Definition
Product diversification is a strategy used by businesses to increase profitability and achieve higher sales volume by introducing new products or services into new markets. Essentially, it involves broadening a company’s range of products or target customer sectors. The purpose of diversifying is to allow the company to grow by reducing dependence on existing products or markets.
Key Takeaways
- Product Diversification refers to the strategic approach of a company entering into new markets or industry sectors with new products or services outside of its current businesses. It is a method of expanding the company’s business and reducing risk.
- It helps companies to maximize their reach to the customers, spread their business risk across various products, and enhance their opportunities for growth and profitability.
- However, product diversification requires significant research, development, and marketing efforts. Poorly executed diversification can lead to the dispersion of resources and failure to achieve desired results, affecting the overall business performance.
Importance
Product diversification is important in finance as it reduces risk by allocating investments among various financial instruments, industries, and other categories.
It aims to maximize return by investing in different areas that would each react differently to the same event.
For instance, a company might diversify its product line to hedge against potential losses from any one product.
The diversified portfolio is likely to yield higher long-term returns while reducing the risk of any single product or investment.
Moreover, product diversification provides opportunities for higher growth and profitability since the company could tap into new customer segments, geographic markets, and revenue streams.
Explanation
Product diversification is a strategic approach used to increase business profitability and growth by entering new markets or creating new products. The primary purpose of product diversification is to spread risk across various types of products rather than relying on a single product or service. This allows a business to tap into new customer segments, safeguard against market volatility, and enhance its competitive position.
Incorporating diversity in product offerings helps a company to remain resilient even when one product line fails or underperforms, and it reduces exposure to potential losses. It also provides an opportunity for increased market share and the ability to capitalize on established brand recognition in new arenas. The usage of product diversification can be observed in many successful corporations.
These corporations deploy product diversification strategies when they expand their product line within the existing market or when they venture out into entirely new markets. For example, a company that originally produced ink pens may diversify into manufacturing notebooks, pencil cases, and other stationery products. Alternatively, an automobile manufacturing company may move into electric or autonomous vehicle production, capitalizing on their existing resources, like brand recognition, production facilities, and experienced staff.
Product diversification can thus be an important strategy to foster business growth, generate more revenue, and mitigate risk.
Examples of Product Diversification
Amazon: Amazon started as an online marketplace primarily for books, but today, it sells everything from electronics to clothing to groceries. It also diversified into digital products, such as Kindle eBooks, music and video streaming, and it even offers cloud computing services through Amazon Web Services. This is a great example of product diversification where the company has expanded its product line to cater to different segments of the market.
Unilever: Unilever is a multinational company dealing in consumer goods. They have diversified their products across various categories including food and drinks, cleaning agents, beauty products, and personal care products. They have numerous well-known brands such as Dove, Ben & Jerry’s, Lipton, and many more under their umbrella, enabling them to appeal to a broad range of consumers.
Samsung: Samsung started as a trading company and has since diversified into various sectors including shipbuilding, construction, home appliances, and more notably electronics. They produce and sell a wide range of electronic products such as mobile devices, televisions, computers, and even medical equipment. This level of product diversification not only mitigates the risks associated with depending on a single product but also extends their market presence.
FAQs about Product Diversification
What is Product Diversification?
Product Diversification is a strategy used by businesses to increase profitability and achieve higher sales volume from new products. This typically involves entering into potential markets where new customers can be tapped over and above the existing ones.
What are the types of Product Diversification?
There are three types of product diversification: Concentric diversification, horizontal diversification, and conglomerate diversification. Concentric diversification is introducing a new, but related product. Horizontal diversification is producing new and unrelated products for existing customers, and conglomerate diversification is introducing new and unrelated products to new clients or market segments.
What are the benefits of Product Diversification?
Some benefits of product diversification include risk reduction, growth, and higher profits. By introducing new products, it spreads the risk across different products. If one product’s sales decrease, another product can make up for these losses. It can also attract new customers which leads to business growth and expanded profits.
What are the risks associated with Product Diversification?
While product diversification can lower risk, it also introduces new risks. These include the costs associated with developing and marketing new products. Also, if the new product fails in the market, it can result in financial loss. Companies need to understand completely the market they are diversifying into to mitigate these risks as much as possible.
What are some examples of successful Product Diversification?
Apple Inc. is a great example of successful product diversification. They started with computers and later shifted to include phones, tablets, watches, and more. Another example is Virgin Group, which has diversified into various businesses including airlines, music, and telecommunications, amongst many others.
Related Entrepreneurship Terms
- Market Penetration
- Portfolio Management
- Risk Management
- Investment Strategy
- Asset Allocation
Sources for More Information
- Investopedia: This site is a highly trusted, comprehensive source for information on finance and investing. The website provides a wealth of articles, financial terms, and tutorials on a wide variety of topics including product diversification.
- The Motley Fool: Known for its recommendation of stocks, this site also provides a wide array of articles and advice on diverse financial topics. Detailed information about product diversification can be uncovered from its resources.
- Yale University: Consider looking at Yale University’s economics department or business school publications for scholarly articles and papers on product diversification.
- Harvard Business Review: This publication is a great source of innovative management ideas and thought leadership in business and entrepreneurship, and it has a wealth of articles and case studies dealing with product diversification.
