Vertical diversification strategy

Vertical diversification strategy
See also
Development by restructurization Methods of restructuring Sustainable competitive advantage Specialization strategy Diversification strategy Horizontal diversification strategy Importance of strategic management Structure follows strategy Business improvement

Vertical diversification strategy is one of the business development options. Managers choose a new market in which the company wishes to go with the new product. Diversification may be carried out using company's own resources or by acquiring other companies.

Extension and diversification of existing market fields is performed with products not yet manufactured by the company. Results of actions can be measured by relation of a prior business results to planned goals. In addition to vertical diversification we can distinguish also: horizontal and parallel diversification.

Fig. 1. Vertical diversification example

Types of vertical diversification

Vertical integration is an extension of business as:

• diversification by backward vertical integration (e.g. the manufacturer of footwear acquires tanneries)
• diversification by forward vertical integration (e.g. the manufacturer of footwear start his own network of shops)

with regard to the already undertaken activities of the organization.

Example of Vertical diversification strategy

Examples of vertical diversification include:

• Adding new products to existing ones: By adding new products to existing ones, a company can increase its market share and reach new customer segments. For example, a company that sells office furniture could expand to include office supplies and stationery.
• Diversifying into new channels of distribution: Diversifying into new channels of distribution can help a company to access new markets and customers. For example, a company that sells its products through retail stores could expand to include online sales.
• Expanding the range of services offered: Expanding the range of services offered can enable a company to differentiate itself in the market and increase customer loyalty. For example, a company that sells furniture could expand to include delivery and installation services.

Vertical diversification is the business strategy of expanding an existing product portfolio by investing in related products and services within the same industry. This strategy has the potential to reduce costs, increase production efficiency, and expand the product range. One example of vertical diversification is a company that offers office furniture expanding to include office supplies and stationery. This would allow the company to access new customer segments and increase its market share. Another example is a company that sells its products through retail stores diversifying into online sales to access more customers. Additionally, a company that sells furniture can expand its range of services to include delivery and installation services, which can help differentiate the company in the market and increase customer loyalty.

In summary, vertical diversification is a strategy used by companies to expand their existing product portfolio by investing in related products and services within the same industry. This strategy can help reduce costs, increase production efficiency, and expand the product range, and can be implemented through adding new products, diversifying into new channels of distribution, and expanding the range of services offered.

Effects of vertical diversification

Taking these action reduces the risk of activity and reduce dependence from suppliers and customers. However, company may experience the negative effects of such changes, for example. flexibility of action and the effectiveness of adaptation to changing environmental conditions can be reduced. Therefore, this strategy is effective mainly in technologically mature branches of production, with relatively low intensity of technical innovation.

When to use Vertical diversification strategy

Vertical diversification is a useful strategy when a company wishes to increase market share, reach new customers, increase customer loyalty, and differentiate itself from competitors. It is also beneficial when a company does not have the resources or know-how to pursue other forms of diversification, such as horizontal diversification. Vertical diversification is also a good strategy when a company wishes to expand its product portfolio but does not want to invest in the development of new products.

To determine whether vertical diversification is the right strategy for a company, it is important to consider the costs and benefits associated with the strategy. The costs include the development of new products or services, the investment in new channels of distribution, and the cost of expanding the range of services offered. The benefits include access to new markets and customers, increased market share, increased customer loyalty, and differentiation from competitors.

Advantages of Vertical diversification strategy

Vertical diversification is a business strategy that can offer many advantages to a company. The main advantage of this strategy is that it allows the company to gain access to new markets and customers, while at the same time, leverage existing resources and know-how. Other advantages include:

• Improved efficiency: By consolidating multiple processes into one, vertical diversification can improve production efficiency and reduce costs.
• Increased customer loyalty: Expanding the range of services offered can help to differentiate a company and lead to increased customer loyalty.
• Reduced risk of market saturation: By diversifying into different channels of distribution, a company can reduce the risk of its products becoming saturated in the market.

Limitations of Vertical diversification strategy

Despite the advantages of vertical diversification, there are also some potential drawbacks. The main limitations include the risk of over-diversification, the costs associated with implementation, and the potential for increased competition.

• Risk of over-diversification: When a company diversifies too much, it can become overextended and have difficulty managing its resources or focusing on its core strengths. This can lead to a decrease in efficiency and profitability.
• Costs associated with implementation: Diversification can be costly, both in terms of the upfront investment required and the ongoing costs associated with managing and maintaining the new products and services.
• Potential for increased competition: By entering new markets and expanding the product range, a company can also create the potential for increased competition. This can lead to pricing pressures and reduced profits.

References

• Chong, Y. Q., Wang, B., Tan, G. L. Y., & Cheong, S. A. (2014). Diversified firms on dynamical supply chain cope with financial crisis better. International Journal of Production Economics, 150, 239-245.