Advantages And Disadvantages Of Concentric Diversification Strategy In Business

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Concentric diversification strategy is a growth strategy that involves expansion into related products or services that are clearly differentiated or distinct from the firm 's current business (Barnat, 2014). Firms diversify into related businesses when there is some kind of strategic fit between the two businesses. Strategic fit exists when businesses have sufficiently related activities in the value chain that offer competitive advantage of lower costs, economies of scale (combining activities into a larger scale operation), economies of scope (ability to eliminate costs by doing things together rather than independently) and transfer of managerial skills and expertise. This competitive advantage increases a business performance (Bae, Kwon, & Lee, 2008).
The goal of related diversification is to achieve strategic fit. Strategic fit allows an organization to achieve synergy. In essence, synergy is the ability of two or more parts of an organization to achieve greater total effectiveness together than would be experienced if the efforts of
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Firms may also pursue a conglomerate diversification strategy as a means of increasing the firm 's growth rate. As discussed earlier, growth in sales may make the company more attractive to investors. Growth may also increase the power and prestige of the firm 's executives. Conglomerate growth may be effective if the new area has growth opportunities greater than those available in the existing line of business. Probably the biggest disadvantage of a conglomerate diversification strategy is the increase in administrative problems associated with operating unrelated businesses. Managers from different divisions may have different backgrounds and may be unable to work together effectively. Competition between strategic business units for resources may entail shifting resources away from one division to another. Such a move may create rivalry and administrative problems between the units (Xiaorong, 2007; Karaevli, 2013;

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