What is Product Diversification?

Product diversification is the process by which companies increase profitability and expand market scope through new products. Usually, product diversification involves adding new components to an already existing product. However, diversification can be extreme, such as products totally unrelated to the company. 

When done properly, diversification improves the brand image, reduces the impact of an industry downturn, and also improves cash flow in the case of a slow market. For a better understanding, know that there are 2 types of product diversification based on the level at which it occurs.

Business-level product diversification: Branching into other segments of the industry the company already works in. For instance, a company that makes female wear for teenagers decided to venture into maternity wear.

Corporate-level product diversification: Expanding into an industry different from the company’s initial scope. For example, an electronics company produces notebooks.

Synonyms

• Product expansion

• Product differentiation

• Product variation

• Market diversification

• Portfolio expansion

What is product diversification for?

While the majority believe revenue growth to be the sole reason for product diversification, that’s not true. Companies use it to address a host of other factors, such as:

1. Avoidance of overspecialisation: Sometimes, companies want to avoid overspecialisation in a particular niche, so they diversify their products to “stretch their muscles” and “task their minds,” so to speak.
2. Market expansion: In a bid to push products beyond new locations, companies opt for product diversification to attract new customers and capture more market share.
3. Social changes: Only one thing is constant, and that’s change. Society changes from time to time, and consumer needs, values, and desires evolve alongside. Businesses use product diversification to stay on top and maintain relevance.
4. New science and technologies: In situations where the development of new technologies makes the company’s product useless, the company has to revamp or diversify its product to maintain relevance.
5. Research findings: New discoveries in research by a company often uncover untapped markets and opportunities for growth. These findings are then worked upon through product diversification. For instance, if the research team of a motor company finds phone assemblage profitable, the company employs diversification of products to accrue the predicted revenue.

Examples of Product Diversification

Product diversification strategies are applied in various industries around the world. Here are some real-life examples to help you grasp the concept better:

Example 1

Car company A is reputed as a manufacturer of high-quality automobiles. Recently, sales dropped and revenue went down as the customers are now environmentally conscious.

To bounce back, company A has to diversify its products by providing eco-friendly options such as hybrid and electric cars.

Example 2

A beauty brand that has found success with women as a trusted brand. But there’s been a shift in consumer demand. They now want cosmetics made from natural ingredients.

So, the brand has to diversify its products to include all-natural cosmetics. In return, it can generate even more revenue as well as reduce risk in case the artificial cosmetic industry collapses.

Example 3

A computer company known to produce technologically advanced computers with a long life expectancy can decide to diversify its products to avoid overspecialization. To do that, they can choose to produce similar products like smartphones, smartwatches, cameras, etc. 

Since they’re already known for producing high-quality technologies, the success rate will be above average.

Product Diversification Strategies

Diversification isn’t a walk in the park. It requires careful planning and detailed research to achieve success. Before you dive into planning, you should understand the various types of product diversification strategies.

1. Concentric diversification

With concentric diversification, the company simply adds similar products or services to the existing ones. For example, when a car manufacturing company starts to manufacture motorcycles. This is very similar to business-level diversification since it’s within the same industry.

2. Horizontal diversification

This type involves the company providing products and services different but related to the existing products. It’s more like branching into another industry. For instance, when a toothbrush company produces toothpaste.

3. Conglomerate diversification

This one’s the riskiest of them all. This is when a company provides a product or service significantly unrelated to its own industry. For instance, an electronics company produces fashion items like jewelry. The business needs more than the usual strategies to ensure successful diversification due to its inexperience in the new industry.