The practice of expanding the original market of a product is called product diversification. The strategy is used so that the sales, as well as the customer base, increase. It is useful in business which has been experiencing reducing sales are declining sales over a period of time.
Product diversification helps the companies to have an additional source of revenue which is helpful during an industry slowdown. The risk level is high with implementing this strategy which is why previous research is necessary.
Many companies have started to adopt a Product diversification strategy like Google. Earlier Google was only a search engine, but now it has come up with a video streaming service – YouTube, Google pages, Numbers, Google Slides and even a Google Pixel phone. This shows that the company has attempted all possible types of diversification.
Even though there are multiple sources of income for Google, Google AdWords remains the highest contributor to Google’s income, and AdWords is yet another diversification that Google has successfully implemented. There are multiple ways to engage and use product diversification in the market.
Methods of Product diversification
Some of the ways are as follows
an existing product can have a different name and also along with a different packaging as well. The newly developed and changed products can be sold in a different country.
The purpose is to remain true to the principle of the original product but adjusted according to the local culture. For example, the name of a product manufactured and packed in the USA will be written in English.
If that company is going to sell the product in Europe, it has to change the name of the product and write it in local languages like German, Spanish, French, Italian or any other European language.
The way in which a product is presented to the customers can be changed so that it is available for a different set of customers. For example, a cleaning product that is used in the household can be repackaged and sold as cleaning products for automobiles.
The price of the product is changed so that along with other improvements and can be positioned as a new product. For example, the watch can be inserted in a platinum casing and can be sold with the help of jewelry stores rather than the earlier positioning as a casual watch.
product can be sold with a different size than standard selling quantity. For example, a product that is sold as a single unit can be combined with one more unit and can be sold as one buy one and get one free or buy three and get two free.
5. Brand extensions
Extending a brand at a higher level is called brand extension. It is possible to do brand extension by extending the brand higher, middle or lower end, whichever is the requirement in the market.
For example, a high-end chocolate manufacturer starts to manufacture a low-end product. Brand extension is done to get the market share that the brand would be missing earlier because of unavailability of that product in that segment.
6. Product extension
It is possible for an organization to sell different versions of the same product by adding additional features or by offering the same product in different colors. For example, Harry Potter books are available in different cover formats to target a different audience.
Defining objectives for product diversification
Many of the existing products in the market are considered while implementing a product diversification strategy. You have to set your objectives before implementing the product diversification strategy. A defensive approach can be taken with the objective of protecting your existing business.
For example, if the demand reduces for a product or if you are facing very strong competition. This also may be important for newly launched companies that have built their businesses around a single product.
Reducing market share could threaten the stability of business in the market. On the other hand, you can also take an offensive approach when you notice that there is an extremely strong opportunity in the market, but because of the existing products, you cannot take full advantage of it.
Choosing a Product Diversification approach
There are multiple ways in which you can approach the product diversification. As mentioned above, there are various types of product diversification that you can implement. The choice will depend on the type of product that you have and the market that you are targeting to enter.
You can also use Ansoff Matrix to determine which growth strategy can be implemented, and with the help of BCG Matrix, you can calculate which product is performing and which product should be discontinued from the market.
External factors like political factors, economic, geographical factors and competition can also be taken into consideration before choosing the product diversification approach.
Sources of Diversification
Product diversification is seen as a time-consuming task and very expensive. You have to analyze if you have the necessary resources to develop a new product or if you want to modify the existing ones. You can also consider other approaches like using the new distribution chain or licensing agreements if you do not want to develop the product is internal.
A supply chain can also be developed by other companies. If you have a good financial position in the market, then you can also consider joining with other companies or mergers and acquisitions so that the products can be diversified by the addition of new products in very less time.
Sources needed for product diversification strategy implementation take into consideration all of the resources that you have so that you can implement your strategy. You have to set a budget which covers the development and marketing costs. You have to consider the supply chain and the implications of new products on it.
In some cases, you may also have to find new suppliers to build a proper relationship with customers. A thorough review of your sales and marketing department should be done. This will help you to understand if you are achieving your sales targets or not, and if not, then what steps should be taken so that you start achieving them. If the manufacturing is by yourself, then you have to analyze if you have the production capacity and if not then do you have the funds to invest in a new plant.
