What is concentric diversification?
Concentric diversification is one of several diversification strategies used by companies to increase their attractiveness to consumers. With this particular approach, the company will try to increase market share by introducing a series of new products that are likely to attract not only the attention of existing customers but also new customers. Sometimes called convergent diversification, the goal is to encourage current customers to continue buying the company's older products while choosing to buy newer products at the same time. At the same time, the effort also attracts new customers who are alien to the old products, building on the appeal of the recently launched product line.
With concentric diversification, it is not uncommon for newer products to have some relationship to the existing product line. For example, a company that has established a stable customer base for its sheets of paper may choose to add other product lines that can be used in conjunction with the sheets. This can include a line of color-coordinated disposable cups, napkins and even plastic cutlery and disposable tablecloths. The idea is to attract customers who already buy the plates to buy the other products to use at the same time. This approach can also attract new customers who want to create a coordinated look while enjoying a casual dining experience such as an outdoor picnic.
In some cases, concentric diversification will involve opening new markets, creating a variation on a product line that has already established a loyal following in a particular market sector. Using this approach, a company that currently offers commercial cleaning products used by professional cleaning services may choose to launch a similar line of products that appeal to families. In some cases, the branding of the new line can be reminiscent of the older commercial line, allowing people who already know and trust the older products to try the newer line at home. Assuming the new lineup provides an acceptable level of satisfaction, the manufacturer will expand its customer base into a new market sector, effectively increasing its profit margin and making the concentric diversification effort successful.
The general principle of concentric diversification can also be easily translated to other environments. When it comes to diversifying the investment portfolio, the investor can choose to include a series or group of shares issued by companies that operate in similar markets, such as the purchase of shares in a telephone company and also in a teleconferencing agency. The approach allows the investor to obtain similar returns on both investments, as there are some consumers who would make use of both types of telecommunications services.