Explain Product Diversification Strategy?

A product diversification strategy is a form of business development. Small businesses that implement the strategy can diversify their product range by modifying existing products or adding new products to the range. The strategy provides opportunities to grow the business by increasing sales to existing customers or entering new markets.


Set your objectives for product diversification. You can take a defensive approach with the objective to protect your business if, for example, demand drops for your products or you face strong competition. This might be important for news companies that have built their business on a single product. Declining market share or revenue could threaten the survival of your business. Alternatively, you can take an offensive approach where you see a strong market opportunity but can’t take advantage of it with your existing products.


You can approach product diversification in a number of ways. You can modify your existing products so that the new version appeals to a different group of customers. If you make tools for building professionals, for example, consider developing a version that appeals to amateur users. An alternative strategy is to offer new products to your existing customers. A retailer of fruit and vegetables could introduce a range of health foods that appeal to the same customer group. Another approach is to add a new product to your range, aimed at a new group of customers.


Product diversification can be an expensive, time-consuming task. Analyze whether you have the resources to develop new products or modify existing ones. If you don’t want to develop products internally, consider other options such as distributing products from other suppliers, taking out licensing agreements to manufacture or supply products developed by other companies, or setting up alliances or partnerships with other companies to jointly develop or market products. If your company is in a strong financial position, consider acquisitions to gain access to products that align with your diversification strategy.


Assess the resources you need to implement your strategy. Set a budget for the diversification program to cover development and marketing costs. Consider the supply chain implications of your new products. You may have to find new suppliers and build effective working relationships with them. Review your sales and marketing resources. Does your team have the product and market knowledge to achieve your sales targets? If you plan to manufacture the product yourself, do you have the production capacity or will you need to invest in new plant or hire more staff? If your new product sells through retail outlets, can you access a suitable distribution network?


Product diversification is a high risk strategy, so it’s important to assess both the opportunity and the level of risk. Focus on product diversification that represents an attractive opportunity for your business, such as an instance where the market is growing and no other company is meeting the demand. Provided the costs of developing and marketing the new product allow you to earn a profit, this is an opportunity to pursue. Risk increases if the new product might take sales away from your existing products or if the cost of market entry is very high. In those scenarios, the benefit to your company may not offset the risk.


Before committing resources to product diversification, carry out research to ensure that you understand the needs of the market. Use the Internet to identify potential competitors and find out more about their products and prices. Carry out a small-scale market test to evaluate the potential of your strategy. Ask for customers’ feedback on their experience with the product. Evaluate the results of your sales and marketing activities in the test. Analyze the cost of taking the product to market so you can prepare an accurate budget for launching the new product.