Most businesses can’t survive, unless they expand beyond selling only their core product or service, because they risk losing customers to competitors that have diversified. In fact, there are two common types of diversification that business owners can pursue: conglomerate diversification and concentric diversification. Business owners must assess the benefits and drawbacks of each type of diversification, before they decide which one to pursue.

Conglomerate Diversification Elements

A business owner that implements a conglomerate diversification strategy is focused on operating companies that have no relation to each other. In other words, this type of strategy involves the acquisition of as many businesses as an owner can afford that don’t complement each other in any way. For example, the owner of a car wash may also choose to buy a dry cleaning store, a check-cashing business, and a furniture store. While this business owner has diversified into different types of industries, there is no relationship or opportunity for promotional marketing that links any of these businesses together. Business owners that implement this strategy tend to buy out existing companies, rather than establish these companies from the ground up.

Concentric Diversity Elements

A business owner that follows a concentric diversity strategy will add related products and services to the core product or service that his business already offers. For example, the owner of a store that sells computers may add a repair service, or the owner of a dry cleaning store may offer coin-operated washers and dryers. Concentric diversity enables business owners to expand, without being forced to reinvent the wheel. In other words, there won’t be a significant requirement of new resources that would add new products and services, because the new products and services are closely related to what the company already sells.

The Advantages of Conglomerate and Concentric Diversity

The primary advantage of conglomerate diversity is that it helps insulate business owners against a downturn in one industry. When a business owner has multiple companies in different industries, struggles in one industry are offset by the successes of another company in another industry that isn’t experiencing a downturn. The main advantage of concentric diversity is that it helps business owners achieve synergy because they can use the experience from selling one product or service to help launch the new product or service. Concentric diversity also helps increase market share by enabling businesses to cross-sell to their existing customers. Cross-selling is the process of selling a similar or related product to a customer. Amazon is famous for doing this with its “Customers that bought this item also bought…” message that appears after you make a purchase.

The Disadvantages of Conglomerate and Concentric Diversity

The main disadvantage of conglomerate diversity is that the lack of focus on one type of business can spread owners thin, and the lack of expertise in one industry can cause that business to fail. The primary disadvantage of concentric diversity is that businesses can water down their core product or service if the new related products or services aren’t as well made. For example, a store that sells computers might not hire qualified technicians to make the kind of repairs that customers find satisfactory, which can dent the overall impression that customers have about the company.