Question

Product diversification with relevant examples from the market and why is diversification important

Answer 1

Diversification & Its Importance
by Neil Kokemuller

In business, diversification means branching out into other product categories, industries or marketplaces. While this strategy does present some risks for a company, diversification is often viewed as a safety net against downturns in a single industry or a way to grow your business.
Avoiding Downturns
A conservative reason to diversify is to avoid major repercussions when an industry or sector suffers a downturn. Some single-business or single-product organizations couldn't survive a lengthy decline in their industry. A fashion retailer often sells in multiple product categories, for instance, because fashion is so trendy and unpredictable. Being diversified protects the company against changes. Many fashion retailers also expand into new store formats, such as for children or babies, to diversify.

Competitive Defense
Another reason to diversify is that under-served locations or customers have available revenue for somebody in your industry to take advantage of. If your company doesn't diversity and expand to fill the additional demand, competitors are likely to do so. If you get in first, you can often increase your customer base or establish yourself as a top provider. Movie rental provider Blockbuster dissolved, in part, because it failed to protect against competitors moving into new DVD-by-mail and online-streaming formats.

Stabilizing Influence
Diversity also helps your company build stability. If you concentrate too heavily on a single industry or product, you risk volatility in revenue and resources as demand rises and falls. If your business stretches across many industries or categories, you may have more predictability. Advertising agencies often diversify clients to avoid major drops in revenue and having to cut significant staff if a single industry falters. Losing a client here or there isn't as destabilizing if the company is diversified.

Company Risks
As important and valuable as diversification is, it does have drawbacks and risks. When you expand, you potentially lose focus on what your best products or offerings are. You also have to spread out your business investments and costs, which may prevent you from putting enough money in cash-cow sectors or products. If you expand, you need experts to work for you or partner with you to achieve success in newer, unproven areas.