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Irish A. Flores Charmaine G. Gonzalgo BSA-4

The document discusses product diversification strategies that companies can employ. It defines three types of diversification: concentric, horizontal, and conglomerate. Companies diversify their products to mitigate risk, increase variety and options, protect against competition, and make use of surplus cash flows. However, diversification also carries risks that must be measured, such as attractiveness of the new industry, cost of entry, and potential synergies.

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Julie Estopace
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36 views

Irish A. Flores Charmaine G. Gonzalgo BSA-4

The document discusses product diversification strategies that companies can employ. It defines three types of diversification: concentric, horizontal, and conglomerate. Companies diversify their products to mitigate risk, increase variety and options, protect against competition, and make use of surplus cash flows. However, diversification also carries risks that must be measured, such as attractiveness of the new industry, cost of entry, and potential synergies.

Uploaded by

Julie Estopace
Copyright
© © All Rights Reserved
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
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Irish A.

Flores
Charmaine G. Gonzalgo
BSA-4
Sales and
Profits ($)

Sales

Profits

Time
Product Introduction Growth Maturity Decline
Develop-
ment

Losses/
Investments ($)
Sales Low sales

Costs High cost per customer

Profits Negative
Create product awareness
Marketing Objectives
and trial
Product Offer a basic product

Price Use cost-plus

Distribution Build selective distribution


Advertising Build product awareness among
early adopters and dealers
Sales Rapidly rising sales

Costs Average cost per customer

Profits Rising profits


Marketing Objectives Maximize market share
Offer product extensions,
Product service, warranty
Price Price to penetrate market

Distribution Build intensive distribution


Advertising Build awareness and interest in
the mass market
Sales Peak sales

Costs Low cost per customer

Profits High profits


Marketing Objectives Maximize profit while defending
market share
Product Diversify brand and models
Price to match or best
Price competitors
Distribution Build more intensive distribution
Advertising Stress brand differences and
benefits
Sales Declining sales

Costs Low cost per customer

Profits Declining profits


Marketing Objectives Reduce expenditure and milk the
brand
Product Phase out weak items
Price Cut price
Go selective: phase out
Distribution unprofitable outlets
Advertising Reduce to level needed to retain
hard-core loyal customers
Product Diversification
Product diversification is a strategy employed
by a company to increase and
achieve higher sales volume from new
products. Diversification can occur at the
business level or at the

Business-level product diversification –


Expanding into a new segment of an industry
that the company is already operating in.
Corporate-level product diversification –
Expanding into a new industry that is beyond
the scope of the company’s current business
unit.
DIVERSIFICATION STRATEGIES

There are three types of diversification techniques:

1. Concentric diversification
Concentric diversification involves adding similar
products or services to the existing business. For
example, when a computer company that primarily
produces computers starts manufacturing laptops, it is
pursuing a concentric diversification strategy.

2. Horizontal diversification
Horizontal diversification involves providing new and
unrelated products or services to existing consumers. For
example, a notebook manufacturer that enters the pen
market is pursuing a horizontal diversification strategy.
3. Conglomerate diversification
Conglomerate diversification involves adding new
products or services that are significantly unrelated
and with no technological or commercial similarities.
For example, if a computer company decides to produce
notebooks, the company is pursuing a conglomerate
diversification strategy.
Why Companies Diversify?
In addition to achieving higher profitability, there are several reasons
for a company to diversify. For example:

•Diversification mitigates risks in the event of an


industry downturn.

•Diversification allows for more variety and options of


products and services. If done correctly, diversification
provides a tremendous boost to brand image and
company profitability.

•Diversification can be used as a defense. By diversifying


products or services, a company can protect itself from
competing companies.

•In the case of a cash cow in a slow-growing market,


diversification allows the company to make use of
surplus cash flows.
Risks in Product Diversification
Entering an unknown market puts a significant risk on a company.
Therefore, companies should only pursue a diversification strategy
when its current market demonstrates slow or stagnant future
opportunities for growth.
To measure the riskiness or the chances of success of diversification,
there are three tests used:

•The Attractiveness Test – The industries or markets


chosen for diversification must be attractive. Porter’s 5
Forces Analysis can be done to determine the
attractiveness of an industry.
•The Cost-of-entry Test – The cost of entry must not
capitalize all future profits.
•The Better-off Test – There must be synergy; the new
unit must gain a competitive advantage from the
corporation or vice-versa.

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