When you keep doing the same work for many years then after a point you start to get frustrated due to monotonous work and this thing does not happen to only individuals but it happens to companies also the only difference is that companies do not get frustrated but their profits start to decline due to saturation in current business. In order to handle such situation company starts diversifying by doing other business so that fall in sales of a current business can be compensated by sales of other business, concentric diversification and conglomerate diversification are two types of diversification, in order to understand both terms, one should look at the difference between concentric diversification and conglomerate diversification –
Concentric Diversification Vs Conglomerate Diversification
Meaning
Concentric diversification refers to that diversification in which the company goes into a new business which is closely related to the current business or in simple words company develops products or services which are closely related with current core products or services of the company whereas conglomerate diversification refers to that diversification in which company goes into new business which is completely unrelated to current business of the company or in simple words company develops products or services which have no relation with current core products or services of the company.
Example
A pizza outlet owner selling only pizzas decides to open ice cream outlet in different corner of the city is an example of concentric diversification because the pizza outlet owner is not moving away from food business rather he or she is expanding into other areas of food business but if same pizza outlet owner decides to open a car showroom or decides to build residential houses than this is an example of conglomerate diversification as pizza outlet owner is moving to a completely different business from his or her current food business.
Knowledge
In the case of concentric diversification company has knowledge about the market as well as the product in which the company is expanding which in turn can be of great help to the company for running the new business successfully but when it comes to conglomerate diversification company has very little knowledge about the market as well as product in which company is expanding resulting in company facing many difficulties at the start of the business.
Risk Factor
In case of concentric diversification since company has diversified into same product line or business the risk of company failing is less due to company being aware of the market as well experience of the company in same product line whereas in case of conglomerate diversification since company has diversified into different product line as well as different business the risk of company failing is high in this type of diversification.
Degree of Diversification
In case of concentric diversification the degree of diversification is less because company has diversified into the same product line or business and any problem in that product or business will lead to fall in the sales of both business whereas in case of conglomerate diversification due to company diversifying into other products or business the degree of diversification is high because if one product or business is sluggish than losses from it can be compensated by other business.
As one can see from the above that there are many differences between concentric diversification and conglomerate diversification and that is the reason why any company thinking of either of diversification should carefully read above differences and then decide which diversification is best suited for the company in long term.