What is horizontal diversification?

Diversification, the process by which a company attempts to increase profitability and sales volume from new products, can take many forms. One form of diversification that particularly stood out during the 1980s (during the Japanese business boom) was horizontal diversification.

But what is horizontal diversification?

Horizontal diversification is the process by which companies add new products to their lines that are meant to serve existing customers. This may mean adding a product to an existing line that is dissimilar to other products on the line. 

The benefit of this is that it can give the company a chance to market new products to customers that already purchase goods from the company, and meet an unmet need that these customers have. 

Alternatively, horizontal diversification can involve creating completely new product lines that differ from previous product lines, whilst still being sold under the same brand or company name.

That’s all well and good, but how can a company know whether horizontal diversification is the right solution to their issues?

Well, firstly, the company must identify a need for a product and thus try and fill that need with a new product that does not already exist in the company’s repertoire. To determine where they might need to engage in horizontal diversification, a company should conduct  market research. This research could take the form of feedback surveys, analysis of  consumer behaviour or analysis of sales performance data for the products they currently offer. 

Once they have this information, companies can then decide which products they might start producing and selling to customers, either within an existing product line or in an entirely new product line.

You might now be wondering whether any companies actually succeeded when they’ve adopted horizontal diversification?

The answer to that is a resounding yes.

Think of Apple, a company that until the 1990s was associated solely with computers. Struggling to get much purchase in a market dominated by Microsoft, under the guidance of Steve Jobs, the company diversified horizontally. First, in 2001 with the launch of the iPod to meet the growing demand for a digital music player to play digital music downloads, and then in 2007 with the release of the iPhone.

Or, think of Pepsi, a company that in 1965 merged with Frito-Lay, the snack food giant, and increased its focus on snacks such as Lay’s, Doritos and Cheetos. 

So, should you, as a company, use horizontal diversification? That is an answer only you can give, but it can have its benefits.