Product Diversification Strategy Definition Types & Approaches

Tue, 06/09/2015 - 23:54 -- Umair Khan

Definition

Product diversification strategy is known to be one of the major forms of business growth strategies. It is also termed as business development. It can be done by adding new products to the range or by altering the existing products. Diversification strategy enables the business to get the opportunity to grow through increased sales by entering the new markets or existing customers.

Approaches

First of all businesses need to set the objectives for the product diversification. You can do it in two ways i.e. defensive approach or offensive approach.

Defensive approach

This approach is used to protect the business. For instance, demand for your products is dropped and there is tough competition in the market. This is seriously alarming particularly for the businesses that build their business on a single product. Survival of the business is seriously threatened with declining revenues.

Offensive Approach

This is an alternative approach to defensive strategy. You see a strong opportunity in the market but you are not willing to take advantage of it via existing products.

Types of Diversification Strategies

The three main types of diversification strategies are

  1. Business can modify its products. New version of the product will be capable of attracting different groups of customers other than the existing data base of buyers. For instance if you are dealing in developing tools for professional building, then you must come up with a version that appeals even the beginners or laymen.
  2. Another way is to offer new product to your existing customers. For instance, a vegetable or a fruit retailer can add healthy foods that attract the same group of customers who are particular about in-taking the fresh fruits and vegetables.
  3. Adding a new product to the existing product range is also a good idea. This is aimed towards a new group of customers.

Source

Product diversification strategy is a time consuming and expensive activity. The business needs to analyze if it has the resources to modify the existing products or can develop a new product. If you are not willing to develop a product then making up alliances with other companies to develop new market products. On the other hand if you are in strong financial position then acquisitions to gain access to the products can be a good diversification strategy.

Resources to Diversification

Review the resources you need to put the strategy into practice. Set a proper budget covering the marketing and development costs. Take in to consideration the supply chain implication for your new products. Assess your resources related to sales and marketing. See if you will need to hire new staff for the purpose. Access an appropriate distribution network.

Risk Associated with Diversification Strategy

This strategy brings high risk with it. Therefore it is important to assess the level of risk as well as the opportunity. Focus of the business must be towards an attractive opportunity. For instance, in what direction the market is growing and which demands are not being met by other companies. Apart from the cost of new product development and marketing of the new products, if the product earns you revenue, then this is the perfect opportunity to peruse. On the other hand risk increases when the cost of entry in the market is really high or when new product takes away the sales of your existing product.

In nutshell, product diversification is a useful business growth strategy. All the above mentioned points need to be considered while planning and implementing this strategy.