What Is Concentric Diversification?
Concentric diversification is a corporate growth strategy where a company adds new products or services that are closely related to its existing business in terms of technology, marketing, or customer base. Falling under the broader umbrella of corporate strategy and business diversification, this approach aims to leverage a company's existing core competencies and resources to enter new, but strategically aligned, markets. Unlike pure diversification into entirely unrelated industries, concentric diversification seeks to achieve synergy by expanding into areas where there are shared capabilities, distribution channels, or customer needs. This strategy is a crucial component of a company's overall growth strategy, focusing on expanding the business while maintaining a degree of familiarity with the new venture.
History and Origin
The conceptual roots of diversification strategies, including concentric diversification, can be traced back to the work of H. Igor Ansoff, who introduced the Product-Market Matrix in his 1957 Harvard Business Review article, "Strategies for Diversification." This seminal work provided a framework for businesses to analyze different growth options based on whether they involve new or existing products and markets. Ansoff’s matrix highlighted four strategies: market penetration, market development, product development, and diversification. Concentric diversification aligns with the "diversification" quadrant, specifically focusing on related forms of expansion where a company can capitalize on existing strengths. The Ansoff Matrix remains a foundational tool in strategic planning for assessing growth opportunities and their associated risks.
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Key Takeaways
- Concentric diversification involves expanding into new, but related, product or service areas that share technological, marketing, or customer similarities with the existing business.
- The primary goal is to create synergies, leveraging existing resources and capabilities to gain a competitive advantage.
- This strategy helps a company grow by tapping into new revenue streams while potentially reducing overall business risk by not relying solely on a single product or market.
- Successful implementation often leads to economies of scale and scope, as shared assets or expertise can be utilized across multiple business segments.
- Concentric diversification contrasts with conglomerate diversification, which involves entering completely unrelated industries.
Interpreting Concentric Diversification
Concentric diversification is interpreted as a strategic move to broaden a company's scope by adding offerings that complement its current operations rather than fundamentally changing its business model. The "concentric" aspect implies that the new activities revolve around or expand upon the company's existing core. This approach allows a company to capitalize on its established reputation, customer relationships, and operational expertise. When evaluating a potential concentric diversification, businesses typically assess the degree of relatedness between the existing and new ventures, looking for areas where existing marketing channels, technology, or production processes can be shared or adapted. The successful execution of concentric diversification often enhances brand equity and strengthens a company's overall market position.
Hypothetical Example
Consider "TechGear Inc.," a company specializing in high-performance computer peripherals like gaming mice and mechanical keyboards. TechGear Inc. has a strong brand reputation for durability and cutting-edge design, primarily targeting competitive gamers and tech enthusiasts.
To pursue concentric diversification, TechGear Inc. decides to launch a new line of professional streaming equipment, including high-definition webcams, studio-quality microphones, and specialized lighting. This move aligns with concentric diversification because:
- Technological Relatedness: The new products require expertise in audio-visual technology and software integration, which shares common ground with the precision electronics used in their existing peripherals.
- Customer Relatedness: While distinct, professional streamers often overlap with their core gaming audience. Gamers who aspire to stream are potential customers for both product lines.
- Marketing Relatedness: TechGear Inc. can leverage its established online presence, social media channels, and relationships with gaming influencers to market the new streaming equipment.
By entering the streaming equipment market, TechGear Inc. utilizes its existing capabilities in design, manufacturing, and marketing to serve a related, yet expanding, customer segment, aiming to increase its market share in the broader tech accessory space.
Practical Applications
Concentric diversification is widely applied across various industries as a strategic avenue for growth and risk management. For instance, a food processing company known for canned vegetables might diversify into frozen organic produce, leveraging its supply chain and distribution networks. Similarly, an automobile manufacturer might expand into electric vehicle battery production, building on its engineering and manufacturing prowess.
