Illustration: Google and its Products Search is still Google’s best product and since 1997 Google is market leader and dominant in the industry. For example, an ice-cream business adds a new type of confectionary into its product line. As with concentric diversification, the new products will be closely related to existing products. Diversification can be expanding into a new segment of an industry that the business is already in, or investing in a promising business outside of the scope of the existing business. ‘Brand diversification’ commonly refers to a process of launching a new product in a new market, as seen in Ansoff’s Growth Matrix; examples of such strategy are the McCafe, Nike’s golfing collection, IBM’s business intelligence & analytics, and UberEATS. Some management experts have tried to show that diversified firms? Product extensions. Horizontal diversification allow a firm to start exploring other zones in terms of product … For example, If you’re a retailer, vertical diversification might mean moving into manufacturing the products you currently sell. Product diversification is the practice of expanding the original market for a product. CFA® And Chartered Financial Analyst® Are Registered Trademarks Owned By CFA Institute.Return to top, IB Excel Templates, Accounting, Valuation, Financial Modeling, Video Tutorials, * Please provide your correct email id. For example company was making note books earlier and now they are also entering into pen market through its new product. 1%. Diversification occurs when a business develops a new product or expands into a new market. The risk of implementation is also involved, such as structure, talent, leadership, processes, and systems that may not prove to be adequate. However, there is a paradox about which strategy is the best one for firms in realizing the ends. A business is defined as a division, product line, or other profit center within its parent … There are a number of ways to engage in product diversification, including the following: Repackaging. 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, whereas, at the corporate level, it refers to venturing out into a new segment that is beyond the scope of the organization existing products. Related diversification: There are potential synergies to be realized between the existing business and the new product/market. Product diversification has been found to make companies make lower levels of profits. Some very famous stories of product diversification are that of General Electric, Disney, Tata Group. The primary consideration is to sell more products by introducing new products to the market. Diversification into various industries or product lines helps in creating stability for the company during economic changing scenarios. The intent is to remain true to the original purpose of the product, but to adjust it to match the local culture. The Secret Ingredient behind the success to Google was being more relevant by indexing. Limited investment in a particular segment will make the diversified entity lose out the growth opportunity, thus reducing profit maximization. The focus on the operation of the company and its innovations will be limited. It helps in multiple investments, which helps in absorbing losses incurred by any other investment. The asset base of a company is determined by the amount of sales made in a particular period of time. Therefore, in this type of growth strategy, the firm only focuses on the introduction of new products. According to them, three levels of diversification exist; 1. By closing this banner, scrolling this page, clicking a link or continuing to browse otherwise, you agree to our Privacy Policy, New Year Offer - All in One Financial Analyst Bundle (250+ Courses, 40+ Projects) View More, Investment Banking Training (117 Courses, 25+ Projects), 117 Courses | 25+ Projects | 600+ Hours | Full Lifetime Access | Certificate of Completion. A company that is widely diversified will not be in a position to respond quickly to various market changes. It creates competition in the market and further helps in surviving this competition with ease. There are many resources available in the market which could be used for the expansion of a business. - Growth Strategy: Product diversification helps the business to capture other markets and even up-sell their products. To maximize the profit of the firm by offering and producing different types of products to the market and helps in searching for the new opportunity in the market. That is a prime example of what product diversification can do. The skills required to run the diversified entity may be an altogether different concept and may be varied from the parent entity, which possesses a challenge on the managerial skills and aspirations of managers. It will also take considerable time to accomplish. For example, a household cleaning product could be repackaged and sold as a cleaning agent for automobiles. For example, a car company decides to build a sports car that is positioned at the top end of its product line. TATA Group initially ventured into the steel manufacturing business and diversified it into other segments such as hospitality, aviation, automobile, power, etc. Product diversification relationships, embracing both innovation and performance, were examined in a structural equation model, where the BSC is treated as an endogenous variable. While this can help lower costs by covering all the needs of your business “in house”, the downside is that it can reduce the flexibility of your business and reduce the opportunity for horizontal diversification in the future. This strategy is used to increase the sales associated with an existing product line, which is especially useful for a business that has been experiencing stagnant or declining sales. For example, a phone company that adds or expands its wireless products and services by purchasing another wireless company is engaging in related diversification. Renaming. Canon diversified from a camera-making company into producing an entirely new range of office equipment. GE diversified its products from being an electricity-related company into segments like aviation, healthcare, digital industry, venture capital, and finance, etc. Concentric diversification strategies are rampant in the food production industry. Product diversification is a business strategy which involves producing and selling a new line of products or product division, service or service division which involve either same or entirely different sets of knowledge, skills, machinery, etc. For example, a company entering new markets with existing products makes more productive use of its sales, marketing and manufacturing resources. It may be possible to sell several versions of the same product, perhaps by adding additional features or by offering the product in different colors. A business diversifies by offering assorted goods and services, participating in new industries, or finding multiple uses for its products. The new product that is manufactured by the company must match the ethical and governance standards of the parent product. Walt Disney moved from producing animated movies to theme parks and vacation properties. It is a part of product line decisions and may occur either at a horizontal or vertical level of business. For example, manufacture and sale of sewing machines in addition to electric fans produced by a firm is a case of product diversification. There are two types of diversification a firm can employ: 1. Conglomerate diversification (or lateral diversification) The company markets new products or services that have no technological or commercial similarities with current products, but which may appeal to new groups of customers. Product diversification can occur at various business levels or at the corporate level. Resizing. In this case there is no direct connection with the company´s existing business - this diversification is classified as unrelated. Login details for this Free course will be emailed to you, This website or its third-party tools use cookies, which are necessary to its functioning and required to achieve the purposes