Horizontal diversification strategy

From CEOpedia | Management online

Horizontal diversification involves the extension of a production of products or service above and beyond the industry, in which the company operates. Companies Introduce into the production new products which are based on know-how, experience and technical-economic capabilities of the company. These products are usually based on related technologies, meet different needs of buyers or similar needs in other ways. Such strategy also allows to use existing brand and distribution system in new area of activity.

Effects of application

Application of horizontal diversification strategy allows the company to achieve a number of advantages, among which following can be distinguished:

  • decrease in risk,
  • independence from previous collaborators,
  • maintenance or improvement of the competitive position of the company, primarily due to the activities in known areas and market segments,
  • increase in the development potential,
  • possibility to make better use of resources, skills and strengths
  • development of the company based on the unchallenged business strengths,
  • new products can compensate for some of the losses from the collapse of sales of already existing products,
  • possibility of spreading the risks.

Worth highlighting is also that this type of diversification is associated with the least amount of risk. Working in familiar areas and in the conditions of the absence of significant changes in the customers will allow for a significant reduction in risk and independence from existing competitors.

If you want to use this strategy, you must first, however, get an idea of whether the company has a group of solid, loyal customers. And if so, whether they would be interested in buying of some new products or services. You must also ensure that the company is able to take care of the production, distribution and sale of these products or services to existing customers.

Examples of Horizontal diversification strategy

  • Apple Inc. is an example of horizontal diversification. Apple started out in the computer and technology industry and has since expanded its product offerings to include consumer electronics, music, software, and services. The company has released products such as the iPhone, iPad, Apple Watch, Apple TV, and AirPods, which have all become incredibly popular. Apple has also developed its own music streaming service, Apple Music, and its own software platform, iOS.
  • McDonald's is another example of horizontal diversification. The fast food restaurant chain started out with just burgers and fries but has since expanded its menu to include salads, breakfast items, chicken, fish, smoothies, and more. The company has also expanded its presence to include stores in over 100 countries around the world. Additionally, McDonald's has developed its own mobile app, which allows customers to order food and pay for it digitally.
  • Amazon.com is a well-known example of horizontal diversification. The company started out as an online bookstore but has since expanded its offerings to include products such as electronics, apparel, home goods, and groceries. Additionally, Amazon has developed its own streaming service, Prime Video, and its own gaming platform, Twitch. Amazon has also ventured into the cloud computing space with its Amazon Web Services offering.

Advantages of Horizontal diversification strategy

Horizontal diversification strategy provides numerous benefits to companies, including:

  • Increased market share - By diversifying into different industries, companies can capture a larger share of the market. This could be done by entering a new geographic area and offering new products, services or both.
  • Reduced risk - Horizontal diversification reduces risk by spreading the risks associated with any single product or industry over a broader range of activities. This can help to reduce the volatility of the company's profits and help to maintain steady financial performance over the long term.
  • Economies of scale - Horizontal diversification can also help to achieve economies of scale. This is because a company can benefit from the same resources and production capabilities to produce different products or services. This can also help to reduce costs and improve efficiency.
  • Increased brand visibility - By diversifying into different industries, companies can increase their brand visibility and recognition. This can help to increase customer loyalty and create a larger customer base.

Limitations of Horizontal diversification strategy

  • Horizontal diversification can be a complicated and time-consuming process, as the company needs to invest in new products and markets, as well as develop new skills, competences and systems.
  • It may also be difficult to make the new business profitable, as the market might be already saturated, or the new product offering may not be attractive to customers.
  • The company might also face competition from existing players who are already established in the new sector, making it difficult for the new entrant to gain a foothold.
  • Additionally, the company may find it difficult to attract and retain the right talent and resources needed to successfully expand into new markets, as it may not have the required skills and experience.
  • Lastly, the company may be subject to a high degree of risk, as it may be difficult to predict the success of the new product or service in the market.

Other approaches related to Horizontal diversification strategy

Horizontal diversification is a strategy that allows companies to extend their production of products or services beyond their industry. There are several approaches used by companies when it comes to horizontal diversification:

  • Licensing agreements: Companies may enter into a contract with another company to use their technology, brand or any other proprietary asset. This allows the company to gain access to new markets or products without the need to make large investments.
  • Strategic alliances: Companies may form strategic alliances with other companies to share resources, technology and resources. This allows them to benefit from each other's strengths and reduce costs.
  • Mergers and acquisitions: Companies may also merge with or acquire other companies in order to gain market share, access new resources and technologies, and reduce costs.
  • Joint ventures: Companies may also form joint ventures with other companies to share resources and expand their reach.

In summary, horizontal diversification is a strategy used by companies to extend their production beyond their industry. Companies can use licensing agreements, strategic alliances, mergers and acquisitions, and joint ventures to gain access to new markets and resources.

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