The asset base of a company is determined by the amount of sales made in a particular period of time. Product Development Improving an existing product or developing new kinds of products is called Product Development. vary according to their levels of diversification. Repricing. Diversification also requires additional management and operational resources. The data in this article are from a sample of corporate ventures launched in the United States by the top 200 companies in the Fortune “500” and a sample of established businesses in the PIMS project.1A corporate venture is defined as a business marketing a product or service that the parent company has not previously marketed and that requires the parent company to obtain new equipment or new people or new knowledge. Product extensions. There are a number of ways to engage in product diversification, including the following: Repackaging. Diversification into various industries or product lines helps in creating stability for the company during economic changing scenarios. 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. usually undertaken with the motive of ensuring survival or growth and expansion. 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. Horizontal Diversification. The Secret Ingredient behind the success to Google was being more relevant by indexing. Walt Disney moved from producing animated movies to theme parks and vacation properties. Canon diversified from a camera-making company into producing an entirely new range of office equipment. Product diversification can be expensive, especially when launching it broadly in a new market. In product diversification, managing and additional product development is a major challenge. In an attempt to expand their market size and invigorate their brand, many firms take a shot at diversifying their brand. For example, a household cleaning product could be repackaged and sold as a cleaning agent for automobiles. The manner in which a product is presented can be altered to make it available to a different audience. Here we discuss its objectives, features, and risk along with examples, advantages, and disadvantages. For example, an ice-cream business adds a new type of confectionary into its product line. You can learn more about from the following articles –, Copyright © 2021. 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. GE diversified its products from being an electricity-related company into segments like aviation, healthcare, digital industry, venture capital, and finance, etc. 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. A business diversifies by offering assorted goods and services, participating in new industries, or finding multiple uses for its products. The manner in which a product is presented can be altered to make it available to a different audience. It is a part of product line decisions and may occur either at a horizontal or vertical level of business. There are a number of ways to engage in product diversification, including the following: Repackaging. 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. This strategy depends heavily upon customer loyalty for existing products to transfer over to the new products and business. Therefore, in this type of growth strategy, the firm only focuses on the introduction of new products. For example, manufacture and sale of sewing machines in addition to electric fans pro­duced by a firm is a case of product diversification. 1%. Similarly, Walt Disney company diversified its business from being an animation industry to an amusement park film production and television industry. Some very famous stories of product diversification are that of General Electric, Disney, Tata Group. It can expand the audience for a particular brand, and it can improve the overall bottom line of … Some very famous stories of product diversification are that of General Electric, Disney, Tata Group. The company's brand categories include: home care, personal care, foods and refreshments. 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. But as risky as it can be, it may also be a great way to maintain a measure of stability. To meet the demand of diversified retailers and curtail market expenditure. This has been a guide to What is Product Diversification & its Meaning. The Business Dictionary definition of diversification highlights common reasons companies diversify markets. That is a prime example of what product diversification can do. Firm resources and sustained competitive advantage and Hitt’s paper International diversification: Effects on innovation and firm performance in product-diversified firms and La Palepu’s paper Diversification strategy, profit performance and the entropy measure (See Table 3). Moderate to High Levels of Diversification. The intent is to remain true to the original purpose of the product, but to adjust it to match the local culture. It helps in multiple investments, which helps in absorbing losses incurred by any other investment. Product Diversification Techniques. Diversification is a corporate strategy to increase sales volume from new products and new markets. Horizontal diversification allow a firm to start exploring other zones in terms of product … Examples of Business Diversification. Diversification occurs when a business develops a new product or expands into a new market. Renaming. The product diversification strategy is different from product development in that it involves creating a new customer base, which by definition expands the market potential of the original product. Diversification is about building new products, exploring new markets, and taking new risks. Market Diversification Benefits. 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. The risk of implementation is also involved, such as structure, talent, leadership, processes, and systems that may not prove to be adequate. Concentric diversification strategies are rampant in the food production industry. A product could be repackaged into a different size or standard selling quantity. 3. 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. 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. 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. Both are the market strategies that organizations use to expand their businesses, although they have different meanings. Product diversification has been found to make companies make lower levels of profits. 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. 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. Consequently it can make sense to launch in several test markets to determine customer acceptance before rolling out a new concept more broadly. Here's a recap of Unilever brands by category:Home care - Omo, Persil, Surf, Comfort, Cif, and… To make stability in the earning and growth of an organization. 2. For example, a household cleaning product could be repackaged and sold as a cleaning agent for automobiles. 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. Product diversification relationships, embracing both innovation and performance, were examined in a structural equation model, where the BSC is treated as an endogenous variable. For example, if the shoe producer enters the business of clothing manufacturing. When the business spreads across multiple market segments, it lowers the risk of business failure. It involves decision risk that involves the choice of the product and market for the product to go wrong. Both are effective growth strategies, but they also bring some risk. Product diversification is the practice of expanding the original market for a product. New skillsets will be demanded; the diversification and lack of this expertise will prove a setback for the company. It creates competition in the market and further helps in surviving this competition with ease. Thus with diversification the income flow is assured during various seasons. Unrelated Diversification is a form of diversification when the business adds new or unrelated product lines and penetrates new markets. 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. Optimum utilization of production and market facilities is offered. 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. The new product that is manufactured by the company must match the ethical and governance standards of the parent product. For example company was making note books earlier and now they are also entering into pen market through its new product. For example, a phone company that adds or expands its wireless products and services by purchasing another wireless company is engaging in related diversification. 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TATA Group initially ventured into the steel manufacturing business and diversified it into other segments such as hospitality, aviation, automobile, power, etc. Objectives of Product Diversification: According to Prof. Andrews, the different objectives of product diversification are: 1. For example, a company entering new markets with existing products makes more productive use of its sales, marketing and manufacturing resources. 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. Resizing. Thereby maximizing the sales of the product and serving the consumer needs from a firm. Full Diversification - this approach is the most risky as you are offering a totally new product or service to an unknown market. The price of a product can be adjusted, along with other improvements, to reposition it for sale through a new distribution channel. 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. There are two types of diversification a firm can employ: 1. ‘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. 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. 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. To make profitable and fruitful use of marketing opportunities. The primary consideration is to sell more products by introducing new products to the market. Combined Strategies – Diversification; Product development. 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). The focus on the operation of the company and its innovations will be limited. A successful diversification can make better use of a company’s existing resources. Product Diversification Example. 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. In that example, the cola company will inhabit a new market of those people who are conscious of their weight. It will also take considerable time to accomplish. 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. According to them, three levels of diversification exist; 1. Old and new sectors of the entity will suffer due to a lack of attention and insufficient sources. Brand extensions. Apple moved from PCs to mobile devices. 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. 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. To gain … Pure product strategy is about product development. It is also sometimes called product differentiation. For example, a car company decides to build a sports car that is positioned at the top end of its product line. For example, If you’re a retailer, vertical diversification might mean moving into manufacturing the products you currently sell. Moderate to High Levels of Diversification. Product diversification can occur at various business levels or at the corporate level. An example of this strategy would be: A fresh trout distributor decides to diversify into selling insurance. 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. The challenges involved in market diversification are research and planning, advertising, marketing, and activities needed to sell a product to a new segment. Diversification is part of the four main growth strategies defined by Igor Ansoff's Product/Market matrix. A company that is widely diversified will not be in a position to respond quickly to various market changes. Making note books earlier and now they are also entering into pen market its! 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