illustrated in the cookie policy. The price of a product can be adjusted, along with other improvements, to reposition it for sale through a new distribution channel. A product could be repackaged into a different size or standard selling quantity. The Business Dictionary definition of diversification highlights common reasons companies diversify markets. Examples of Business Diversification. To gain … If the market undergoes the process of saturation, product diversification helps in undergoing and reducing the. An existing product could be renamed, perhaps along with somewhat different packaging, and sold in a different country. The challenges involved in market diversification are research and planning, advertising, marketing, and activities needed to sell a product to a new segment. TABLE 3HIGHLY CITED DOCUMENTS: 2000-2009 Total Citations Full Citation Index For Document Here we discuss its objectives, features, and risk along with examples, advantages, and disadvantages. Similarly, Walt Disney company diversified its business from being an animation industry to an amusement park film production and television industry. Unrelated Diversification is a form of diversification when the business adds new or unrelated product lines and penetrates new markets. For example, a ketchup manufacturer starts producing salsa, using its current production facilities. An industry analyst explains: This wide diversification is what has allowed Disney to be so successful recently; Disney owns some of the biggest names in the entertainment world: ESPN, ABC, Disney theme parks, Disney cruise lines, and Pixar, just to name a few. For example, a watch movement could be inserted into a platinum casing and sold through jewelry stores, rather than its original positioning as a sport watch. GE diversified its products from being an electricity-related company into segments like aviation, healthcare, digital industry, venture capital, and finance, etc. Product Diversification Example. Repricing. There are a number of ways to engage in product diversification, including the following: Repackaging. Diversification also requires additional management and operational resources. When the business spreads across multiple market segments, it lowers the risk of business failure. Product diversification can be expensive, especially when launching it broadly in a new market. For example, if the shoe producer enters the business of clothing manufacturing. A successful diversification can make better use of a company’s existing resources. Low Levels of Diversification. Product Development Improving an existing product or developing new kinds of products is called Product Development. For example, a product normally sold as a single unit could be packaged into a quantity of ten and then sold through a warehouse store. It may be possible to extend an existing brand at the low or high end, or fill in a hole somewhere in the middle of the product line. In that example, the cola company will inhabit a new market of those people who are conscious of their weight. Optimum utilization of production and market facilities is offered. This strategy depends heavily upon customer loyalty for existing products to transfer over to the new products and business. Moderate to High Levels of Diversification. Related Corporate Diversification - related constrained or related linked?Unilever is definitely the king of product diversification with over 30 brands being sold in more than 190 countries. The manner in which a product is presented can be altered to make it available to a different audience. Old and new sectors of the entity will suffer due to a lack of attention and insufficient sources. vary according to their levels of diversification. Product diversification gives also other challenges to managers such as the need of new skills to manage a wider group of businesses, new techniques, sometimes new facilities, large capital to test the viability of the new product, produce it and market the product, hire and train new employees, etc. Thus, when companies specialize in production of certain products they have added advantages in that they can maintain a higher profile of customers (Jones, 2009). 3. Brand extensions. Product diversification helps in maximizing the utilization of available resources. Concentric diversification, a strategy used to increase company appeal to consumers, can also involve opening new markets by creating product variation. Product line extension is another form of diversification that aim at reaching those market segments which the firm has not yet penetrated. Concentric diversification involves adding new products that have technological or marketing synergies with existing product lines or industries, but appeal to new customers. Both are effective growth strategies, but they also bring some risk. To make profitable and fruitful use of marketing opportunities. Thereby maximizing the sales of the product and serving the consumer needs from a firm. It involves decision risk that involves the choice of the product and market for the product to go wrong. Product diversification means adding new products or services to expand the business offering within existing markets. Horizontal Diversification. 2. Virgin Group moved from music production to travel and mobile phones. This is almost always done through brand extensions or new brands, but in some cases the product modification may "create" a new market by creating new uses for the product. Conglomerate diversification (or lateral diversification) The company markets new products or services that have no technological or commercial similarities with current products, but which may appeal to new groups of customers. Diversification is a corporate strategy to increase sales volume from new products and new markets. Conglomerate diversification (or unrelated diversifcation) on the other hand is about entering a new market with a new product that is completely unrelated to a company’s existing offering. You may require new technology, skills or marketing approach to diversify in this way. To meet the demand of diversified retailers and curtail market expenditure. For example, a smart phone may be offered in several colors. For example, a leather shoe producer that starts a line of leather wallets or accessories is pursuing a related diversification strategy. New skillsets will be demanded; the diversification and lack of this expertise will prove a setback for the company. A great example of a conglomerate is Samsung, which is operating in businesses varying from computors, phones and refrigerators to chemicals, insurances and hotel chains. In product diversification, managing and additional product development is a major challenge. 2. Objectives of Product Diversification: According to Prof. Andrews, the different objectives of product diversification are: 1. Diversification is about building new products, exploring new markets, and taking new risks. usually undertaken with the motive of ensuring survival or growth and expansion. Product diversification versus focusing on one product are the major strategies in which firms decide and engage for increasing profitability, market value, revenue or both of them. The manner in which a product is presented can be altered to make it available to a different audience. Diversification is part of the four main growth strategies defined by Igor Ansoff's Product/Market matrix. Moderate to High Levels of Diversification. It can expand the audience for a particular brand, and it can improve the overall bottom line of … Combined Strategies – Diversification; Product development. Apple moved from PCs to mobile devices. Some examples of concentric diversification include resource sharing, strategic partnerships and acquisitions. Both are the market strategies that organizations use to expand their businesses, although they have different meanings. It is also sometimes called product differentiation. CFA Institute Does Not Endorse, Promote, Or Warrant The Accuracy Or Quality Of WallStreetMojo. This has been a guide to What is Product Diversification & its Meaning.
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