Strategic Management: Formulation and Implementation

Concentric Diversification

Adding new, but related, products or services is widely called concentric diversification. The corporation's lines of business still possess some "common thread" that serves to relate them in some manner. The point of commonality may be similar technology, customer usage, distribution, managerial skills, or product similarity.

Concentric diversification occurs when the diversification is in some way related to, but clearly differentiated from, the organization's current business.

The basic difference between a concentric diversification and a concentration strategy is that a concentric diversification strategy involves expansion into a related, but distinct, area whereas concentration involves expansion of the current business.

A concentric diversification strategy can have several advantages. The most obvious is that it allows the organization to build on its expertise in a related area. A related diversification strategy involves diversifying into businesses that possess some kind of "strategic fit."

Strategic fit exists when different businesses have sufficiently related activity-cost chains that there are important opportunities for activity sharing in one business or another.

A diversified firm that exploits these activity-cost chain interrelationships and captures the benefits of strategic fit achieves a consolidated performance greater the sum of what the businesses can earn pursuing independent strategies.

This effect which can produce a combined return on the firm's resources greater than the sum of its part is frequently referred to as synergy (the 2 + 2 = 5 effect).