Lateral diversification strategy

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Lateral diversification strategy
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Lateral diversification strategy involves the search for new opportunities through the introduction of new products into new markets. This kind of diversification strategy is one of the most risky and costly for company. It requires the effort associated with the process of manufacture of a new product (planning, purchase of technology, acquisition of machinery and equipment, licences etc.) and gain new markets (market segmentation, crowding out competition, intense distribution and promotional activities).

Types of diversification strategies

Based on the depth, diversification strategies can be divided into:

  • centred diversification strategies,
  • conglomerate diversification strategies.

In the framework of the centred diversification strategy there are 3 subtypes:

Fig. 1. Lateral diversification strategy

Lateral diversification strategy

It consists in the development of the side activities of the company. It is also linked to the introduction of a new product (s) not related to the current range of market and existing customer groups (usually without any synergies).

In the case of the production it involves an entirely different kind of products that changes the position on the market. Offered goods are extended with new products, which do not show a connection with a previous, it is the entry into the completely new territory.

Lateral diversification creates new chances and opportunities for development. The choice of such a strategy results in a so-called mergers, linking of not related industries, which often lead to the creation of conglomerates. The implementation of the lateral diversification strategy involves activities in different segments of the market, large variation in the environment. In comparison with other development strategies it is the most risky, but allows to spread of financial risk that is associated with a seasonality of sales fluctuations.

Applications of lateral diversification strategy

Compared with the horizontal and vertical diversification, it can be stated that the lateral diversification creates unlimited possibilities in the area of interest in the company, while the other two restrict it through the natural limits of diversity.

Lateral diversification strategy is mostly used in the electrical and chemical industry, thanks to the large amount of research activities and numerous merger opportunities. Lateral diversification is characteristic in industries with a high productivity rate, a large share of technical workers among the employed and of greater and faster pace of development.

In practice, companies generally do not use only one type of diversification strategy. Usually it is a combination of above mentioned three kinds, where lateral and horizontal diversification create greater opportunities to strengthen internal and external market position.

See also:

References