E.g., 07/14/2020
E.g., 07/14/2020

Diversification: Risks Outweighed by Opportunities

By: Tanja Wendling (Head of Marketing) - Across Systems GmbH

17 January 2018

The language services market is constantly moving, and competitive pressure is on the rise. Businesses need to react to changing customer needs and continually adapt their product offering to changing market conditions. By pursuing different growth strategies, translators and Language Service Providers can secure their economic future, and perhaps even boost their revenue. But which growth strategy should they pursue? This article suggests that product diversification may be the key to success. The objective of product diversification is to develop new markets with new products. Let's take a look at how product diversification can be applied in the language services market. 

Named after its creator, Harry Igor Ansoff, the Ansoff matrix – also known as the product/market matrix – is a strategic planning tool that provides a framework for executives, senior managers, and marketers to devise strategies for future growth. The matrix presents the following four possible product/market combinations:

Market Penetration

Where existing products meet existing markets, the competitive pressure is usually high. Therefore, the goal is to increase the demand among existing customers and to expand the customer base. This can be done through various measures, e.g. additional sales and marketing measures. Though the implementation is relatively easy, it should be carefully examined which actions appear to have been truly successful. Otherwise, the costs will rise without reaching the desired result.

Market Development

The objective of this growth strategy is to develop new markets and/or geographies with existing products. These could be new regional, national, or international territories or additional industries. For example, translators could offer additional language pairs or acquire expertise to expand their industry competence. As this could involve substantial investments, the risks of this approach are higher than the risks of improving the market penetration.

Product Development

Through product development businesses aim to boost their sales in a developed market. This is possible though innovation and/or other variants. For example, an online dictionary for a highly specialized subject area like cardiovascular diseases, for example, and an exotic language combination (e.g. translations into Icelandic) would fit this category. This growth strategy is especially suitable for translators who address a limited group of customers with highly specific services.

Product Diversification

In the case of product diversification new markets are developed with new products. There are three types of diversification worth considering in this context: horizontal, vertical, and lateral. The risk level and the probability of success may be higher or lower, depending on which one a translator decides to apply.

Horizontal diversification refers to the broadening of the product range offered. The newly developed products are functionally linked to the ones previously offered. A typical example is a fashion manufacturer who intends to develop new markets with a perfume or care products. Translators can achieve this if, in addition to their core business, they e.g. offer review or interpreting services in their respective language combinations or serve as trainers for translation management systems.

Vertical diversification describes the act of deepening the product offer. The purpose is to systematically target new buyer groups with different models, quality, or prices. Translators could offer meaningful additional services, e.g. developing glossaries and term bases containing definitions and background information or desktop publishing activities such as formatting the target texts in a suitable layout.

For these two diversification types, Language Service Providers and individual translators can make use of existing expertise and marketing experience and can often improve the capacity utilization. Furthermore, potential buyers will associate the new products with known ones, which creates trust.

With lateral or diagonal diversification, the situation is somewhat different. Here, the objective is to develop new products that are not related to the existing ones. Therefore, the initial investment is much higher and new processes are required. The buyers' interest and trust need to be won. For this, the company cannot count on any past experience. Rather, the company needs to expand its business field by developing previously unknown markets. Thus, this is the riskiest growth strategy. For example, translators could provide services for the export department of enterprises or offer editorial work in the field of journalism.

Many Roads Lead to Rome

Regardless of the variant that businesses and translators opt for, they can implement it in three different ways: under their own steam, via purchasing, or in collaboration with other translators.

The first two variants involve the reinvestment of profits, use of synergy effects, and optimization of human and material resources. Translators rarely purchase the respective product externally. By contrast, language service providers use this variant more frequently. Translators often consider the joint product development with a partner company to be attractive. For example, they could cooperate with other translators in order to offer additional language pairs or with graphic design agencies for various DTP activities.

Evaluation of Risks and Opportunities

The risks associated with diversification must not be underestimated. Many new, different subjects and products need to be promoted competently, which requires additional know-how and resources. Another aspect is that the motivation to diversify is often driven by bad results in the core business. This limits the possibilities, as translators must pay careful attention to their budget.

However, there are also numerous opportunities. For example, the business risk is spread over several areas, which leads to more independence from a single industry or market. Moreover, the profit situation can be stabilized or even improved.

Depending on the diversification type, it might be possible to combine sales and marketing activities. The research and development of new ideas can concurrently affect multiple products. Sales channels can be jointly used for different products. A changing team, e.g. with new partners, often generates new "spirit" that enables an examination of the previous strategy from a different angle.

What Is Needed?

A number of conditions should exist or be created in order to enable translators – especially those who are not familiar with the turf – to successfully roll out a diversification strategy. Good management skills are required for effectively planning and realizing the project. This also reduces the risk of getting into the weeds. The risk can be mitigated by means of an advance market analysis. Moreover, the available resources should be examined in order to decide whether the planned diversification will be possible without any external aid or whether the service provider should look for suitable partners. The core business should never be neglected.