Product, Market, and Firm Diversification Strategies
Product Development
Product development is a strategy where a company stays in its current market but creates new or improved versions of its products with new features or characteristics.
How It Works
Companies use technology or innovation to enhance traditional products, adding new features or improving performance.
When It’s Useful
- In fast-changing industries with intense competition.
- When products quickly become outdated (short product life cycles).
Constant updates and improvements are necessary to stay competitive.
Market Development
Market development involves taking existing products and selling them in new markets.
What New Markets Can Mean
- New customer groups: Selling to different types of customers, such as those with different income levels, or using new sales channels.
- New uses for the product: Adapting the product for purposes it hasn’t been used for before.
- New locations: Expanding sales locally, regionally, nationally, or internationally.
Why Choose This Strategy
- New, affordable ways to reach customers, like reliable and cost-effective distribution channels, are available.
- The company is performing well in its current markets and wants to expand to less crowded ones.
- The company has extra production capacity and wants to use it by selling in new markets.
This strategy helps the company grow by finding fresh opportunities for its existing products.
Firm Diversification
Diversification means a company starts offering new products and enters new markets simultaneously. This exposes the company to new competitors and challenges, potentially requiring changes in its structure and management.
Reasons for Diversification
1. External Reasons
- The current market is saturated (too crowded) and doesn’t offer enough growth potential.
- This can happen due to declining demand, outdated products, or new technologies.
2. Internal Reasons
- Diversification can reduce risk by spreading the company’s activities. If one business fails, others may still succeed.
- The company might have extra resources (money, equipment, skills) from its current business that it can use for new activities.
3. Other Reasons
- The company might want to enter new industries because of technological changes that could affect its main business.
Risks of Related Diversification
Even though related diversification (entering new businesses similar to the company’s current ones) seems beneficial, there are risks involved. These risks can lead to extra costs, primarily of three types:
1. Cost of Coordination
As the company expands into related businesses, managing everything smoothly becomes harder. More effort is needed to coordinate activities between different parts of the company, potentially leading to higher costs, especially if the businesses are quite different.
2. Cost of Compromise
When businesses share resources (money, technology, employees), they might have to compromise. Each business can’t be managed completely separately, which may limit growth or change. This can create conflicts or slow down progress.
3. Cost of Inflexibility
Connected businesses may become too reliant on each other. This could make it harder for any one business to react quickly to competitors or market changes because decisions might affect other businesses in the portfolio. Related diversification can lead to higher management costs, less freedom for each business, and slower reactions to market changes.