Lateral diversification is a strategy

Lateral diversification is a strategy

Of all the diversification strategies that companies can choose, lateral diversification is the riskiest. The reason for this is that in lateral diversification, companies serve new markets with new products.

Conversely, this means that companies have little to no experience with the products and the markets they want to conquer. Nevertheless, this market cultivation strategy is necessary in many branches in today's economy.

Lateral diversification – examples

An example of lateral diversification is the car manufacturer developing an app for customers. The reason for the app is the increased environmental awareness of customers who want to rent cars. The car manufacturer invests in the car-sharing sector. Developed an app for this purpose. This new market with the new product is good for the company's image and an additional source of revenue. At the same time, the automaker is entering completely new territory entrepreneurially. Likewise, a car manufacturer that invests in smartphones would be one that starts lateral diversification.

Risks and opportunities of lateral diversifications

The example already shows that lateral diversification entails high demands. These and the opportunities they create include:

Risks:

– Entering a new market with new customers and foreign competition is a high entrepreneurial risk. There are high costs associated with market analysis. – The probability of failure is particularly high in this case, and failure has a financial and intangible impact (z.B. Image loss) negatively impact the entire company. – The biggest risk is the cost incurred. These are usually higher with lateral diversification than with other diversification strategies. These higher costs can also threaten the core business. Thus threatening the entire company. – There is a lack of knowledge about the new product and the market. – In a new market there are usually already competitors and these are usually experienced in the market and have a customer base.

Opportunities

– Lateral diversification offers the chance to win new customers on the new market. – The influence of a company can increase to a large extent, by the wider field that is served. – The awareness of the company increases. – Business success no longer depends on just one market. – The influence of external conditions on the company is reduced, as the company finds different conditions in several markets. – Less dependence on one product / one market

Lateral diversification is a strategy that is designed for the medium and long term. In the short term, this strategy almost always results in losses. In the long term, however, new customers can be acquired, the company can spread its economic risks across different areas and is more flexible in the event of changes in the market.

Risk management with lateral diversification

Careful risk management is therefore essential in lateral diversification. Only in this way can the high risks be considered realistically and weighed up whether the risk is in a healthy relationship to the opportunities. At the same time, the chances and profits of a successful lateral diversification are very high, which is why this strategy is chosen by companies. In addition, the changes in the market are accelerating, so that a too slow reaction is threatening for the existence of the company.

Change of the market

Lateral diversification can be a strategy by which the company exits a stagnant market in the long term and enters a new market. Alternatively, the focus may shift to the new market over time. Here, the company may benefit from already having a good image. Alternatively, with this strategy, smaller companies are often bought up, which are already active in the new business field, and the change is made through them. But a complete change of the market is the exception. Can also be carried out through other strategies. However, in the lateral diversification is always observed, which market, for the company is the best. Therefore, this change of the market can occur, even if it was not originally planned.

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