to Vaara & Whittington (2012), “diversification is a perfectly logical development,
ensuring rationale and efficient use of resources”. This is true because every business enterprise
needs to face decline stage once in a lifetime and in that period of time, organization may get
success otherwise it will fail. Authors have described that Strategy-as-Practice plays crucial role
in strategic management concept and it helps the organization to manage the activities in an
effective manner. Strategy-as-Practice has two meanings: “practice” signals both an attempt to
be close to the world of practitioners and other meaning is sociological theories of practice. Main
aims of these studies are that the strategy processes are relies upon the organizational functions
and on other functions that affect the performance of the strategies and their outcomes. SAP
research has provided an alternative method to the organizations in relation with performing
decision making process in an effective manner. Strategy-as-Practice has common characteristics
with the approaches of strategy process and the new micro-foundations approaches of strategy.
The primary focus of SAP approach is to find out the most appropriate way so that distinct
method could be originated with regards to strategic management. Apart from the utilisation of
SAP approach to determine alternatives for decision making processes, it is also used in the
research for analysis of social practices (Tixier, Bataillé & Jagla, 2010).
In relation with diversification, it is required for an organization to perform market research
activity in an appropriate manner so that the desired outcomes could be acquired. Diversification
is being implemented within the workplace with the objective of expansion and for expanding
business into new fields of market, it is required to adopt certain unique and advanced level

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strategies such as SAP approach. This approach has the capability to strengthen the process of
making strategies and it is also essential in the procedure of executing all functions of the
organization in an appropriate manner. As per my opinion, the statement given by Whittington
(2012) is true because diversification is the only activity through which organization could
expand its business in the domestic or in international marketplace. This is the strategy which
promotes the organization to enter into a new industry with a new product and that too without
any experience, talent or knowledge for that market. This strategy helps the organization to
identify its capability as well as various challenges occur for an organization which could be
moulded into opportunities using unique strategies of organization. If organization will not be
able to make their separate image in the new marketplace then it could be observed that the
chances for surviving in the dynamic business environment for a long run are quite less (Vaara &
Whittington,, 2012).
Diversification is a strategy which is essential for the growth of an enterprise. It helps the
organization to mitigate risks factors involved in the market as well as it also expand the network
of the organization so that desired outcomes could be attained. Apart from this, the statement’s
second part says that efficient and rationale utilisation of resources is necessary in order to
implement diversification and related strategies effectively. Resource management is another
crucial task for an organization which should be executed in an appropriate manner with the
objective of attaining higher results with minimum wastage of resources (Calmès & Théoret,
2011).
Resource management technique includes management of technical resources, production, man
power, etc. All these resources should be combined together in such a way so that the task could
be accomplished in the most appropriate manner. This will help the organization to gain its
desired goals and objectives along with this, organization will be able to develop its separate
image from competitors. Diversification is implemented with the purpose of expansion and this
could be done in the existing product line or in the different product line. Thus, combination of
resource management and diversification strategies should be executed in an appropriate manner
so that organization will be able to create opportunities for itself for achieving desired outcomes.
Under resource management technique, one of the crucial tasks is allocation of duties to the
employees (Lamin, 2012). While allocating the tasks to the employees, it is required for the

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organization to ascertain its employees’ capabilities, skills and knowledge so that ‘right task
could be allocated to the right person’. This is also known as the golden role for business
enterprises in relation with gaining success and gaining competitive advantage in the
marketplace. It has been observed that every product and service has a limited life and if an
organization will focus over single product or service, then the life for that organization will be
dependent upon that particular product only (Delcoure, 2010). But while setting up business,
primary objective is to survive in the dynamic business environment for a long run and this is the
reason organization focus over various products and services of the same product line as well as
over different products and services from different fields. Diversification helps the organization
to make its network broad and wide and while diversifying the business, organization should
determine every aspect of the new filed so that the chances of failure could be mitigated. Apart
from this, it has also been observed that the authors have said that the resources usage should be
rationale as per their requirements (Belousova & Dorfleitner, 2012).
For instance, Disneyland has developed their position as performing company in terms of
providing its customers qualitative entertainment services. Through this, organization has
attained highest value visitor satisfaction and a huge number of tourists along with pleasure and
happiness. In this manner, employees plays crucial role in attainment of desired goals and
objectives of the organization.
Conclusion
From the aforesaid information, it can be concluded that strategic management plays crucial role
in success and growth of an organization. In this essay, various aspects of strategic management
and diversification have been discussed. Diversification helps the organization to gain its desired
goals and objectives along with ascertaining the opportunities for acquiring success and growth
related objectives. The fact cannot be denied that diversification consist of high risk factor but
there are various benefits which could be attained through application of this strategy such as
expansion, growth, etc. In this essay, strategy-as-practice approach has also been discussed
which is essential in acquiring success and developing strategies for attaining competitive
advantage and growth as per the management’s expectations (Chambers & Zdanowicz, 2014).

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