What is Diversification? And Why is it Important?

Diversification is one of the growth and market expansion strategies adopted by an organization in order to compete in the market and satisfy its stakeholders efficiently. The contemporary business environment has become highly competitive in nature, which makes it imperative for firms to look for new opportunities for revenue outside its existing business model. Not only does it allow a firm to find new sources of revenue, but it also enables it to create a strong competitive advantage in the market.

As a student of business management, you will often come across various marketing marketing essay where you may need to implement diversification strategy to foster future growth and sustainability of the firm.

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Diversification as a part of Ansoff Matrix

As mentioned in the definition of marketing strategy, an organization develops a set of activities which allows it to reach out to its target customers and influence their buying behavior in its own favor. The Ansoff matrixalso known as the Product/market expansion grid helps in determining the said strategy which can help an organization to expand its business venture into its existing or new market locations. This theoretical model showcases four different types of growth strategy for an organization to follow, which are market penetration, product development, market development and diversification.


As highlighted by the Ansoff matrix model, the diversification strategy involves selling new products to new market locations. In this case, a company expands to a new market which presents potential opportunity for the company to expand its business. However, the organization sells new products which is significantly different from the ones which are sold in its existing market. Thus, according to the Ansoff matrix, the diversification strategy involves company growth through starting or acquiring new business ventures outside the firm’s current products or markets.

If you are wondering how to write an essay body on diversification as a business strategy, you first need to identify the current trends in the global market that the chosen company can leverage. These trends may or may not be related to the existing business operation of the company. However, it is important to assess the financial feasibility of the business venture. For example, a company which operates in the fast food industry in its home country may choose to enter into the specialty coffee shop industry in a neighboring country, because the popularity of coffee shop is significantly higher in that host nation. Therefore, it is important to identify the product and service categories which are in most demand or are likely to increase in demand in the near future. Secondly, you also need to ensure that entering in the chosen market region is a viable option for you. Conduct a thorough PEST analysis, in order to get a clear understanding of the key environmental factors of the market.

It is important to understand that there can be many potential opportunities in terms of market demand and trend in a given market, however it is essential to ascertain if your chosen company will be able to expand its operations there. For example, a company might find that there is a potential for entering in the skin and personal care sector in a neighboring country. But your PEST analysis has revealed that the bilateral trade relationship between the home and the host country is not at all favorable and there are also certain political tensions between the two countries. So, in such a case it is always suitable to look for a different market location.

Importance of Diversification Strategy

At this point, you may ask why should you adopt diversification strategy in your explanation essay? Well, the answer is quite simple. Diversification allows offers potential opportunity for growth in a new market with new product categories. Compared to all the other growth/expansion strategies presented in the Ansoff matrix, diversification is the most rewarding. This is because it allows the company to have access to a new customer base, thereby increasing its chancesof more revenue generation and it also allows the company to sell products which follow the existing trend in the market.

Thus, diversification not only allows a company to internationalize its business, but it also ensures that the offered products are specifically tailored to the needs and preferences of the host market. Diversification also enables a firm to open up new avenues of cashflow. Investing in new markets and product categories also distributes the risk of operation for the company. For instance, if the Uber business model in the home country takes a dip, the company can still manage to earn revenue from other business ventures in the host markets.

Modes of Diversification

A company can choose to diversify its business venture in two different ways, which are:

  • Horizontal Diversification
  • Vertical Integration

In case of horizontal diversification, a company chooses to set up or acquire a business in a sector closely or distantly related to its current venture. Typically, the company operates in at identical points in the supply chain at all of its ventures. Horizontal diversification can be further broken down to related and unrelated diversification. Related diversification refers to diversifying to industries that are closely related to the one that the firm is currently operating. On other hand, unrelated diversification refers to entering into industries which are not at all related to the current one.

The vertical integration allows a company to set up or acquire a business in the current sector but at different points in the supply chain. For example, a company catering to the coffee shop industry, may decide to acquire a coffee bean supplier or a farmland that produces a particular coffee. Vertical integration offers more control over the supply chain, thereby making the company more reactive to market changes and cost control.

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