Organizations That Have Used Concentric Diversification

Businesses use various strategies to expand their markets, geographical reach or product lines. Some use an acquisition strategy to grow, while others favor a product-driven marketing and sales strategy. Still others employ a diversification strategy to achieve company goals. Companies diversify when they grow the business through expansion into another industry. Concentric diversification occurs when a company expands into an industry related to its current operations.

Companies may diversify to spread risk, maximize shareholder value and use up cash on a cash-laden balance sheet. Businesses adopt a concentric diversification strategy to increase shareholder value through the achievement of “synergy, ” which occurs when companies experience better results as a whole than as the sum of its parts. Companies attain synergy through transferring knowledge and market intelligence, sharing resources and combining operations. Concentric diversification is also called related diversification.

Companies develop products for related industries that enable them to leverage available resources or gain further traction with a target market. For example, Fuhu began life as a software company, buying hardware from suppliers or partnering with hardware vendors. However, the owners saw an opportunity to gain entry into the children's market by manufacturing hardware. As they made further inroads into the children's market they began offering companion low-tech offerings to protect and personalize their hardware offerings.

PepsiCo adopted a related diversification strategy when it broadened its product line from soft drinks to fast food franchises and snack foods. The fast food restaurants --including Burger King and Pizza Hut -- purchased large quantities of soft drinks because their patrons often drank Pepsi and other soft drinks with their meals. Similarly, soft drinks often served as the companion to snack foods --including the Frito Lay brand. This strategy broadened PepsiCo's consumer base and helped it sell more of its core product.

All of the largest public accounting companies in the United States entered the business consulting industry as part of a related diversification strategy. Many of the firms' large corporate clients encountered a variety of accounting-related financial and operational issues. Accounting firms now offer business consulting in disciplines including human resources, information technology and business process engineering. This allows accounting firms to leverage their accounting and auditing relationships with their clients to drive additional revenue from those same clients. The diverse offerings also make the accounting firms more valuable to their clients, deepening the relationships.