Organizations pursue different types of diversification strategies. One of these is known as concentric diversification.
The term concentric diversification is used to describe a strategy of having many different strategies in your portfolio that are closely aligned with one another.
Think of a book publisher. Large publishing houses don’t only print the works of one author; they have many. In addition to this, they’ll publish print books, e-books, audiobooks and may also sell rights to the books for film and TV adaptation. This allows them to harness multiple streams of income for one product. This is one form of concentric diversification.
Let’s take a closer look at concentric diversification strategy and what it means for businesses.
We see concentric diversification examples all around us. Swiggy entered the market delivering food. It then expanded to on-demand delivery for just about anything through Swiggy Genie. Most recently, they have started instant grocery delivery, too.
The goal of concentric diversification is twofold: profit maximization while minimizing risk. This is a powerful business strategy. Businesses are dynamic and changeable. Changes in consumer preferences and needs and the economy at large mean that if you aren’t prepared to evolve, your chances of long-term survival are not strong. Here are some features of concentric diversification:
A concentric diversification strategy is a great way for investors to have their cake and eat it too. It allows you both to diversify your assets while strengthening the core of what your business excels at.
Several businesses employ a concentric diversification strategy to maximum effect. Here are some concentric diversification examples:
Imagine you own an ice cream store. Every time you try out a new flavor of ice cream, you are seeking concentric diversification. If this strategy is highly effective, your store can grow on the back of these many different flavors of ice cream. If the market for your original flavors dries up, you will have other flavors still selling.
We’ve already looked at how publishers might use their catalog to maximum effect. Another example could be an organization such as Netflix. It started as a mail CD delivery service. When that market dried up, it reimagined itself, keeping its core intact. Netflix still delivers movie content for home consumption; it simply changed the technology by which it does so.
By being true to your business’s key value proposition, avenues for concentric diversification become clear. For instance, a brand such as Pepsi has a wide range of beverages. Instead of only coming up with different variants of sodas, it has also branched out into juices and flavored waters. Now with many consumers seeking the healthier choice, they can provide options for various customer preferences.
There are a variety of ways of investing in related products and businesses. But there are both advantages and disadvantages of concentric diversification. We’ll now turn our attention to these.
There are several advantages and disadvantages of concentric diversification. A few to consider are –
While this business model can work great for some businesses, others might not necessarily fit this structure. Here are some disadvantages of concentric diversification:
As we’ve seen from concentric diversification examples, it is a powerful strategy for companies whose foundational business is doing well. By spreading your resources over different businesses, it can help shield you from risk if one business fails.
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