Scenario

● You are on a work experience placement at a business that has so far specialised in
designing and making shop front signage for organisations in the local area.
● The firm has enjoyed a lot of success since it first opened three years ago but the managing
director is concerned that the local market is saturated.
● She has asked you to put together a report explaining how the firm could grow using each of
the four strategies in Ansoff’s Matrix.

For each strategy;

● Define it
● Explain how the signage company could use the strategy – use specific examples
● Give the level of risk associated with the strategy
● At the end of the report, recommend one strategy that the firm should move forward on.
Justify your recommendation.

1. Definition

Diversification is a growth strategy that involves selling new products in new markets that involving
substantially different skills, technology and knowledge from what the business currently possesses.
Diversification is achieved by adding new products, services, or features that will appeal to the customers
in these new markets.

2. Application
a. Related diversification

In this case, the signage shop can diversify by merging with a billboard advertising company. This is an
example of a related diversification as billboards is a relatively similar product line with signages. Both
billboards and signages serve a similar purpose of displaying an organisation’s brand or advertisement.
Furthermore, the two products are finished goods which means that the newly merged company does not
have to go beyond the Secondary sector. The firm can utilize its existing equipment and production
facilities to coordinate the production of signages and billboards without the need for retooling. Related
diversification allows for the company to enter a new product and market segment without necessarily
going beyond their area of expertise. This way, the company might be more comfortable diversifying into
segments which they already have some degree of familiarity with. Let’s say if the signage company were
to merge with or take over a pharmaceutical company, then there will be a lack of integration unless it is
their aim to become a holding company. However, related diversification carries its own risk as the
company would have to understand the market they are entering and to ensure that new products can be
competitive against existing rivals. The signage company must be prepared to compete with other
billboard manufacturers and to recognize what the customers (e.g. advertisers) expect.
b. Unrelated diversification

While when it comes to unrelated diversification, what the company can do in this case is to merge with
an automobile company. This is an unrelated diversification as it would be selling completely new
products into an untapped market. Although there is no direct fit with the the signage business itself, the
benefit of buying this unrelated business is that the company reduce the danger of placing “all your eggs
in a single basket”; if company, or even the business, is struck difficult because of the economic climate,
or competition, or any other success aspects, after that buying a not related company may help to offset
the slump. This is because many companies have actually seasonality highs and lows; when the signage
business can obtain an automobile business, they will thus be able to offset the low times of the business
due to the diversification. However, an unrelated diversification may at the same time further intensify a
lack of synergy. This may also result the signage company from focusing on its core activity, and
therefore limiting productivity and efficiency of the existing signage business that has long operated.

3. Risks

Unlike other strategies, diversification strategy is considered high risk for the signage not only because of
the inherent risks associated with developing new products, but also because of the business’s lack of
experience working within the new market. When a company chooses to diversify, they knowingly put
themselves in a position of great uncertainty.

Additionally, diversification often requires significant expansion of human and financial resources, which
can sometimes have a detrimental effect on the allocation of resources in the core industries. For these
reasons, it is recommended that the signange company should only pursue a diversification strategy
when their current product or current market really no longer offers opportunities for further growth. It’s
critical for companies to thoroughly evaluate the risks and assess the likelihood of achieving a profitable
outcome before deciding to pursue diversification. With this, it is highly suggested for the signage
company to consider the other three strategies first before looking into diversifying.