To develop the new products and to add them in the existing product line is called diversification. It includes the introducing of new products and of different sizes of the existing product, etc. It may be horizontal , vertical and lateral. Horizontal diversification helps to connect the new product to the production line which is complementary. Such commodities reproduced with the same production facilities and provide more or less the same service.
For example, a soap manufacturer may add a new soap to his existing soap brands. Then it will be called horizontal diversification. Vertical diversification refers to the production of by-products in the process of production. Lateral diversification refers to the manufacturing of those goods which have no interconnecting links. For example, if a cotton textile manufacturer enters into hotel industry, it is lateral diversification.
Objectives of Product Diversification
Diversification happens for many reasons in a company. Whatever the reason of diversification, the ultimate objective is to survive in the market. Diversification is resorted in order to :
(a) maximize sales and cater to consumer needs,
(b) reduce per unit overhead expenditure owing to reduction in the amount of indirect expenses,
(c) fully utilize the production and market facilities,
(d) compensate the loss arising out of the sale another product or products,
(e) curtail market expenditure,
(f) increase the popularity and goodwill of the concern, and
(g) face the competition and survive in the market.
(h) reduce the risk in the current business due to the market saturation,
(i) in search of new oppotunity in the market.
Sometimes acquisition of new business also offers opportunity for expansion and diversification. But diversification should be adopted only to the extent where it does not pose problems of sales, marketing purchase, personnel, and quality control. Sometimes, the invention of a new product may adversely affect the sales of those existing products which are in great demand. Thus, chances should be avoided and diversification should be adopted carefully.