Question

what do you understand by diversification of as a growth strategy? explain the two types of diversification illustrate your point with the help of two example for each type of diversification

Answer 1

MEANING OF DIVERSIFICATION-

Diversification is an act of an existing entity branching out into a new business opportunity. This corporate strategy enables the entity to enter into a new market segment which it does not already operate in. The decision to diversify can prove to be a challenging decision for the entity as it can lead to extraordinary rewards with risks.

The following are the two types of diversification strategies:

HORIZONTAL DIVERSIFICATION-

This strategy of diversification refers to an entity offering new services or developing new products that appeal to the firm’s current customer base. For example, a dairy company producing cheese adds a new variety of cheese to its product line or apple company who sells iphone start selling iwatch also.

VERTICAL DIVERSIFICATION-

This form of diversification takes place when a company goes back to a previous or next stage of its production cycle. For example, a company involved in the reconstruction of houses starts selling construction materials and paints or apple co selling items it uses to make phone such as batteries, screen etc. It may be forward integration or backward integration.