Diversification Strategy Advantages & Disadvantages

Diversifications strategy for new entrants in the mobile market has been advocated by literature on mobile operators’ strategy (Gruber, 2005). The reason for differentiating the product is to achieve a unique identity in the market. We adopt a penetration strategy, which is achieved through low pricing of the product. This memorandum aims at understanding the effectiveness of the strategies that have been suggested in the industry analysis.

The industry analysis suggests that there is extensive competition among competitors and there is a lot of competition in the market. The overview of the industry suggests that there are high entry barriers from new entrants. However, there is high supplier power as there are few suppliers. Porter’s model suggests that high competition prevails in the industry. Competition is adverse between mainly between competitors in the pre-paid mobile phone business. In such an industry condition, a new player needs to develop a sustainable competitive strategy, which will help them attain maximum value. One such method, which has been suggested to Max, is to differentiate the product offering and diversify the business. Differentiation is essential to attain a competitive advantage to choose (deliberately) a unique set of values delivered to the customers (Porter, 1996). As there is a very high level of competition in the pre-paid mobile market, it becomes essential for the company to enter novel avenues to gain further advantage. This is necessary to dissipate the risk of business and keep it to a minimum. However, the company is now planning to diversify its business and enter new avenues for business.

In the next section, the paper will discuss the various advantages and disadvantages of diversifying our business. Then do a pro-con analysis of diversification.

Diversification is a strategy that is opted by companies when they need to grow in a market. This strategy helps companies to grow in sales volumes in markets, which is new to the company with a product, which is new to it. Diversification is one of the four main strategies that have been indicated by the Ansoff matrix, where Ansoff indicates two key factors for marketing, which are the products that are sold and to whom it is sold (Ansoff, 1957; Ansoff, 1958).

It provides a four-box matrix wherein the strategy that Ansoff suggests for new product new market entrant is diversification (Ansoff, 1958). Diversification strategy can be employed either with related or unrelated products in the market. The importance of diversification strategy lay in its need to acquire new technology, skill, and facilities as opposed to the other strategies wherein a company could use the existing facilities. Thus, diversification also entails a complete shift from the existing business model and leads to “physical and organizational changes” in the structure of the company (Ansoff, 1958, p. 394). Intuitively it can be said that diversification assumes the highest risk factor among all the other three strategies (i.e. market penetration, product development, and market development) that a firm may pursue.

Diversifications strategy may be divided into three categories:

  1. lateral diversification,
  2. horizontal diversification,
  3. vertical diversification (Ansoff, Strategies for Diversification, 1957).

Lateral diversification is a business unit level strategy wherein the company diversifies into a new industry by leveraging technical knowhow from the current industry it operates. Horizontal strategy is for the firm to enter the market with a related product and appeal to the existing set of customers. Vertical diversification strategy is to enter the market with an unconnected technology or any business synergy and appeal to a new group of customers.

The advantages of diversifying lie in the necessity of opting for the strategy. Ansoff pointed out that companies choose to diversify in order to “compensate for technological obsolescence, to distribute risk, to utilize excess productive capacity, to re-invest earnings, to obtain top management, etc.” (Ansoff, 1958, p. 395). The companies may be in a position to secure their long-term gain by adopting diversification strategy (Ansoff, 1957).

The second advantage of diversification is to immune itself to ever changing environmental conditions, which may have a great effect on sales figure of the company (Ansoff, 1957). However, these foreseeable market conditions have been seen to benefit from diversification strategy. The third factor that diversification may help in is in combating unforeseeable events (Ansoff, Strategies for Diversification, 1957).

As mentioned earlier, diversification by virtue of its novelty is riskiest of all the four strategies suggested by Ansoff. Therefore, it requires very careful and in-depth investigation before it is implemented. The degree of uncertainty attached to it is immense and our company must be prepared to take the risks. Further, it also requires substantial expansion of financial as well as human resources, which may divert attention and resources of the company from the core industry into other areas.

From the above discussion, it is clear that diversification strategy can be a very helpful strategy to our company if caution is taken as to how it will be pursued. Diversification will help us gain new avenue in a highly competitive pre-paid mobile market, but will also put a great deal of risk on our company which is not present in the other three strategies suggested by Ansoff.

Reference

Ansoff, H. I. (1958). A Model for Diversification. Management Science Vol. 4 No. 4 , 392-414.

Ansoff, H. I. (1957). Strategies for Diversification. Harvard Business Review Vol. 35 No. 5 , 113-124.

Gruber, H. (2005). The economics of mobile telecommunications. New York: Cambridge University Press.

Porter, M. E. (1996). What is Stratgy? Harvard Business Review. Web. 

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NerdyRoo. (2021, November 26). Diversification Strategy Advantages & Disadvantages. Retrieved from https://nerdyroo.com/diversification-strategy-advantages-and-amp-disadvantages/

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