Question

discuss how you think the diversification effect relates to modern firms (think in terms of product diversification). Can you think of any firms that sell or provide a single product or service?

Answer 1

Product diversification refers to the strategy used by an organization to increase its existing profits, by achieving higher sales through new products. It can take place at business level or corporate level. The diversification effect relates to modern firms in the following ways :

a. Mitigation of risks : If there is an industry downturn, the organization with diversification can still survive this downturn as there are other options and markets to explore. This helps in avoiding complete shutdown of business.

b. Boost for Brand Image : When a company diversifies its product, there are more options available for products. Selection helps the customers to choose better products. If diversification is done in a proper manner, it can be a huge boost for brand image.

c. Competitive Advantage : Selling different varieties of the same product can help the company in gaining a competitive advantage over its competitors. Diversifying products and services before actual and potential competitors helps in building a competitive defense.

d. Tapping new and more markets : Diversification helps an organization to enter new markets. This entrance to new markets helps in increasing profits in the long run. Entering more and more markets helps in increasing market share in the industry.

WD-40 Company is an example of a company selling single product which is WD-40 water-displacing spray. The formulation of this spray is a trade secret. This formulation has not been changed since decades.