To Focus or Diversify?

Jan 20, 2021

Change is a trigger for innovation.

The covid induced crisis that hit the world’s economy, has made firms of all sizes to reconsider their positioning strategy in the market. Businesses are expected to reshape themselves in the new world and a lot of it is already happening.

With changing times fuelled with uncertainty, the firms are pushed to make a difficult call, To pivot or persist?

To Persist- Focus Driven Strategy

The Law of Focus (here) states that for a firm to etch its presence into the user’s mind, the firm must focus on a strategic word that would resonate with the product. For instance , say “fast food”, and Mcdonald as the first point of recall.

This captures the essence of a focus driven strategy. Michael Porter defines focus strategy - the one where the firm strives to build and develop its product/ service to cater the needs of a particular competitive market segment. Under this strategy, the firm continues to keep focus on its present markets (specific consumer, product line, or geographic location)

The ability to cater through a focus strategy requires:

    • Identification of gaps in the market, not covered by cost leaders and differentiators
    • Or, create superior skills to cater to niche markets

Although the payoff of targeting a niche category might be less than a growing market, the limited competition can help build a monopoly.

To sustain a monopolistic position, it's imperative to build a competitive advantage. These can be achieved through

    • Focused Cost Leadership Strategy: firms seek to provide customers with affordable and competitively priced solutions through this strategy. (For eg- Walmart, IKEA)
    • Focused Differentiation Strategy: firms seek to cater to the unique needs of a narrow market segment (niche). For example- Premium luxury cars, vitamin supplements to fitness enthusiasts , etc)

To Pivot- Diversification Strategy

Simply put, diversification strategy is defined by adding new products in new markets. When a company plans to diversify it can do so in two forms:

  • Related diversification: the new product/ service has commonalities with the core business. Firms with a strong brand name, marketing skills, distribution channels and R&D can expand the product line horizontally
  • Unrelated diversification: the new product does not share many commonalities with the core product. These are usually developed to enter new markets, and/or reduce risk by operating in multiple product markets, or vertical integration.
  • The different types of diversification strategies are :
    • Horizontal diversification: this involves the least amount of risk as you’re working with familiar customer and market segments. Eg- CureFit has launched online fitness classes (due to shutting down of gyms)
    • Concentric diversification: when a company enters a new market with a new product, that is technologically similar to existing products. The brand name, technical know-how and industry experience assures the user of the credibility of the new product. Eg- Iphone moving into Tabs and Airpods , to capture the same customers with a complimentary / better product.
    • Conglomerate diversification: when moving into new markets with unrelated products to reach a new customer base. Eg- Zomato launched groceries and essential delivery services through Zomato Market
    • Vertical Diversification: also known as vertical integration, is when a company moves up or down a supply chain. This typically means the company decides to take over some (or all) functions related to production or distribution.

Eg- Forward diversification- an ecommerce firm begins to deliver directly to customers, removing the delivery companies.; Backward diversification- Netflix began as a media distribution platform, now creates its own content.

Conclusion: These are unprecedented times and obviously both big and small companies are affected, with the smaller businesses being more impacted because of their limited resources. But smaller companies and startups are also nimbler and able to quickly transform themselves to tap new opportunities.

The product needs to evolve, as the customers and market requirements are changing.

Pivot, persist or coexist!

Author(s) :
Swadha Agarwal     
Brijesh Damodaran Nair