What is diversification strategy

what is diversification strategy

growing sales of a new product in a new market.

Any modification of a current product that serves to expand the potential market implies that the company is following a strategy of product diversification .

The product diversification strategy is different from product development in that it involves creating a new customer base, which by definition expands the market potential of the original product. This is almost always done through brand extensions or new brands, but in some cases the product modification may "create" a new market by creating new uses for the product.

Teen People was an example of product diversification since it was a new product that expanded the market potential of the original product, People magazine. While some teenagers undoubtedly bought People magazine, they were not People's target market. Eventually, however, the product and Web site were merged into the People brand. Courtyard by Marriott and Fairfield Inn are other examples of product diversification since before Marriott offered those new brands they had little potential to expand sales in the business and budget categories. Marriott had business and budget guests, but they were not specifically targeted. so by concentrating on these two markets they were able to add to their market potential. It should be apparent why Marriott could not expand into such different categories with their original brand name.

When Heinz realized that children play with food and it would be more fun to play with ketchup if it were green or purple rather than red, they also were following a product diversification strategy since the market potential for ketchup increased from food to

food plus play. Notice in this case that the brand name was unchanged.

Sometimes product diversification takes the form of a product extension with the same brand name. Heinz's introduction of "black label" ketchup, Heinz Tomato Ketchup Blended with Balsamic Vinegar, targets the upscale buyer who might not consider Heinz's regular ketchup, thus expanding market potential.

The dangers of product diversification

The main dangers facing a company following a product diversification strategy for a brand are that it could fail to adequately understand the new customer base and that any new brand name may result in loss of meaning for the original brand and/or cannibalization of the original brand, particularly if it is a brand extension.

The risk of not understanding the new customer base is present as it is with market development. And the risks of loss of meaning and/or cannibalization are just as significant as with product development.

For while Teen People had limited success, all of the women's sports magazines failed. The new market (women) was not interested in the new product (new magazines with various titles) since—unlike men—women did not want to read a magazine about sports without some link to fitness. And the few who did buy the new magazines simply switched from the men's versions.

The special case of retailers

Just as with product development, retailers present a special case. Thus, Subway's conversion from a ordinary sub shop to a healthy food outlet not only changed the brand's positioning substantially but also added new potential customers since, before the change, many of them would have never considered a Subway.

Source: www.theproduct.com

Category: Insurance

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