by Product Diversification is a strategy employed by a company to increase profitability and achieve higher sales volume from new products. Diversification can occur at the business level or at the corporate level.
Business-level product diversification: Expanding into a new segment of an industry that the company is already operating in.
Corporate-level product diversification: Expanding into a new industry that is beyond the scope of the company’s current business unit.
Diversification Strategies
There are three types of diversification techniques:
- Concentric diversification
Concentric diversification involves adding similar products or services to the existing business. For example, when a computer company that primarily produces desktop computers starts manufacturing laptops, it is pursuing a concentric diversification strategy.
- Horizontal diversification
Horizontal diversification involves providing new and unrelated products or services to existing consumers. For example, a notebook manufacturer that enters the pen market is pursuing a horizontal diversification strategy.
- Conglomerate diversification
Conglomerate diversification involves adding new products or services that are significantly unrelated and with no technological or commercial similarities. For example, if a computer company decides to produce notebooks, the company is pursuing a conglomerate diversification strategy.
Product Diversification Techniques
There are a number of ways to engage in product diversification, including the options noted below. Product diversification can be expensive, especially when launching it broadly in a new market. Consequently it can make sense to launch in several test markets to determine customer acceptance before rolling out a new concept more broadly.
Renaming
An existing product could be renamed, perhaps along with somewhat different packaging, and sold in a different country. The intent is to remain true to the original purpose of the product, but to adjust it to match the local culture.
Repackaging
The manner in which a product is presented can be altered to make it available to a different audience. For example, a household cleaning product could be repackaged and sold as a cleaning agent for automobiles.
Resizing
A product could be repackaged into a different size or standard selling quantity. For example, a product normally sold as a single unit could be packaged into a quantity of ten and then sold through a warehouse store.
Repricing
The price of a product can be adjusted, along with other improvements, to reposition it for sale through a new distribution channel. For example, a watch movement could be inserted into a platinum casing and sold through jewelry stores, rather than its original positioning as a sport watch.
Product Extensions
It may be possible to sell several versions of the same product, perhaps by adding additional features or by offering the product in different colors. For example, a smart phone may be offered in several colors.
Brand Extensions
It may be possible to extend an existing brand at the low or high end, or fill in a hole somewhere in the middle of the product line. For example, a car company decides to build a sports car that is positioned at the top end of its product line.
Benefits of Product diversification
There are several benefits to product diversification. Companies may employ product diversification for several reasons, from avoiding profit loss to the anticipation of a societal shift. Therefore, the strategy offers a variety of advantages depending on a company’s specific situation. Here are a few benefits companies can enjoy from diversifying their products:
Risk mitigation: If an industry downturn occurs, product diversification can mitigate a company’s financial risk. When companies can effectively expand the market of a product line, they can broaden the scope of what purposes their products accomplish. This can help alleviate any potential impacts from industry-related challenges.
Brand strength: Product diversification can help companies build robust brands with strong visibility. Consumers are more likely to identify and remember brands that offer more variety and options within their products or services. This can be an enormous benefit for companies seeking to increase their profits and improve brand loyalty.
Protection and stability: Oftentimes, product diversification is employed as a defensive strategy to stave off competitors from encroaching on a brand’s market ownership. When companies increase the variety and options of a particular brand, they can broaden their stable hold on a market and gain more protection against such competition-related challenges.
Resourcefulness: If companies find relative accomplishment and profitability with their original products, they can use product diversification as a method to maximize their resources and continue to achieve success in the same capacity.