Before finalizing the product ever say vacation you have to carry out extensive research about your competition and your customers. You have to identify the potential competitors that you good and counter and the products that they have along with their prices. A small-scale market test should be carried out to evaluate the potential of your strategy.
You can ask the customers for their feedback after using or buying the product. These results are evaluated for sales and marketing activities and changes if any are made so that it is more acceptable in the market. You also have to consider the additional costs of the product and decide if the market is ready for your product.
Customer research can also be conducted as part of competitor research. Understanding customers’ demand and if their likings and wants have changed with time is essential to launch a product in the market. You have to make the changes according to the demands of the customer. This will make the product more acceptable in the market.
Advantages of Product diversification
- New products are considered as an additional revenue source for the organization. But at the same time, it spreads risk across multiple products.
- The spending patterns of people depend on the economy. As the economy changes, the diversification pattern should change because of the spending pattern of the people changes. Diversifying into different segments will help you to balance during absent downs in the market. Surprises are always going to be present in the market with one investment. But when you diversify the surprises can be minimized.
- Potentially underutilized resources can be used to the maximum extent because of diversification.
- Certain industries get severely affected for a specific time because of economic factors. This can be avoided, and the crunch that you experience during such an economic slump can be minimized because of product diversification.
- The company can have an additional source of income because of product diversification.
- The company can ensure maximum utilization of available resources.
Risks of the Product Diversification strategy
The product diversification strategy has very high risks in it. It is very crucial that before you implement the strategy, you understand the level of risk. The focus of the product diversification strategy should be on an attractive opportunity in the market.
For example, you have to analyze the growth of the market and see if the demands of the customers are being met by other companies or not. Apart from the cost, new product development and its marketing of the new product that you have introduced gets you good revenue then it would be a good opportunity that you should peruse.
When an entry in the market is very costly then the risk is very high. This is true even when new products take away the sales of your existing product.
Types of Product Diversification
There are three types of Product diversification strategies: horizontal, Concentric and Conglomerate.
1. Horizontal Diversification
In the case of horizontal diversification, the organization increases or add new products that are not related to the current products. But these products are expected to appeal to the current customers. This form of diversification is acceptable and expected in a competitive market if the present customers our brand oil to the existing products.
Also, if new products have good quality and are priced at a reasonable charge and promoted well, even then the new strategy is acceptable. Also, the new products are to be marketed in a similar economic environment that existing products are marketed in. This may cause instability and rigidity sometimes.
In other words, the firm’s dependency increases on specific market segments because of this strategy. For example, a company that was earlier making glass crockery now manufactures glass for windows.
2. Concentric diversification
In the case of concentric diversification, there is a technological similarity between two different products. For example, a company which is manufacturing laptops starts to manufacture mobile phones. The technology in manufacturing both of them would be the same, but the marketing effort that is required to promote the product would be entirely different.
The market share of the company also increases when the new product is launched, which helps to earn a decent profit. For example, manufacturing shampoos and extending it to soaps is an example of concentrate diversification which is technologically related.
Concentric diversification is profitable for the company because the company already has the required expertise and other tools necessary to start the business including the supply chain, marketing plan and most importantly, customers.
In concentric diversification, the company can target the same customers for upselling or selling the new product. In the above example, the company may already have a database of customers who purchased their laptops. The sales team can contact them directly for selling newly launched mobile phones.
3. Lateral or Conglomerate diversification
when the company starts marketing products or services which are not technologically similar to their existing products but the aim is to appeal to a large group of new customers, then it is called a lateral or conglomerate diversification. This strategy has very little or no connection with the existing business of the company.
The primary reason for adopting this strategy is to increase and improve profitability. This also improvises the flexibility of the company. The second reason to adopt the strategy is to get a better reception in capital markets since the company has now diversified.
The strategy is considered to be very risky, but if successful, it can also provide tremendous high growth and continuous profitability.
Pinky is an MBA in Marketing from the University of Mumbai. She loves helping people out in learning Marketing and sharing latest ideas and tactics for growing businesses.