Question 1 (7 marks)

What do you understand by diversification as a growth strategy? Explain the two types of diversification.
Illustrate your point with the help of two examples for each type of diversification. Answer this question
in 400 words
ANSWER: ** Answer box will enlarge as you type
Diversification is simply considered as the process which helps the investor in reducing the risk by
allocating their investment across the various financial industries. It helps the investor to get the
maximum return on their investment. Similarly, diversification as a growth strategy can be simply
understood as the process of entering into the new market or any industry in which the business does
not currently operate and also by creating various new products and services for the new market.
Diversity has its own advantages and disadvantages, its advantages include increasing sales and
revenue, growing the share of the market finding new and more effective income streams, and many
more. It also has certain cons such as it may limit the growth of the main areas of the business and
likewise, lack of knowledge in the new market could lead to various kinds of errors which may cause
various financial damages.1
There are various types of diversification among them Its two types are: 2
1. Horizontal diversification
It is the type of diversification that means to introduce the new product or services for the purpose of
expanding the market share. It can be done through licensing the new products or even by merging or
acquisition of the other company. Among horizontal diversification, we can find two types which are
concentric and conglomerate. It has certain pros such as it helps the business in overcoming the tough
competitive market and also helps the company in expanding their reach in the marketing similarly, it
also has certain cons like it create the high risk of failure and also because of the too much growth too
fast it could reduce the resources. Some of its major examples are Disney acquiring Pixar and Facebook
acquiring Instagram.

2. Vertical diversification
It is the type of diversification in which the business finds the opportunity for expansion from mobbing
forward or backward along with the production cycle. It also has various benefits as it helps in
developing the supply chain of the business and also helps in cutting the various cost-related to
production. Not only that it also helps in gaining revenue. It also has certain cons as it is very difficult the
fit the culture with the new team and also required high operating costs. Its major example is Ikea
purchasing forests so that it could supply its own raw materials.

1
https://www.nibusinessinfo.co.uk/content/business-growth-through-diversification
2
https://bstrategyhub.com/what-is-a-diversification-strategy-its-types-and-why-is-it-important/