Product Diversification

Updated on April 4, 2024
Reviewed byDheeraj Vaidya, CFA, FRM

Product Diversification Meaning

Product diversification is a business strategy that involves producing and selling a new line of products or product division, service or service division that involves either the same or entirely different sets of knowledge, skills, machinery, etc., usually undertaken to ensure survival or growth and expansion.

Key Takeaways

It is a tactic that organizations use to enter a new market where it already has a presence on a professional level.

  • Companies go for product diversification to increase the company’s profit by providing and creating various items for the market and aiding in the hunt for new business prospects.
  • Market diversification differs from product diversification and is frequently done to upend a rival and find new revenue streams.
  • Although it helps maximize the utilization of available resources utilization, a widely diversified company will be unable to respond quickly to various market changes.

Explanation

Product diversification can occur at various business levels or the corporate level. It is a strategy implied by an organization to expand into a new segment in which the company is already operating at a business level. At the corporate level, it refers to venturing out into a new segment beyond the scope of the organization’s existing products.

It is also sometimes called product differentiation. It is a part of product lineProduct LineProduct Line refers to the collection of related products that are marketed under a single brand, which may be the flagship brand for the concerned company. Typically, companies extend their product offerings by adding new variants to the existing products with the expectation that the existing consumers will buy products from the brands that they are already purchasing.read more decisions and may occur either at a horizontal or vertical business level.

Product-Diversification

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Source: Product Diversification (wallstreetmojo.com)

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Objectives

Features

  1. Repackaging – A product produced by a company can be altered in packaging and can be resold as a product for different use. For example, a cleaning agent for household purposes can be repackaged by the company for the use of cleaning automobiles.
  2. Repricing – With the motive of selling through a new distribution channel, the product’s price can be adjusted along with other improvements to position it for sale. For example, a watch manufacturer can insert its casing into a platinum product instead of a sports look to sell it through jewelry stores.
  3. Remaining – An existing product could be renamed with different packaging to sell it in the offshore market. Different countries could remain authentic to the product’s original purpose but change according to the community’s local culture.
  4. Resizing – The product could be repacked in different sizes according to the needs of an individual in the market. For example, a product sold as a single unit can be sold in a unit of 10 or 100 after resizing.

Product Diversification Example

Some very famous stories of product diversification are that of General Electric, Disney, Tata Group. GE diversified its products from an electricity-related company into segments like aviation, healthcare, digital industry, venture capitalVenture CapitalVenture capital (VC) refers to a type of long-term finance extended to startups with high-growth potential to help them succeed exponentially. read more, finance, etc. Similarly, Walt Disney diversified its business from an animation industry to an amusement park film production and television industry. TATA Group initially ventured into the steel manufacturing business and diversified it into other segments such as hospitality, aviation, automobile, power, etc.

Risk

Product Diversification vs. Market Diversification

Both are the market strategies organizations use to expand their businesses, although they have different meanings. Market diversification means extending the business offering to a new market that has not been previously targeted. In contrast, product diversification is the addition of new services and products to an existing business to expand within existing markets.

Market diversification is often done to challenge a competitor and find additional income sources. When the business spreads across multiple market segments, it lowers the risk of business failure. The challenges involved in market diversification are research and planning, advertising, marketing, and activities needed to sell a product to a new segment. In product diversification, managing and additional product development is a major challenge.

Advantages

Disadvantages

  • A widely diversified company will not be able to respond quickly to various market changes. The focus on the company’s operation and its innovations will be limited.
  • New skill sets will be demanded; the diversification and lack of this expertise will prove a setback.
  • The entity’s old and new sectors will suffer due to a lack of attention and insufficient sources.
  • Limited investment in a particular segment will make the diversified entity lose the growth opportunity, thus reducing profit maximization.

Frequently Asked Questions (FAQs)

What are the levels of product diversification?

The three levels of product diversification include Low, Medium, and High. High to Moderate Levels of Diversification High to Moderate Levels of Diversification.

What justifies the variety of product diversification?

Businesses utilize diversification as a risk-reduction technique to expand into new markets and industries and boost profitability.

How is product diversification created?

Companies can diversify products through the process of product extension. Businesses expand their product lines by releasing various iterations of the same product, for as, by offering a product in various designs or colors.

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