Diversification is defined as entry into new products or product lines, new services or new markets, involving substantially different skills, technology and knowledge. It involves expansion into new businesses that are outside the current businesses and markets.
Diversification strategies have been classified into four broad categories, which are as follows:
i) Vertically integrated diversification
In vertically integrated diversification, firms opt to engage in businesses that are related to the existing business process of the firm upward or downward.
The firm does not jump outside the vertically linked product- process chain. The previous or the next process in the production chain becomes new businesses. Hence, it has two components-forward integration and backward integration.
Forward integration - Moving to the next process in same business
Backward integration - Moving to the previous process in same business
ii) Horizontally integrated diversification
It involves the acquisition of one or more similar businesses operating at the same stage of the production-marketing chain that is going into complementary products, by-products or taking over competitors' products.
iii) Concentric diversification
In concentric diversification, firms opt to engage in businesses or products that are related to the existing business process of the firm upward or downward, the new related business is linked to the existing businesses through process, technology or marketing.
The new product is a spin-off from the existing facilities and products/processes hence there are benefits of synergy with the current operations.
While in vertically integrated diversification, the new product falls within the firm's current process- product chain, in concentric diversification, there is a departure from this vertical linkage. The new product is only connected in a loop-like manner at one or more points in the firm's existing process/technology/product chain:
iv) Conglomerate diversification
In conglomerate diversification, no such linkages exist; the new businesses/ products are disjointed from the existing businesses/products in every way; it is a totally unrelated diversification.
In process/technology/function, there is no connection between the new products and the existing ones. Conglomerate diversification has no common thread at all with the firm's present position.