What Is Market Diversification?
Market diversification is a process that is often used by companies to improve their positions and ensure a steady flow of revenue. The sources of that revenue may have to do with actions to secure investments that are varied enough to ensure returns in most economic situations, as well as the influx of sales revenue that is generated in more than one type of consumer market. With market diversification of any type, the ultimate goal is to ensure the business has money coming in that will sustain the operation and also pave the way for future growth.
In terms of products, marketing diversification typically involves finding ways to successfully launch product lines in more than one type of consumer market. At times, the range of products offered by a company may be connected in some manner while still serving a different need of the consumer. For example, a teleconference provider may focus primarily on providing audio and web conferencing solutions, but may also arrange to provide fax services to customers at competitive rates. This may not only serve the purpose of strengthening ties with customers who use both faxing and conferencing in their daily business models, but also open the door for the company to secure customers who are more interested in faxing than in any type of conference service.
Market diversification may also involve a business diversification process that involves creating and marketing products in totally unrelated markets. This means that a company may have an established presence in the clothing industry, but decide to also create a line of home appliances as a means of engaging in product diversification. The end result could be that both product lines perform well, adding to the revenue of the business. Should economic conditions lead to one of those two lines beginning to generate less revenue, there is a chance that the other line will see an upswing in revenue generation, a situation that would help to keep the company relatively stable throughout the current economic crisis.
As it relates to the stock portfolios owned by businesses, market diversification is often one of the strategies used in allocating resources to those portfolios. For example, a company owner may determine to allocate half of the portfolio to stock issues. Within that half, the owner may choose to include certain percentages of stocks associated with computer technology, retail, renewable energy, and manufacturing. The idea behind this type of market diversification is to create a mix of stocks that are likely to hold up well in any type of economy, with gains on some holdings offsetting losses sustained by others and making it possible for the portfolio to still post an increase from one accounting period to the next.
Market diversification is basically about not putting all of one's eggs in the same basket. If a business makes only one good and if that good loses out to market competition, the business might lose everything. Having additional products means that the business has alternative sources of profit to fall back on.
@serenesurface-- That's an interesting point. I had never thought of that before.
I suppose there may be disadvantages to market diversification if the company ventures out to a completely different and unrelated sector to the one they're currently in. I mean, if a chocolate manufacturer starts manufacturing car tires, that would be strange. It might make the customer think twice before buying, as you do.
But also keep in mind that when a company diversifies its production, it's also establishing a new brand. I think that at the end of the day, quality, availability and price determine whether a product succeeds or not.
Is market diversification really a good idea?
Sometimes, I see a company start manufacturing something that's totally different than what they have been doing. I personally hesitate to buy their new line of products because I feel like that's not their expertise.
So isn't it risky, in terms of customer loyalty, to diversify production?
@Logicfest -- that seems ridiculous, but it happens regularly. It is hard to resist the temptation of a huge company that needs all the services and/or products your business provides.
If that major customer decides to take its business elsewhere, your business can fail (and that is often what happens).
But, what is a company to do? Stay loyal to its existing clients that could also come and go at will or stick with a major client that is paying enough to make your company extremely successful? That is a hard choice to make.
Customer diversification is also important.
Why? Let me tell you a little story of a trucking company that started out with just a couple of trucks and, through hard work and a lot of marketing, eventually grew to a fleet of around 300 trucks. Things were good for the trucking company, indeed.
So good, in fact, that the trucking company caught the attention of a local retailer that had just started to grow nationally. The retailer was one of the company's smaller clients, and then a larger one and then became the trucking company's biggest client, utilizing over 90 percent of the fleet.
The trucking company grew huge as the retailer became a major, national force. Things were going great for the company until the day the retailer decided it could save a few pennies per mile by buying and operating its own trucks.
The trucking company doesn't exist anymore. Sad but true.
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