PRODUCT DIVERSIFICATION

The meaning of the word diversification is very simple. As soon as a manufacturer offers more than one product, it is described as product diversification.  Diversification implies that a company has moved from one product item to marketing more than one product. Generally, diversification is categorised into two types:

1. Related Diversification and

2. Unrelated Diversification.  

Where the new products introduced in the product mix are similar to the existing product, diversification is described as 'related'. When a company accepts new products which are very different from the existing products, the diversification is said to be ‘unrelated'.

Related Diversification

Related diversification is the commonest form of diversification, inexpensive and easier. As part of activity  you have really recorded the cases of closely related diversification in each Product Line. These also constitute a Product Line. However, in case of Hindustan Lever a part from a part from manufacturing soaps like Lifebuoy Lux and Pears, it can also include other brands of soaps or cleaning materials such as Vim, Surf or Rin etc. as part of related diversification strategy. So far, the relatedness of the products is quite clear.

However, this relatedness is sometimes stretched to include other similar items. For example, in case of Hindustan Lever, toiletries would also be included under related diversification. For example, Hindustan Lever produces Pepsodent and Close-up Toothpastes.

Some of the probable reasons for companies undertaking related diversification are:

1. to make a more effective use of the existing selling and distribution facilities,

2. to use its under-utilised production capacity,

3. to meet varied customer needs,

4. to take advantage of its existing reputation in a particular type of products, and

5. to increase the sale of existing products.  

Do you know why Gillette company launched their razor? Surprisingly, the answer was not just to make more profits through this extra product namely the razor, but to increase the sale of their blades.  

Unrelated Diversification

When the new products offered or introduced are quite different from the existing ones, the company is said to have adopted the strategy of unrelated diversification. For example, if a consumer products' manufacturer diversifies into the manufacture of raw materials such as chemicals or industrial products, such diversifications would be described as unrelated diversification. This naturally involves heavier costs and management challenges. This is the reason why related diversification is more popular.  

Hindustan Lever was basically a consumer products company. It was forced into unrelated diversification because of its desire to grow in the face of Foreign Exchange Regulation Act and Industrial Licensing Policy. Today this company is a leading manufacturer of sodium tripoly phosphate (STPP), glycerine, nickel catalyst and fine chemicals. It is also producing a plant-growth nutrient, a product of its own research innovation, branded 'Paras'. It is supposed to increase cereals and vegetable yields considerably. Thus, this company has now diversified into unrelated products. Take another well known company which has a varied product mix-Godrej; it not only makes cosmetics, but also steel furniture, animal feeds and its popular locks. It can be seen that this company has also adopted unrelated diversification as its product mix strategy.  

Integrated Diversification or Integration

Backward Integration is a term applied where a company diversifies and manufactures products which it previously purchased, that is, industrial products. For example, a company may start manufacturing what it uses as raw materials for its final products. Previously this raw material was purchased from outside. Now the company has decided to be independent of outsiders and so indulges in backward integration.

The term Forward Integration applies when a company decides to go forward into starting its own distribution system from mere manufacturing. In this way, it gains independence with regard to retail outlets. Bata brand of shoes are largely retailed through company controlled outlets.

At times the expression "Horizontal Integration" is also used. This is where the company starts buying up and getting control over its competitors.

However, it must be remembered that any type of integration or diversification involves several questions, the most important of which concern cost, the possibility of profits, the extent of competition and the ability to meet it and the risk involved. The product-mix strategy or the diversification strategy of an organisation must fit into the organisation's long-term objectives in terms of profit, growth and sales stability.