A prominent real-world example is Apple Inc. While initially a computer company, Apple has strategically diversified into related areas like portable music devices (iPod), smartphones (iPhone), tablets (iPad), wearable technology (Apple Watch), and a vast array of services (iCloud, Apple Music, Apple TV+). This expansion leverages Apple's innovation in user interface design, its brand loyalty, and its strong ecosystem, demonstrating a successful application of concentric diversification where new offerings complement existing ones and appeal to a similar customer base. 6This strategy allows companies to reinforce their market presence and optimize capital allocation across related ventures.
Limitations and Criticisms
While concentric diversification offers numerous benefits, it is not without limitations and criticisms. One significant challenge is managing the increased complexity that arises from expanding into new product lines or markets. Integrating new operations, technologies, and customer segments with existing business units requires careful planning and coordination to avoid operational inefficiencies. 5There is also the risk of overextending resources, where a company spreads its financial, human, and managerial capital too thinly across various ventures, potentially diluting its focus and weakening its existing core business.
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Furthermore, the assumed "synergies" may not always materialize as expected. Companies might misjudge the degree of relatedness or overestimate their ability to transfer core competencies to the new areas. A notable historical example of a related diversification effort that failed to achieve its intended benefits was Philip Morris's acquisition of 7Up. Despite initial hopes of leveraging existing marketing and distribution expertise, the anticipated synergies never fully materialized, leading to the divestiture of 7Up less than a decade later. 2Academic research also suggests that highly diversified firms can sometimes trade at a "diversification discount," meaning their market valuation might be lower than the sum of their individual parts, partly due to the complexities and potential misalignments inherent in managing diverse operations.
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Concentric Diversification vs. Horizontal Diversification
Concentric diversification and horizontal diversification are both strategies for business expansion, but they differ in their relationship to the company's existing offerings.
Concentric Diversification involves adding new products or services that are closely related to the company's existing ones, either technologically or commercially. The new offerings leverage shared expertise, distribution channels, or a common customer base. The core idea is to achieve synergy by building on existing capabilities and market knowledge. An example would be a company that manufactures car engines expanding into manufacturing engines for boats, utilizing similar engineering knowledge.
Horizontal Diversification, on the other hand, involves a company introducing new, often unrelated, products or services to its existing customer base. The new offerings do not necessarily share technological or production similarities with the current products, but they appeal to the same group of customers. For example, a company selling stationery might horizontally diversify by offering office furniture to its current corporate clients. The confusion often arises because both strategies involve expanding product lines, but concentric diversification emphasizes a deeper operational or technological connection, while horizontal diversification focuses on serving the existing customer with new needs.
FAQs
What is the main goal of concentric diversification?
The main goal of concentric diversification is to expand a company's business by adding new products or services that have a strong strategic fit with its existing operations. This typically involves leveraging shared technologies, distribution channels, or customer relationships to create synergy and enhance overall business performance.
Is concentric diversification high-risk?
Concentric diversification is generally considered less risky than conglomerate diversification (entering entirely unrelated industries) because it builds on existing strengths and market knowledge. However, it still carries risks, such as the potential for misjudging market demand, overextending resources, or failing to realize anticipated synergy. Effective risk management is crucial.
How does concentric diversification differ from vertical integration?
Concentric diversification involves expanding into related products or services at the same stage of the value chain or into new, related markets. Vertical integration, conversely, involves a company taking control of different stages of its own production or distribution process—either backward (acquiring suppliers) or forward (acquiring distributors). While both are corporate strategy moves, vertical integration focuses on controlling the supply chain, whereas concentric diversification focuses on expanding the product-market scope using shared capabilities.
Can concentric diversification lead to a competitive advantage?
Yes, when executed effectively, concentric diversification can lead to a significant competitive advantage. By leveraging existing core competencies, a company can achieve economies of scale or scope, reduce costs, and offer more value to its customers, making it difficult for competitors to imitate its diversified portfolio.