Product diversification is a process by which businesses attempt to expand their market reach and customer base by delivering products somewhat different than the ones for which they are known. These new products can simply be extensions of existing brands or they may be entirely new. By engaging in product diversification, a company can extend its business into new areas and markets, thereby increasing their opportunities for profit. There are some potential pitfalls to this strategy, including the possibility that a company might stretch itself too thin or that it might dilute its original brand with the existence of the new product lines.
Diversification, in any form, is essentially a way to manage risk. By removing all of the focus from one area and spreading it among many different areas, there is less reliance on any one area to produce. This strategy can be used by investors attempting to spread out their money and gain new areas of exposure. Companies that sell products to the public may also need diversification, especially if they can’t sustain their businesses with just one product or approach. For that reason, product diversification is an often effective business strategy.
There are several ways in which a company may achieve product diversification. It doesn’t necessarily have to be with a completely new product, although that is one way to achieve diversity. A particular brand might be naturally extended. For example, a company that sells cola might decide to bring out a line of diet colas based on their original formula but with fewer calories than the original product.
In that example, the cola company will inhabit a new market of those people who are conscious of their weight. That is a prime example of what product diversification can do. It can expand the audience for a particular brand, and it can improve the overall bottom line of a company if done effectively. Ideally, the new products or brand extensions can act as a complement for the original brand, so that customers familiar with the original brand might also have use for the new choices.
It is important for business leaders to realize that there are some drawbacks associated with product diversification. Too much extension can eventually dilute the original brand and confuse the customers the company is attempting to reach. In a worst-case scenario, it may even dissuade customers from the original brand. Business familiar with making one type of product can also stumble if they are unfamiliar with a new market and its customer base.