Product Diversification

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.

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.

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Objectives

• To make profitable and fruitful use of marketing opportunities. There are many resources available in the market that could be used to expand a business. Optimum utilization of production and market facilities is offered.
• To make stability in the earning and growth of an organization. Thereby maximizing the product’s sales and serving the consumer needs of a firm.
• If the market undergoes the process of saturation, product diversification helps in undergoing and reducing the risk of the businessRisk Of The BusinessBusiness risk is associated with running a business. The risk can be higher or lower from time to time. But it will be there as long as you run a business or want to operate and expand.read more.
• To maximize the firm’s profit by offering and producing different types of products to the market and helps in searching for new opportunities in the market.
• It creates competition in the market and further helps survive this competition with ease.
• It helps reduce overhead expenditureOverhead ExpenditureOverhead cost are those cost that is not related directly on the production activity and are therefore considered as indirect costs that have to be paid even if there is no production. Examples include rent payable, utilities payable, insurance payable, salaries payable to office staff, office supplies, etc.read more and thus amounts to the reduction of indirect expensesIndirect ExpensesIndirect expenses are the general costs incurred for running business operations and management in any enterprise. In simple terms, when you want to buy grocery from a supermarket, the transportation cost to get you to the supermarket and back is the indirect expenses.read more overall.
• To meet the demand of diversified retailers and curtail market expenditure.

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

• The skills required to run the diversified entity may be an altogether different concept. They may be varied from the parent entity, which possesses a challenge on managers’ managerial skills and aspirations.
• It involves decision risk consisting of choosing the product and market for the product to go wrong.
• The new product that the company manufactures must match the ethical and governance standards of the parent product.
• The risk of implementation is also involved, such as structure, talent, leadership, processes, and systems that may not prove adequate.
• The company’s stockholder’sStockholdersA stockholder is a person, company, or institution who owns one or more shares of a company. They are the company's owners, but their liability is limited to the value of their shares.read more return may considerably be reduced due to the financial riskFinancial RiskFinancial risk refers to the risk of losing funds and assets with the possibility of not being able to pay off the debt taken from creditors, banks and financial institutions. A firm may face this due to incompetent business decisions and practices, eventually leading to bankruptcy.read more involved.

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

• Product diversification helps in maximizing the utilization of available resources.
• It helps in multiple investments, which helps absorb losses incurred by any other investment.
• Many economic factorsEconomic FactorsEconomic factors are external, environmental factors that influence business performance, such as interest rates, inflation, unemployment, and economic growth, among others.read more lead to the falling of certain industries for a specific time frame. Diversification helps in providing movement away from such activities that create decline.
• Diversification into various industries or product lines helps create stability for the company during economic changing scenarios.

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)

Recommended Articles

This has been a guide to product diversification & its meaning. Here we discuss its objectives, features, and risk along with examples, advantages, and disadvantages. You can learn more about from the following articles –

• Product Line
• Production Cost Formula
• Product Cost
• Business Economics