What is Product Diversification

Product diversification is a strategic approach where a business expands into new markets to offer an entirely different product category than what they are currently offering. 

Why It Matters

Product diversification matters because it allows businesses to:

  • Mitigate risks associated with market fluctuations and declining product demand.
  • Increase revenue by tapping into new markets or meeting new customer needs.
  • Strengthen brand loyalty by offering comprehensive solutions or a wider range of products.
  • Stay competitive in dynamic markets by innovating and adapting to trends.

For companies in the international e-commerce and marketplace sector, product diversification is essential to remain relevant and grow globally.

According to a study conducted by Oladimeji, M. S. and Udosen, I., published in their journal “The Effect of Diversification Strategy on Organizational Performance,” the benefits of diversification outweigh the costs, thus diversification has a positive effect on an organization’s performance.

Related: More Products, Less Risks: Guide to Product Range Expansion

Types of Product Diversification

  1. Related Diversification: Expanding into product categories that are closely linked to the company’s existing offerings, leveraging existing expertise and resources.
  2. Unrelated Diversification: Entering entirely new industries or markets that have no significant connection to the company’s current products.

Examples of Product Diversification

  1. Apple Inc.: Originally known for computers, Apple diversified its product line to include smartphones (iPhone), wearables (Apple Watch), and services like Apple Music.
  2. Amazon started as an online bookstore but later diversified into many unrelated industries, including cloud computing (AWS), groceries (Whole Foods), and streaming services (Amazon Prime Video).
  3. Disney began as an animation and film company but has ventured into unrelated industries through acquisitions, like ESPN (sports broadcasting) and Pixar (animation) as well as theme parks and resorts.
  4. Procter & Gamble (P&G): P&G has diversified its offerings to include a wide range of personal care, cleaning, and baby products under different brands.

Industry Use Cases of Product Diversification

  • Retailers: Adding complementary products like accessories to their core offerings to increase average order value.
  • E-commerce Platforms: Expanding product categories to attract a broader customer base.
  • Startups: Launching new product lines to capitalize on emerging trends.
  • Global Marketplaces: Diversifying inventory to cater to the preferences of international customers.

Related: International Marketplaces: Key to Global E-commerce Success

Product Diversification Strategy

  • Concentric Diversification: Adding new products that are closely related to the existing product line to cater to the same customer base.
  • Horizontal Diversification: Introducing new products that are unrelated to the existing ones but appeal to the same target audience.
  • Conglomerate Diversification: Venturing into entirely new industries or markets with products that are unrelated to the company’s current offerings.
  • Geographic Diversification: Expanding the availability of products into new regions or international markets.

Related Terms

  1. Vertical Integration: Expanding within the supply chain, such as producing raw materials or distributing products.
  2. Horizontal Integration: Expanding into similar or related industries to strengthen market presence.
  3. Market Penetration: Increasing sales of existing products within the current market.
  4. Brand Extension: Using an existing brand to launch products in new categories.
  5. Portfolio Management: Strategically managing a diverse range of products or services.

FAQs

What is the main purpose of product diversification?

The main purpose of product diversification is to increase the profitability of a business. This is achieved by introducing a new product category to expand into new customer segments, increasing total market share.

How is product diversification different from product line extension? 

Product line extension involves adding variations of an existing product, while product diversification involves introducing entirely new products or venturing into new markets.

What is the difference between product diversification and product development?

Product Diversification involves introducing new products that are different from the current offerings and often target new markets.

Product Development, on the other hand, focuses on improving products to meet customer needs better. For example, a smartphone manufacturer may develop a new model with advanced camera technology or improved battery life.

Can small businesses benefit from product diversification?

Yes, small businesses can benefit significantly from product diversification. By introducing new products or services, they can attract a wider customer base and increase revenue streams. This expansion not only boosts sales but also enhances customer loyalty, as clients find more options in one place. 

However, businesses shouldn’t blindly enter an entirely new market that is remotely related to their current business. This will position the business as not an authoritative entity on the market and will increase the likelihood of failing.

Relevant Resources

Small Business Strategies to Implement Product Diversification Effectively

The Effect Of Diversification Strategy On Organizational Performance