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Hello Gromit
Hope you are well
I am slightly confused in understanding the related diversification. I completely understand the concept of vertical integration (taking over either your supplier or distribution network) and horizontal integration (taking over your competitor) however I am not getting the logic behind this on Ansoff Metrix.
Ansoff says that we diversify when we have a new product and new market but how does vertical or horizontal integration achieves diversification?
If we buy our competitor, supplier or distribution network then this could even be possible while we are sticking to our current product.
What does this have to do with new product and new market?
Please explain.
Thanks
Buying a competitor is certainly no diversification.
Buying a supplier or a distributor is diversification. For example, a shirt manufacturer could buy cloth manufacturer. Although related, the skills needed to spin and weave cotton are different to those needed to make a shirt. There would be different skills, different suppliers and different competitors (if not all cloth could be transferred internally).
Similarly, the shirt manufacturer could set up a chain of shirt shops – but once again, although they are dealing with shirts the skills etc needed are very different. The market is certainly different as that part of the business would have to make its shops attractive, devise consumer ads and so on.
The company could mess that up – or the diversification could be its life saver. For example, if its manufacturing was expensive (because of where the factories are located) so that the shirts were difficult to sell at a profit, the retail chain could buy shirts from cheaper manufacturers – an eventually the factory might even be shut so that the company has changed from manufacturing to retailing.
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